Avoid a collapsing deal

Over the last few months, several of our clients have walked away from the homes they were purchasing because of items that were uncovered by thorough home inspectors.

This can be frustrating for both the buyers and the sellers. 

By the time the home inspection is done, the buyers usually have their mortgage financing approved, which means they’ve been through a stressful time negotiating an offer then waiting to make sure they have everything they need lined up.

The sellers may have already written an offer on another home, which may have started a chain reaction of other purchases. 

Once the inspection has been completed and reviewed with the potential purchasers, if any significant issues are identified, the purchasers have to decide how to handle them.

Most purchase contracts now include a clause relating to the results of the home inspection. There is a price cap written in so that any minor issues are assumed to be dealt with by the purchasers. For example, any repairs under $2,000 would be assumed to be part of normal wear and tear or upkeep. 

Any repairs that need to be done that will cost more than the specified amount are generally discussed by the buyers and sellers through their respective realtors. Depending on market conditions at the time, these discussions can go several different ways.

• Sometimes this results in a reduced purchase price.
• Sometimes the sellers have priced the home accordingly and are firm with their price. 
• Sometimes the cost of potential repairs or the scope of the damage means that the purchasers decide to collapse their offer.

This is one of the reasons that I always encourage clients to work with realtors. Having a representative negotiate through this process takes the emotion out of it and can sometimes help people come to an acceptable compromise.

Depending on the repairs that need to be done. A Purchase Plus Improvements mortgage might be a great option for purchasers.

As an example, maybe you find the home of your dreams, but the home inspection shows that you need to replace the roof within a year. You do your homework and find that a new roof is going to cost $8,000.

As the buyer, regardless of whether the price is adjusted, you decide you are going to move forward with the purchase. Many lenders will allow you to add the cost of the new roof into your mortgage.

Here is the short version of how this works:

Quotes for the roof replacement are submitted to the lender. On closing day, funds are transferred to the seller to complete the sale. The funds for the roof are held in trust by your lawyer or notary.

Once work has been completed on the new roof, those funds are then provided to you. Each lender handles this slightly differently. Some will release the money based on a paid invoice; others will require an inspection by an appraiser.

Generally, you need to be able to cover the cost of the repairs upfront. This can be done by using other savings, a credit card or line of credit temporarily, or finding a contractor willing to wait a few days for payment.

As the seller, there are a few ways that you can avoid this.

For example, if you are preparing to list your home, hiring a home inspector will reveal any potential issues ahead of time. This way you can take steps to deal with any issues before listing. 

By spending a few hundred dollars up front, you could potentially save yourself pain, aggravation, and money once you have an accepted offer on your home.

On the other hand, you might learn your house is very solid with no issues, which gives you confidence negotiating a higher selling price.

Another way to potentially avoid a collapsed sale is to take care of regular home maintenance over the years you have your home. 

Heading into the new year most of us make resolutions. Why not make yours around adopting a regular schedule for inspecting and maintaining your home?

I found a few great lists online and am implementing them myself. I’ve taken one of the lists and broken it into tasks I am going to tackle one at a time. I’m old-school, so I have written them into my planner and spread them out over the year.

If you are currently house hunting and want to keep your options open, a Purchase Plus Improvements mortgage can also be used for renovations and updates. For more detailed information, here is a link to a previous article I wrote about this type of mortgage: Creating Your Dream Home.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.