5 Things Homebuyers and Sellers Should Know About Credits
After months of searching for the perfect home, writing multiple offers, and dealing with sellers who won’t budge on price, you’ve finally got a contract on the perfect home. It took you and the seller weeks of negotiations and several rounds of offers to get there. But, you have a deal at last.
Or do you?
Too often, getting a signed contract and putting your money into escrow is simply the beginning of what can become yet another round of negotiations. Here are five things every home buyer and seller should know about last-minute credits.
Usually, your real estate contract provides for a property inspection. As part of your inspections contingency, you may have a general property inspection performed. Depending upon the property and the issues, you might also have a specific type of inspection for the sewer line, pool or roof. Also, depending on which part of the country you live in, it may be important to have a termite or mold inspection.
These inspections can bring to light issues that the buyer couldn’t possibly have known about before writing an offer and signing the contract. Once inspected, the buyer may still be interested in pursuing the sale. But given the needed repairs that have come to light, the buyer will probably want to re-negotiate the price by asking for credits or cash off the purchase price, usually up to 3 percent, per most lenders. To come up with a reasonable figure, the buyer or seller will often get two to three bids and use the average of them combined.
2. Sellers may try to avoid giving credits by having work done before escrow closes.
Other times, you and the seller might agree to have the work done prior to the close of escrow. Or the seller may require that the credit be given directly to a contractor for the purpose of performing the specific, required work and nothing else.
These agreements help protect the seller because many times, a buyer asks for credits just to help offset the closing costs — and never intends to do the repair work. It also protects the seller in the event that initial estimates for needed work turn out to have been overstated.
For example, a property inspection performed on a San Jose, CA condo during escrow uncovered that water was leaking from the condo’s master bathroom into the unit below. Two different estimates calculated that the needed repairs would involve ripping out and replacing bathroom tiles at a cost between $8,000 and $10,000. The sellers gave the buyers an $8,000 credit. After moving in, the buyers had the leak permanently fixed — with a $200 caulking job.
3. Buyers who ask for credits just to get the price down may be taking a chance.
Many times, the buyer may concede to the seller on purchase price after a long road of negotiation. The buyer might do this knowing that they can come back to the seller during the property inspection contingency and ask for an additional concession. The buyer may even feel empowered now that they’re in contract, had their loan approved, completed a series of inspections and are just weeks away from closing. The seller isn’t going to go back to the drawing board over a few more dollars, right?
Maybe. If it’s a strong buyer’s market, there’s a good chance you can pull it off. If it’s more of a neutral or a seller’s market, the seller may feel they actually have you by the strings. They’re assuming that you’re the one who, having invested all this time and money on inspections and an appraisal, isn’t going to walk away over a few dollars.
Bottom line: Using property inspection just to get the price down comes with risks. And then there’s that karma thing: Doing this to a seller may come back to bite you when you’re the one trying to sell.
4. Sellers should consider having a property inspection before listing.
The goal is to avoid any further negotiations once you’re in contract, because they’re not going to be in your favor.
If you know the roof is near the end of its life or the furnace breaks from time to time, let it be known up front via your disclosure statements or even verbally communicated through your real estate agent.
Depending on local custom and the market, you might even go as far as having your own property inspection done before listing the home. This way, you can iron out or repair any outstanding items or, at the minimum, make the inspection report available to buyers. When the buyers are making their offer, they can come up with a final price knowing what they’re getting. For more on this topic, read “Get a Property Inspection Before You List.”
If you have an inspection report or are otherwise assured your property is in great shape, you could even ask for an “as-is” clause in the contract. Though it’s not necessarily enforceable, it will send a strong message to the buyers that you aren’t open to more negotiation; that the property has been inspected; and that you’ve done all you can to make its condition known to the buyer.
5. Buyers nearly always ask for credits, so sellers should give themselves some cushion.
You should also leave some additional room for negotiation when you’re in escrow. Always assume the buyer will ask for minor repair work; they nearly always do. If you leave some cushion for yourself, you’ll feel better about the deal and you’ll have protected yourself against the inevitable. Conversely, the last thing you want is to be blindsided by a buyer asking for a few thousand dollars credit — just when you think the deal is finally done.
Brendon DeSimone is a Realtor® and real estate expert based in San Francisco and New York. He is a contributor to Zillow Blog, has collaborated on multiple real estate books and is often quoted by major media outlets. Follow Brendon on Twitter.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.