Renegotiating
the terms when repairs are necessary
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When the inspection turns up
significant physical problems with the house and
your contract doesn't require the seller to remedy
them, you might ask the seller lower
the price of the house or to pay some or all of the
cost of repairs.
If they won't do so then you might want to try to
have the cost of repairs added to the mortgage so
you can finance the repairs rather than paying for
them up front. We'll cover all those things on this
page.
But first, you'll need to get an idea of how
much it will cost to have the problems fixed. Call
a local contractor and get a bid on how much the
repairs will run. You don't have to get multiple
competitive bids because you're not shopping for
the best price at this point, you're just trying to
get a ballpark idea of how much the repairs will
cost.
Asking for a reduction in
price
The obvious concession to ask for
when repairs are required is to for the seller
to lower the price of the house. You don't
necessarily have to ask for the full amount of
the repairs, though. If the asking price is
$200k, and the repairs will run $10k, you might
ask for only $5k off the asking price. That's
because the seller may figure that any
significant problems with the house are obvious
to potential buyers even before they have the
house inspected, and that the price is figured
with those defects in mind. Though in that case
you might wonder why you would ask for
anything off the purchase price? The
answer is that it usually can't hurt. Usually
the worst that can happen is the buyer says no,
in which case you can try to negotiate a smaller
concession, or just buy the house for the
original asking price. In theory the seller
could be offended by a requested reduction in
price and try to back out of the deal, but
that's rare, and as long as you have a contract
the seller is obligated to sell.
Asking the seller to pay
closing costs
An alternative to asking for a price
reduction is to ask the seller to pay part or
all of your closing costs. What's the
difference between the seller paying $3,000 of
your closing costs vs. lowering the purchase
price by $3,000? Nothing, really, at least
nothing significant. So why would you ask for
this vs. asking for a reduction in price? The
answer is that a seller might be psychologically
attached to their sales price and won't want to
change it, while it might be easier for them to
make concessions in another area.
Note that your bank might limit the amount
of closing costs the seller can pay. For
example, I'm currently working on a house
purchase where my bank limits the seller's
contribution towards closing costs to 3% of the
purchase price of the home. I have no idea why
they impose this limit; I didn't get a good
explanation about it when I asked.
Asking the seller to pay
for repairs
Instead of asking for a discount,
you can simply ask the seller to pay for the
repairs. This can either take the form of
having the work done before you actually buy the
house, or having the seller put the repair money
into escrow so you can pay for the work after
the sale goes through. If the work is being done
before the purchase goes through and the
repairs will take a while, then make sure to
amend the contract to account for a later
closing date if necessary.
Rolling the repair cost
into the mortgage
If the seller won't pay for the
repairs, you will probably want to have the
repair costs added to the mortgage so you don't
have to come up with the cash up front. For
example, let's say you were going to get a $180k
loan, and the house needs $10k of repairs. If
your bank will allow it, you would instead get a
$190k loan, and use the extra $10k the bank
loaned you to pay for the repairs. Some banks
won't do this, but if not then you still have
another option...
Pad the sale price to
account for the repair costs
Let's say the seller won't pay for the
repairs, and your bank won't let you finance the
cost either. The sale price is $200k, and you
were going to put down 10% ($20k) and get a
$180k loan for the rest. The cost of the repairs
is $10k. What you do is to increase the
price of the house by $10k and get the seller to
pay for the repairs. The seller shouldn't mind
because they're not out any extra money --
you're paying them the $10k through the
increased sales price, and then they pay that
$10k towards the repairs. But doing it this way
lets you add the cost of the repairs to the
mortgage. Let's see an example in action:
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Original Way
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Clever Way
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Sale Price
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$200,000
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$210,000
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Down Payment (10%)
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(20,000)
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(21,000)
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Loan Amount
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180,000
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$189,000
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Seller's contribution towards
repairs
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0
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10,000
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Seller nets
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$200,000
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$200,000
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Giving the seller a few
different options
If you're going to ask the seller to
change the terms, give them two or three
different choices. If you give them just one
option, they'll view their decision as between
accepting a concession or rejecting it. But if
you give them a few different choices, then
hopefully they'll view their decision as
which concession they'll accept. This
won't work every time, but it's an old and
useful sales trick: get the other party to
choose among various options that all benefit
you, vs. choosing between accepting your offer
and rejecting it.
Let's see an example. Let's say the seller is
asking $200k for the house and it will need $10k
in repairs. Here are three different choices you
could present to the seller:
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A
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B
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C
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Sales price
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$190,000
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$200,000
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$205,000
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Seller's contribution towards
closing costs
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0
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6,000
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0
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Seller's contribution towards
repairs
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0
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0
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10,000
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Cost to seller
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$10,000
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$6,000
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$5000
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As long as the seller picks any of these
options, you win: You got a concession from the
seller.
You'll notice that A is the best deal for you
and C is the worst. Why wouldn't you set them
all up to be equal? Because if you did that then
the seller could be indifferent to all of them.
But if you make any choice a better deal than
the others, then the seller may focus on that as
the best deal for him/her. You can easily see a
seller gravitating towards B or C because it's
the smallest concession. But remember, if the
seller picks any of them, then you win by
getting a concession. You lose only if the
seller rejects all of them. That's why you want
the seller focused on which concession
s/he'll make rather than on whether
s/he'll make a concession.
Once you and the seller have agreed to any
new terms, you're ready to order
the appraisal.
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Amount spent so
far.
Red
items apply towards the purchase.
Amounts are typical, not exact.
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$40
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Credit Check
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To the Lender
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$150
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Option
Fee
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Paid to the Seller.
Might apply
towards purchase, depending on
contract. Allows you to walk away for
any reason.
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$1000
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Earnest
Money
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Held in Escrow, probably by the
Title company
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$400
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Inspection
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To private inspection company to
find physical problems with house
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$100
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Termite inspection
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To private company; required by your
lender
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($700)
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Termite treament
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(If necessary)
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$1690 - $2390
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Total
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