A few months ago I was helping some clients buy their first home. As we went through the process they asked a lot of good questions about each step. I reminded them each step is a new negotiation.
1) Contract – The first negotiation is the contract. It outlines the terms including price, earnest money, length of the inspection period, who will pay the HOA transfer fees (HOA disclosure fees are required to be paid by the Seller), what appliances will convey with the property and any seller concessions or contributions to buyer’s closing costs, etc.
2) Inspections – The next negotiation occurs during the inspection period which is usually 10-15 days. The home and termite inspectors are the key participants in this phase. But if there appears to be potential plumbing, electrical, structural or roof issues then contractors for each these specialities should be scheduled during the inspection period. Most contractors will give free estimates. These estimate are crucial to the next stage of the process. (Note septic inspections are required to be completed by the seller.)
3) Repairs – Once the inspections are complete then the buyer needs to decide what repairs he or she will ask the seller to complete. No house is perfect so it is up to the individual buyer to decide what is important. In some cases if the buyer does not have the money or skill set to make a repair then they may ask for a lot of repairs. In other cases the buyer may only ask for a expensive items like a roof replacement. My philosophy is if you never ask for a repair you will never get it. The worst thing that can happen is the seller says no. I feel it is to the buyer’s benefit to include estimates so the seller knows what the out of pocket cost may be. The seller then decides if they will make all the repairs, some of the repairs or none of the repairs. Or the seller give the buyer an allowance to cover the repair costs. Remember even if the seller says the house is sold as is and the buyer has signed the As Is Addendum it does not preclude the buyer from asking for repairs. Especially if the repair is something that could not be determined until the house has been inspected by a professional.
4) Appraisal – It is up to the buyer to decide when the appraisal will be ordered. This is driven by the inspection results. If the buyer decides they will buy the house even if the seller does not make any repairs then they will tell the lender to order the appraisal. I recommend the buyers do this as soon as possible because appraisals seem to be taking longer. Appraisers can also ask for repairs to be completed so there needs to be time for the repairs to be completed and the appraiser to return to the property to confirm they are done to his or her satisfaction. If the buyer decides they will not buy the house unless certain repairs are completed then the appraisal order is delayed until an agreement on repairs has been reached. There is no reason to waste the buyer’s money on an appraisal until the seller responds to the repair request.
One of my colleagues gave me an example of why it is important to finalize the repair negotiations BEFORE discussing the appraisal. In this case the seller had not responded to the repair request. The appraisal came in and it did not meet contract. The buyer’s realtor immediately informed the seller’s realtor. The seller responded he would not do any repairs because he had already reduced the price (the final contract price was less than asking) and he would not do repairs and reduce the price more to meet the appraisal. Of course it is unknown whether the seller’s response would have been the same regardless of when he received the appraisal but now the buyers will never know.
If the appraisal meets contract the buyer is not required to provide a copy to the seller nor tell the seller the appraised value. (Sometimes the seller will be upset if the appraisal is higher than the contract price. It is better not to disclose this information until after close of escrow.) If the appraisal does not meet contract then the buyer is required to provide a copy to the seller. The seller can either reduce the price to meet the appraisal, reduce the price half way between the contract and appraisal or refuse to reduce the price. If the seller does not reduce the price to meet appraisal then the buyer would have to increase their down payment to cover the difference. It is up to the buyer to decide what they want to do based on the seller response. Depending on the difference in price the buyer may not have the money to make up the difference. In this case the buyer can cancel and get the earnest money back as long as they have not removed the appraisal contingency in the contract.
5) Appraiser Requested Repairs – The appraiser can ask for repairs regardless of whether it is an FHA, VA or Conventional loan. For example peeling paint on a house built in 1969 would be required to be fixed to eliminate the potential danger from Lead Based Paint. Depending on the cost it is typical to have the seller pay for these repairs. The reason is if the deal falls out the next buyer will have the same issues. An FHA appraisal is good for 90 days. So if the next buyer is an FHA buyer then the repairs will have to be completed anyway. However sometimes the buyer will volunteer to do the repairs if it is something simple like missing outlet or switch covers rather than wait for the seller of complete them and possible delay the closing.
So there you have it. Residential real estate purchases can have up to five different negotiations.