This is a compilation of brief articles about the Request for Repair process in California Real Estate. Though the California Residential Purchase Agreement (RPA) is the governing document for this discussion, the overall principles and strategies will apply to most states and situations. Note that this article is not applicable to commercial real estate transactions, in California or elsewhere.
At some point in the life of a residential real estate transaction, the buyer will need to remove inspection contingencies built into the contract. In California, that point, by default, is on the seventeenth day after the contract has been ratified by all parties. That date can be negotiated to come sooner or later, but seventeen days is typical, so let’s use that time period for the purpose of these discussions.
If the buyer has to remove inspection contingencies by the seventeenth day (or cancel the contract!), then any request by the buyer for the seller to make repairs must be submitted and agreed upon before that date.
The inspection contingency removal is a pivotal event in the life of the transaction. Frequently it is a time of great stress for both sides, seller and buyer, and often the most dangerous period of the transaction. The inspection contingency removal is a signal that the buyer is satisfied with the property and ready to go forward to closure.
Different psychologies can come into play during this period, but let’s take a look at two typical kinds of stressful attitudes:
The buyer, beginning the purchase is infatuated with the property, thrilled that the offer was accepted, but now facing the reality of the home as sliced and diced by the various professional inspectors, the flaws, problems, warts, and zits exposed for all to see, comes down with a serious case of buyer’s remorse, second thoughts, jitters, what-ifs, and cold feet.
You, the seller, knowing that a Request for Repair is imminent, become defensive and paranoid, aware that two things might happen, both of them bad. (1) The buyer may cancel, having decided, based on the inspections, that the property is no longer acceptable, or (2) the buyer may slam down an ultimatum in the form of an extensive and expensive Request for Repair. “Fix these things or I quit!”
In the following sections, we’ll see what we can do to alleviate your concerns. What can we recommend to help you chill out? How about these qualities: fairness, flexibility, generosity, kindness, and plain old good manners?
2. A PRIMER FOR SELLERS
What’s good for the buyer is good for the seller.
What’s good for the seller is good for the buyer.
Many people don’t understand that sentiment, but it’s true nonetheless. Buyers and sellers are not enemies. They have a common goal: to transfer title from one to the other. Certainly, the seller wants the biggest check possible at the end of the transaction, and you want to spend as little as possible. Of course. Granted. Understood. But, neither you or the seller wants to see each other down the road in a courtroom. And I don’t want to be there either.
So, drive as hard a bargain as you can, but play fair. Be honest.
Okay, that’s it for today’s sermon. Let’s get down to the nitty gritty.
The buyer has the right to conduct inspections on your property and on all matters pertaining to the property (Home Owner’s Association documents, permits, liens, etc.)
You must make your property available for the buyers’ inspections.
You must have all of the utilities on and operable for the inspections. This includes the heating and air conditioning, hot water heater, solar systems, domestics well and sewer equipment, and so on.
Turn off all burglar alarms or make sure that the agent responsible for opening and securing your home knows how to engage and disengage the system.
If smoke detectors and or CO detectors are required, install these before the first inspections.
The buyers have the contractual right to be at the inspections, to walk through your property and discuss the findings with their inspectors in private. That is, without you hanging around, interfering, giving feedback, arguing, helping, eavesdropping, or otherwise making the buyers uncomfortable. You may request that your listing agent be present (if you absolutely must), but your agent should go find a corner to sit in, read a magazine, and leave the inspectors and buyers alone.
The correct protocol is for the buyers’ agent to unlock your home for the inspections, and then assure that your home is re-locked afterwards, lights turned off as appropriate, and so on. Sometimes the buyers’ agent will stay for the inspection, sometimes not, and sometimes the agent will come at the end to hear the findings. It’s the agent’s choice.
If you have pets, they must be removed for inspections. You cannot ask buyers, inspectors, or buyers’ agent to be responsible for your animals. (We’re not talking about fish or caged animals, of course.)
Inspections must take place by agreed-upon deadlines. (In California, the default deadline is 17 days after acceptance, but this may be negotiated in writing between you and the buyer.)
Requests for Repairs are generally governed by the “subject to” clause in the purchase contract. See the “Subject To” section for more discussion.
Having conducted (or waived) inspections, the buyer has the right to submit a Request for Repairs to you. The buyer must make the request prior to the inspection deadline.
You, the seller, have the right to:
- Ignore the request
- Deny the request
- Agree to the request
- Compromise (deny some items and agree to other items)
In almost all transactions, I advise you to make some response to the Request, a concession, no matter how small. Please read the relevant article on “Seller Response.”
Regardless of how you respond to the Request for Repair, the buyer is still obligated to:
(a) remove applicable inspection contingencies by deadline, or
(b) cancel the transaction (and receive a full refund of earnest money on deposit),or
(c) request more time to inspect, re-inspect, or continue to negotiate the Request for Repairs.
If you and the buyer cannot come to a meeting of the minds about the Request for Repair, and the buyer has not removed the applicable inspection contingency, you have the right to issue a Notice to Perform. If the buyer fails to perform, you have the right to cancel the transaction.
QUESTION: Under what circumstances may you retain some or all of the buyer’s earnest money deposit because of unsuccessful negotiation of a request for repair?
ANSWER: Hardly ever. Typically not worth the effort, and you usually lose the fight, at which time you may be liable for a fine of $1,000. I’m not kidding about this. Most of the time you are well-advised to return the deposit, dust of the chaps, and get back in the saddle.
3. YOU PREPARE FOR INSPECTION
You, the seller, should get ready for the Request for Repairs before your house goes on the market. Here’s what you can to do to mitIgate the stress of the Request–and enhance the probability of a successful transaction:
- Perform routine and deferred maintenance before the house goes on the market.
- Consider upgrades, but don’t go crazy or you may not get your money back. Consult with your reputable, competent, experienced Realtor before committing to upgrades. (My favorite upgrade? Curb appeal; just thought I’d mention it in passing.)
- Have the house and windows professionally cleaned before going on the market.
These actions will give the buyer confidence in the house and will usually pay off when they sit down to write a Request for Repair.
In some geographical areas it has become customary for the seller to order a professional whole house inspection prior to going on the market. Such a practice has its proponents and its detractors. Consult with your Realtor. Whole house inspections cost $350-550 depending on the location and the size of the house. Let’s skip this step for now. (Typically, I do not recommend it.)
Okay. You’ve done what you can to get the place spiffed up.
There’s one final, and supremely important, piece of your preparation: the Net Sheet.
The “net sheet” is also called the “seller estimated settlement” and other variations. It shows you how much money you are going to get after the transaction is concluded and after all of your selling expenses are paid.
In the next SECTION, I’ll show you how the Net Sheet is constructed and why it plays a crucial role in negotiating the Request for Repairs.
4. THE SELLER NET SHEET
You, the seller, should request a Net Sheet, aka Seller’s Estimated Settlement, from your listing agent before the property goes on the market. Net Sheets provide you with information to help make numerous decisions, one of which is how to respond to the Request for Repair. I prepare Net Sheets for my clients to include several different selling price scenarios, but to simplify things for this discussion, I’ll just use a single story-line.
Let’s say the listing price of your home is $400,000.
You and the buyer finally agree on a sales price of $380,000.
Let’s deduct typical seller expenses in order to arrive at the “net,” the all-important bottom line, the amount of the check I happily put into your hand.
- $22,800 Commissions at 6%
- $151,000 Existing mortgage loan payoff (wild numbers I am inventing for this exercise)
- $3,000 A bunch of closing costs and fees (title insurance, notary, escrow, and so on)
- $2,000 Preparation and staging (more wild numbers)
- $500 Transfer taxes (in some areas you pay, in some areas buyer pays, and in any event, the expense can always be negotiated between seller and buyer)
Those expenses, subtracted from the sales price of $380,000, yield a “net” of $200,700.
Please understand that these are just rough numbers to illustrate a point, and there are always miscellaneous things that pop up, or that are peculiar to your situation (local retrofit requirements, for example).
Now, you expect that you are going to get served with a Request for Repair in some form or another. My strong, heartfelt advice, based on years of experience and hundreds of transactions is this:
Set aside money in your Net Sheet for those repairs before you go on the market.
The psychology is impeccable. In your mind you have already spent the money, so when the time comes to respond to the Request for Repair, quickly and under pressure, you are ready. You’ve already “spent” the money. You don’t feel under assault, taken advantage of, nickel-and-dimed to death.
How much money to set aside? No way to say. It depends on the condition of the home you are selling. It depends on what you disclose to the buyers before they write their offer. It depends on the phase of the moon and your astrological sign. How the heck do I know? But let’s pretend that your home is in A-1 condition. You have a recent Wood Destroying Pest Inspection in hand, and except for some areas of dry rot (fungus) on the exterior, you are in good shape. No termites or other vermin. Maybe the Pest Company bids $1,000 to take care of it. Lucky you. You seem to be in good shape.
But, the buyer is going to bring their own inspectors to the property. Do you think these professionals are going to find other problems, warts and zits you didn’t even know about? You bet your ass they will! Dollars to donuts, a bunch of unexpected items are going to find their way onto a Request for Repair, all backed up with a professional report.
So, under these circumstances (A-1 condition, $1,000 for pest repairs), I would recommend that you set $5,000 aside on your Net Sheet. Now your anticipated net, your profit, is $195,700.
What happens if the repairs come in at less than $5,000? Why, your “net” goes up! Yay for you!
What happens if the repairs come in at more than $5,000? That’s the topic of another section: The Request for Repair is More than Anticipated.
One final thing, and a very important thing it is. Keep your Net Sheet absolutely secret, and make sure your agent does the same. The only eyes that should see the Net Sheet, besides you and your agent, are those of your accountant (if you have questions about taxes, for instance) or those of your lawyer (if you have estate or partnership or some other kind of knotty issues to work out.) Keep the Net Sheet secret, right? Shhhhh. Mum’s the word.
5. PEST INSPECTIONS
The subject is somewhat complex, but it is worth your concentration. Successful transactions (and substantial funds) hinge on your understanding of the topic).
We have noticed an upturn in pissing matches between Wood Destroying Pest inspectors. A new pest inspection “environment” has evolved from recent changes in the California Residential Purchase Agreement (RPA), and those changes have caused us to rethink our tactics regarding the timing and responsibility for pest inspections and repairs.
Let me remind you of four of crucial points about Wood Destroying Pest Inspections. Pay close attention to number four.
- Unlike home inspections which are private and proprietary, pest inspections are public and permanent. They are filed with the California State Pest Control Board.
- If a pest inspection is made part of the contract, the lender is going to demand a pest clearance before funding the loan. This requirement removes a useful negotiating tool from the hands of sellers and buyers.
- The results of any and all pest inspections must be disclosed to the buyer. You cannot hire multiple inspectors and then select the most favorable report to disclose to the buyer–and conceal those reports less favorable.
- Buyers have the right to get their own pest inspection regardless of whether you have already provided a current inspection, and regardless of whether you have already provided a current pest clearance. Can you see how this sets the table for conflict between dueling pest inspectors, between you and the buyers, between real estate agents?
Let’s look at an example:
Your pest inspector says that there is such-and-such damage and estimates repair and clearance cost at $2,000. You pay for the repairs and get the clearance. Then the buyers bring in their own inspector and he/she reports additional damage and estimates $5,000 to repair and provide an official pest clearance. Your inspector accuses the buyers’ inspector of inflating the report in order to have a big pay day—and of “self-inflicting” the additional damage by aggressive poking and probing. The buyers’ inspector accuses your inspector of incompetence and laziness. The buyers accuse you (and your agent) of hiring an inspector that will “go easy” on you. You accuse the buyers of bringing in a hired gun to ramp up the cost in order to beat down the price of the home or gain some other advantage. The real estate agents on both side try to keep the transaction together while going nuts.
There has to be a better way. There is.
Let’s look at the change in the Residential Purchase Agreement (RPA) that has contributed to the hostile new environment, and has caused us to alter our tactics. The Wood Destroying Pest Addendum (WPA) has been discontinued and is no longer used as a rider to the contract, nor is there (1) specific mention of wood destroying pest inspections in the RPA or (2) specific sections for assigning responsibility for pest clearance within the contract itself. There is a blank section in the contract wherein the buyer can propose that you order a pest inspection; pay for it, and/or clear pest issues. But, the California Association of Realtors, and its lawyers, think that the best place, and best time, for dealing with pest issues is in the Request for Repair.
Crucial Tactic Number 1
In years past we felt that the optimum tactic was for you to get your own pest inspection before going on the market, and in some cases, to complete necessary pest repairs before going on the market. This allowed you to advertise the home as pest-free. No more. We now think it is best to put the responsibility for ordering pest inspections entirely on the buyers (who can elect not to have a pest inspection if they so wish). Based on their own report, the buyers have the right to request pest repairs, along with any other repairs, on a single document: the Request for Repair. Keep in mind this critical point: the Request for Repair is not a part of the contract. Why not? Because you do not have to sign it, and can, in fact, ignore it altogether.
Isn’t that interesting?
I’ll speak more on how you respond to Request for Repairs later, but let’s stick to pest tactics for the moment.
Because the Request for Repair is not part of the contract, it does not cross the desk of the buyers’ lender. Consequently, negotiations for repairs, and their costs, remain in the hands you and the buyers—where they belong. How important is that? It’s everything. If lenders get involved in repair negotiations, it may render the transaction much more difficult to conclude.
Crucial Tactic Number 2
If you are a buyer:
Do not write pest inspection language into the blank spaces of your offer, because if you do, the lender will demand a pest clearance, and you will no longer be able to negotiate a price concession or credit in lieu of pest repairs.
Let’s look at an example:
Your home has an old porch with a bunch of dry rot. Cost to correct? Let’s say $5,000 according to the pest inspector. For $5,000 the buyer gets the same old porch with some new boards and posts here and there, different stains that don’t match, and, let’s face it, an eye sore—and a clearance to satisfy their lender. But what they really, really want to do is tear off the porch completely and build a brand new, totally re-designed modern porch with state of the art materials. Cost for that? Let’s say $15,000. Their best move is to get $5,000 in lieu of pest repairs from the you to offset the cost of the new porch.
Their lender is not going to allow them to do that—if the lender knows about it. Does the lender want to know about it? No. The lender does not want to know about it. What the lender wants to know is that all reported wood destroying pest damage has been corrected before funding the buyers’ loan.
If you are a seller:
Do not accept contracts with language that requires you to provide pest clearance. How do you know how much such a pest clearance is going to cost? Do you like writing blank checks for strangers? In the old days, agents might write a counter offer that says something like “Pest damage repairs to be capped at $2,000” or some such bullshit. It doesn’t work. Why? Because if the lender gets wind of any pest inspection they will have no choice but to require that all corrections be made before funding–and your $2,000 “cap” be damned.
Let’s look at an example:
You and the buyer agree to a $2,000 “cap” on pest repairs. The actual cost of the repairs comes in at $4,000. You say, “I agreed to $2,000 and the other $2,000 is on you.” Even if the buyers agree to share the cost, the work must be performed, and the clearance issued, before the transaction can close. This puts buyers in a position of spending $2,000 on a house that doesn’t belong to them (yet—or maybe never if something goes wrong). Which buyers are going to do that? Not my buyers! There are numerous reasons (liability, insurance, etc.) for buyers to stay out of repairs before they actually own the home, but for now, let’s just agree—buyers do not pay for repairs in advance of owning the home.
(Hey, maybe we can do this “on the side,” you know, “outside of escrow,” just a friendly little agreement between seller, buyer, agent, and contractor? The only problem is that it’s illegal. It’s called fraud if a loan is involved, and risky business if a loan is not involved. Don’t do it. Do you want CJ to lose her license? Nah, I didn’t think so.)
To sum up:
(1) Do not accept, wood destroying pest language in the purchase contract, (2) buyers should be responsible for hiring the (one and only) pest inspector, and (3) negotiate any and all pest repairs in the Request for Repair.
Epilogue to this article: There are special circumstances when a pest clearance is going to be necessary: (a) VA loans, for instance. (b) When Home Owner Associations get involved, for instance. (c) When elderly or incapacitated persons are buying or selling, for instance. (d) When termites or beetles or bats or snakes have infested the home, for instance. I’m sure every agent has examples or reasons for demanding a clearance, but for normal transactions, we will recommend the tactics summarized above.
6. YOUR “AS-IS” SALE
Sometimes sellers get it into their heads that they are going to sell their home “As-Is” with no repairs. I’m sorry to tell you, but successful As-Is sales rarely happen. But, since you insist, let’s pretend that the seller (not you, for crying out loud, some other seller, the bullheaded one) is adamant—no repairs!
- “I’ve put too much money into this property already, and I’m not spending one more cent.”
- “With the mortgage payoff, the commissions, and all the fees, I will be lucky to break even.”
- “I’ve worked six months getting this place ready and it’s in better shape than any other house in the neighborhood.”
- “All my neighbors say my house is under-priced and that I should ask for more anyway.”
And so on.
(By the way, your neighbors will always say that you are not asking enough for your house. Always! Why? Because the value of their property will be based on what you sell yours for. It’s just human nature. )
When you advertise your home As-Is, what message are you sending to the buyers?
- “We’re tough, we’re inflexible, you ain’t taking us to the cleaners.”
- “This house is so beat down, that it’s not worth spending money on.”
- “We’ve already deducted repairs off the price.”
And so on.
Let me pose a scenario for your consideration:
You’re in contract for $380,000, and you have stated (emphatically, clearly, make no mistake about it) that the property is to be sold As-Is. You’ve been on the market for sixty days, and in contract for fifteen days, and you have another forty-five days until the transaction closes and you get your “net” check for $200,700. That’s a total of one hundred and twenty days (four months) from starting gun to crossing the finish line. It costs you $3500 a month to hold the place (mortgage, tax, utilities, insurance, and holding costs (!) etc) for a total of $14,000 for the duration of the four month transaction. Are you with me so far?
You get a Request for Repair with a price tag of $2,000. Your “net” drops from $200,700 to $198,700. You’re not going to stand for that! You tell the buyers “No! I told you this was As-IS!” The buyers cancel the transaction, get their deposit back(!), and walk away. Now you start over. Another four months go by (if you’re lucky) with a holding cost of another $14,000. Now your best-case “net” is $186,700 ($200,700 – $14,000).
Let’s see, if you had ponied up the two grand for the repairs, you would have $198,700 in your pocket, but by sticking to your As-Is guns, you can now look forward to $186,700, (if you’re lucky) a loss of $12,000.
Is this good business? Of course not. So if you have the choice of closing the transaction by spending more, or cancelling the transaction and continuing to pay the costs for holding the property longer (as it goes stale on the market and becomes stigmatized by a failed transaction), which would you choose?
What should guide your choice?
- The Net Sheet discussed earlier
- Common sense
- Good manners
QUESTION: How much time do buyers have to conduct their investigations and deliver a Request for Repair to the sellers?
ANSWER: By default, the California Residential Purchase Agreement (RPA) gives the buyers seventeen days (17) to conduct investigations. This deadline is negotiable between buyer and seller.
QUESTION: Why would the buyer or seller want to shorten or lengthen the default seventeen day investigation?
- Four reasons to shorten the investigation period: (1) a quick escrow, (2) buyer agrees to accept previously conducted reports, (3) the market is overheated with intense buyer demand, and, should there be a cancellation, you insist on an accelerated inspection timetable in order to get the property back on the market, (4) you want to know for sure that the buyer will “stick.”
- Four reasons to lengthen the investigation period: (1) the property is occupied by a tenant or otherwise unavailable, (2) buyers are out of the country or unable to investigate for valid reasons (hospitalization, etc), (3) the property itself poses difficulties or complexities that will take longer than seventeen days to resolve (permits, inspectors or appraisers are booked weeks in advance, bad weather, etc.) (4) the initial inspection may require further inspections from busy specialists.
QUESTION: How much time do you have to respond to the buyer’s Request for Repairs?
ANSWER: This is trickier that it seems. Bear with me as I tell the easy, non tricky, story first:
Prior to the seventeenth day, the buyer, having completed all investigations, submits a Request for Repair. You respond. There is a negotiation and a meeting of the minds. The buyer removes the inspection contingency. Everybody breaths a sigh of relief. The transaction moves ahead into the next phase.
Here’s the tricky version.
The buyer submits the Request for Repair. There is no meeting of the mind. In fact, you ignore the request (and by contract, it is your right to ignore the request. Can that be true? You have the right to ignore the request? Yep. Hey folks, you can’t make this stuff up.)
But wait, the best is yet to come. The buyer is still obligated to remove the contingency. Or what?
Or cancel the transaction.
And you can go back on the market and start all over.
QUESTION: When must agreed-upon repairs be completed?
Five days before scheduled close of escrow.
8. THE “SUBJECT TO” CLAUSE
From paragraph 11 of the California Residential Purchase Agreement (RPA), please read this subtle, confusing, profound, and difficult passage:
CONDITION OF PROPERTY: Unless otherwise agreed in writing: (i) the Property is sold (a) “As-Is” in its PRESENT physical condition as of the date of Acceptance and (b) subject to Buyer’s Investigation rights.
What does it mean?
Buyers, make your offer on what you (you intelligent, observant grown ups) actually see. If the windows are broken, let that be reflected in your offer price. Don’t think you can make the offer and then come back and say to the sellers that they have to reduce the agreed-upon price because of broken windows. You knew the windows were wonky when you made your offer. If the house is pink, and you want it blue, reflect the cost of a paint job in your offer price. Offer on what you actually see, the Property in it’s PRESENT physical condition.
However, though the buyers are certainly intelligent and observant grown ups (we hope), they are not professional inspectors. They have the right to bring in inspectors of their choosing or examine existing reports, and based on that additional information (which they could not reasonably be expected to know at the time of making their offer), request that you make repairs (or offer concessions).
That’s the “subject to” part of the contract.
10. THE BUYER CREATES A REQUEST FOR REPAIR
From the California Residential Purchase Agreement:
14B(1) Buyer has 17 (or ___) Days After Acceptance, unless otherwise agreed in writing to: (i) complete all Buyer Investigations; review all disclosures, reports, lease documents to be assumed by Buyer pursuant to paragraph 8B(4), and other applicable information which Buyer receives from Seller, and approve all matters affecting the Property; and (ii) Deliver to the Seller Signed Copies of Statutory and Lead Disclosures and other disclosures Delivered by the Seller in accordance with paragraph 10A.
14B(2) Within the time specified in paragraph 14B(1), Buyer may request that Seller make repairs or take other action regarding the property (C.A.R. Form RR). Seller has no obligation to agree or respond to (C.A.R. Form RRRR) Buyer’s requests.
In short, you get a reasonable amount of time to inspect the property, after which you may request the sellers take action, usually in the form of repairs or cash concessions or a combination of the two.
Having completed inspections, you devise a list of items you want the seller to correct (or compensate you for) in order for the transaction to move forward. As you refine the repair list keep in mind:
- You should consult with your real estate agent about each item and your list as a whole.
- Items that concern health and safety are the most potent items and the most likely to be granted by the seller.
- Some items may already be agreed-upon in the contract (pest repairs for example).
- The seller may be obligated to make some repairs by law or local governance (smoke and CO detectors, water heater strapping, sewer retro fits, home owner association regulations, etc.) so you do not have to include these on your request. You may include them if you want, but you don’t have to. The seller is still obligated to make these mandated corrections.
- Request items generally must fall within the scope of the “subject to” clause in the Purchase Contract. Please read the relevant article about Subject To Clause.
All items on the Repair list should be evidenced by professional inspections and should be referenced by inspector, date, page, and item number.
(Shhhh. Now, let’s talk strategy, just you and me.)
If you are trying to blow up the transaction, an awesome way to do it is to present the seller with an excessive repair list.
That being said, you may want to include one or more items on your list that you are willing to give up. Capiche? This doesn’t mean to list everything you can think of and “see what you get.” Unless you are trying to piss off the seller. Sellers who get mad, get unreasonable.
The Request for Repair phase is an excellent opportunity to demonstrate your best manners. This phase is nerve-wracking for both you and the sellers. More transactions crash at this point than at any other time. Flexibility and understanding, grace and generosity, grease the wheels and keep the transaction on track.
Decide ahead of time if you will accept compensation (price reduction or credit at close of escrow) in lieu of actual repairs.
Get your request in well before the deadline. You need a few days before your inspection contingency removal deadline to (a) negotiate with the seller or (b) to learn that the seller is not going to negotiate. After which you must (a) lift your contingency and go ahead with the transaction anyway or (b) cancel the transaction.
You need to remove the applicable contingency or cancel before deadline or risk losing your earnest money deposit!
9. NO SELLER RESPONSE PRIOR TO APPRAISAL
We advise you to refrain from responding to buyers’ Request for Repairs until after the appraisal (if any) has been filed. In other words, no appraisal, no response from you.
In the California purchase contract (RPA), the (1) Appraisal and (2) Request for Repair contingency removals, by default are due before the seventeenth day after the contract is ratified. Of course, these deadlines can be negotiated, but for the purpose of this example, let’s say they are due on the default date, the seventeenth day, after which the buyers must remove both contingencies (inspection and appraisal) or quit.
Let me sketch out an example. The appraisal comes in low, very low, twenty-five thousand dollars below the agreed-upon sales price. Yikes. The transaction is in trouble. Either the buyer must make up the difference in cash (lender permitting), oryou must lower the price, or some combination of the two. In any event, to save the transaction there will be a dramatic re-negotiation.
Request for repairs should not be a part of this re-negotiation.
Let’s say you have, prior to the appraisal, agreed to buyer request for repairs, or cash in lieu of repairs, or a price reduction in lieu of repairs, or some combination. You have already given this to the buyer. Then comes the low appraisal. Now, the buyer wants a price reduction on top of the repair concessions already agreed upon. Say what? In Texas Hold ’em parlance, this is like you showing your hole cards before the flop. You have already given away your hand.
You need to be in position to say, “Okay, I’ll reduce the price so you can secure the loan, but that’s it. No repairs. You’re already getting (in this example) twenty-five thousand dollars in price reduction.”
I’ve said this before, but let me repeat myself, nobody wants the lender involved in repairs–least of all, the lender. In the sorrowful event of a low appraisal, do not let repair negotiations get into the lender’s file, or you are almost certain to lose the transaction.
10. YOU RESPOND TO THE REQUEST FOR REPAIR
How do you respond to the buyer’s Request for Repair.
(Ha ha. My little joke.)
Let’s take a look at Section 14B(2) in the California Residential Purchase Agreement (RPA).
(2) Within the time specified in paragraph 14B(1), Buyer may request that Seller make repairs or take other action regarding the Property (C.A.R. Form RR). Seller has no obligation to agree or respond to Buyer’s request.
However, if you ignore or reject the request, there is a high likelihood that the buyer will cancel the contract, retrieve their earnest money deposit, and go elsewhere. And, by the way, to clear up any misconception about the deposit, it will be returned to the buyer. The buyer has the right to request. You has the right to refuse. And the buyer has the right to get their deposit back–all of it.
Unless you are deliberately trying to blow up the transaction, you should give careful consideration to the buyer’s request. Ignoring it altogether is, in my opinion, insulting and rude unless the buyer has given you ample reason for such bad manners. Moreover, a total rejection is bad business, again in my opinion.
It is advisable in most situations for you to respond with some concession, however small, to the buyer’s request. If the requests are modest, you should consider granting most or all of them. If the requests are more substantive, you should consider granting some of them. but not all. You can see at this point, midway through the transaction, you and the buyer will probably be involved in a secondary negotiation–one that can send the transaction swirling down the toilet.
Usually, this is the most dangerous time of the sale. Nervous buyers, suffering from cold feet, may be looking for an excuse to bail out. Wise sellers should, therefore, be cautious, judicious, mannerly, and fair.
Here are the various methods you can respond:
(1) Agree to accomplish some or all of the repairs requested by the buyer.
(2) Offer a cash concession in the form of a credit to the buyer at close of escrow. Some buyers really prefer this. Why?
- They can use the credit to cover closing costs.
- They can personally supervise the repairs after they take possession, perhaps using contractors and materials of their choice, perhaps using the money for other items (furniture, landscaping, whatever)
(3) Offer to reduce the price. This will cost you the same amount as a credit, but has different results for the buyer.
- It may reduce the annual property tax basis depending on what state the property is situated.
- It will usually lower mortgage payments.
(4) Offer some combination of the above.
“Avoid the word ‘no’ and, in fact, any negative language.”
Suppose you receives an outrageous demand for repairs, and, after analyzing the expense, you estimate an expense of $10,000 to make the corrections. You instructs your listing agent: “Tell that buyer to bite me. I ain’t gonna do it.” There goes the deal, right down the tubes. After calming down, I suggest, rather, that you say this:
“We have examined your Request, and we are pleased to grant you a credit of $1,000 at close of escrow for any and all repairs.”
One final note: I usually advise you to offer a credit or a price reduction to the buyers instead of actually performing repairs. It is much cleaner and less stressful on all concerned if a cash settlement can be reached. There are, of course exceptions: (a) state or local safety requirements that must be met before close of escrow, (b) occasional conditions foisted upon the transaction by the lender, (c) repairs agreed upon in the original contract, (d) the seller is a licensed tradesman capable of making satisfactory repairs, and (e) so forth, most of which exceptions are known long before the Request for Repair arrives at your doorstep like an unwelcome house guest.
11. THE REQUEST FOR REPAIR IS EXCESSIVE
Sometimes you, the seller, receive a Request for Repair that is excessive–or that’s what you believe, and what is “excessive” anyway?
Only you can decide when a Request for Repair is over-the-top, and how much over-the-top, and what to do about it. Your canny listing agent may be able to offer advice, but in the end, you are going to have to step up with a decision.
Let’s say that you have budgeted for “reasonable” repair expenses at $5,000. The Request arrives (on time) with (a) repair costs estimated at $15,000, or with (b) a request for credit-to-buyer or price reduction of $15,000. That’s $10,000 more than you anticipated.
You remember my earlier advice about “negative responses,” so you will not respond to the buyer by saying “bite me.”
Nor will you ignore the Request or reject it completely.
Rather, you will say something like: “We have received your request and we are happy to accommodate you with repairs (or credit or price reduction) in the amount of $4000.” (Leaving you with $1000 of your repair budget if you need to make another smallish concession).
Maybe the buyer comes back with a counter offer somewhere in the middle. Maybe you take it. Maybe you re-counter. The art of the deal, right?
Let’s say that the buyer’s request for $15,000 comes with repair estimates (evidence!) from reputable contractors. The buyer’s roofing inspector has stated that your roof is in poor shape, not worth fixing, and a roofing contractor has confirmed the report and estimated $10,000 for a new roof. You can challenge the roofer’s bid with a bid of your own from another contractor, but let’s say that, for this discussion, the reasonable cost for the new roof actually is $10,000. The buyer’s evidence is sound. The roof is shot. The buyer states that without a new roof, there is no sale.
What do you do?
1. You, the seller, can still attempt to negotiate. You might offer $5,000 toward the cost of the new roof to be installed after close of escrow, buyer to be totally responsible for installation (and any cost overruns).
2. You, the seller, can hold firm, no concessions, risk cancellation, go back on the market knowing you have a damaging roofing report against you. Do you have to disclose this damaging report to future buyers. You bet your ass you do. Always, always remember: When in doubt, disclose. So now you are back on the market with a bad roof. Gee. Do you think you are going to see that bad roof reflected in your next offer? Meanwhile, time is going by, your home is getting stale on the market, and your holding costs are mounting up.
True Storytime: Buyer and seller were stalled over $5000 for foundation repairs. The seller got “pissy,” and the buyer fell “out of love” with the home and stated that he just “didn’t want to do business with that jerk,” and cancelled. The house remained on the market for many months, costing the seller $4,200 a month in holding expenses. Now here’s the part that hurts both buyer and seller: the agreed-upon sales price was $760,000. That’s right, $760,000! And the transaction crashes over $5,000, less than 1%?
Certainly the listing agent in this parable (not us!) has some share of the blame by (a) failing to make the seller see how much his intransigence was going to cost him in the long run, and (b) how it was going to impact his “Net,” and (c) that the repair being requested (a slipping foundation issue, for Pete’s sake!) was not going to go away and would have to be disclosed to the next buyer.
The buyer’s agent (yep, us) also has some share of the blame for allowing the buyer to cancel because “the seller is a jerk.” This is business, and in my little part of the world, a price tag of $760,000 is “significant” business. Buyers and sellers both need to realize that, in a month, they won’t even remember each others’ names. So he’s a jerk, so what? Once again, this is business.
3. You, the seller, can examine the evidence provided by contractors and inspectors, find it compelling and accurate, and accept that the home is not as wonderful as you thought, and is not worth as much as agreed upon in the initial contract, and suck it up, concede to the buyer, conclude a successful transaction, and get on with your life.
4. You, the seller, can examine the evidence and determine that the request is excessive and that you have a reasonable chance of securing a better “net” by going back on the market. You make your final offer, if only a token, and if rejected by the buyer, issue a Notice to Perform (charging the buyer to remove all inspection contingencies) and cancel.
In summation, the most important calculation for the seller is (a) cost of requested repairs vs. (b) cost to hold if the transaction cancels. The net, the net, and only the net should be your mantra.
12. THE BUYERS’ FINAL WALK-THROUGH
In the five-day window before the transaction closes, the buyer has a right (some say the obligation!) to come by for a “final walk-through.” In California it is called “Verification of Property Condition.”
Take it seriously and prepare for this important visit:
- Be sure all the utilities are still on.
- Be sure your four-legged creatures are somewhere else.
The Final Walk Through is not a re-inspection. In fact, the Walk Through is limited to these three actions:
1. Verification that the property is still in the same condition as when the offer was accepted. Do not remove fixtures or appliances or anything else that was part of the sale. (This can be a bit tricky, so be sure to check with your listing agent before you take down that favorite chandelier.) Make sure you have kept the landscape in good condition. If there has been damage to the home or grounds during the escrow period, make sure it has been put aright.
2. Verification that all repairs, (a) those agreed upon between you and the buyer and (b)those required of you by state or local regulations, have been completed in a manner acceptable to the buyer.
3. Verification that all your personal property is gone (including trash) and that, if required, your property has been cleaned as agreed.
Occasionally, the third verification is not possible because you are still moving out, you have boxes everywhere, the carpets are still filthy. the trash cans are overflowing with more to come. What do you do? Let your expert real estate agent work with the buyers’ agent to figure something out. They’ve done this before. Just alert your agent ahead of time.
Occasionally, the buyer will ask you to be there to answer questions. Graciously agree. But while you are showing the buyer “the ropes” be sure you say as little as possible, make the interaction as brief as possible, depart as soon as possible. Be friendly and positive, of course, but don’t volunteer information that has not been asked for. Don’t hang around. Don’t shoot yourself in the foot. Don’t fumble the ball on the one-yard line.
Give the buyers a warm wish for happiness in their new home, maybe a potted plant or some little housewarming gift–and vamoose.
13. FINAL THOUGHTS
Here are summary points to keep in mind:
In the majority of cases, the interests of buyers and sellers are well-served if they never meet each other face-to-face. Let the agents do their jobs.
You should never be in the home during buyers’ scheduled inspections. Buyers have a right to “be” in the home, and to “try it on” without you nervously or suspiciously following them around, breathing down their necks, eavesdropping, and making a nuisance of yourself. Buyers have a right to consult privately with their inspectors in the home during and after inspection. The same goes for the your listing agent who should facilitate the scheduled inspection and then go away.
When in doubt, disclose.
Avoid the word ‘no’ and, in fact, any negative language.
The net, the net, and only the net.
This is business.
What’s good for the seller is good for the buyer.
What’s good for the buyer is good for the seller.