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What To Do When Your Buyer Wants You to Spend Money Before Closing

by Ken Corsini on November 29, 2012 · 6 comments

  
buyer upgrade requests to home sellers

Is it just me or do buyers have an entitlement mindset these days? There is no doubt that it has been a buyer’s market for the last few years  (although I am seeing a fairly dramatic shift in my market in recent months).

Yes, it has been hard for buyers to qualify for financing.
Yes, there have been fewer buyers in the market.
Yes, there has been ample supply of inventory to choose from, but does that mean that we as investors should bend over backwards to accommodate our prospective buyer’s every whim and fancy?

The last 3 retail deals that I sold have involved buyers that have asked us to go above and beyond in order to make the property exactly the way they want it. While I can understand that a buyer wants to negotiate as much as possible, it’s important that as the seller, you protect your interests as well. The last thing I want to do as the seller, is sink a bunch of money into upgrades and unreasonable repairs for a buyer that may not end up closing on the property.

It basically comes down to how much you as the seller want to gamble that your buyer will actually close on the property. While you will almost always end up putting some work into a house as part of the negotiation, there are certain strategies that I’ve employed over the years to decrease the hassles and lower the risk associated with a buyer’s requests:

Strategies to Minimize Your Costs as a Seller of Real Estate

Non-refundable earnest money:  When a buyer is adamant about a large repair or upgrade before closing, it is always possible to ask for additional (non-refundable) earnest money. This way, if they back out of the deal or can’t close for any reason, you have some cushion to help cover the costs of the repairs and upgrades.

Escrow Agreements:  Another strategy I’ve employed in the past was the use of an escrow agreement that outlined work to be done after the closing. In doing this, the buyer and seller typically agree on an amount equal to the cost of the repairs to be held by the attorney (or escrow company) at closing. This money is not released until after the work has been completed (typically performed within a week or two after the closing). As a seller, this is a great way to get the property closed first and eliminate the risk of investing money into repairs for a seller that may not have closed.

Lower Sales Price:  Often times I’ve found that it’s easier to simply avoid doing repairs or upgrades for a buyer if possible. This way, you avoid unmet expectations or disagreements as to how the work should be done and the risk of investing money for a buyer that may not close. There have been many occasions where I simply offered to lower my sales price and allow the buyer to use the extra money to do the work themselves.

Contribute More Towards Closing:  Along the same lines as lowering the sales price, I like to find ways to avoid doing the requested work if possible.  Sometimes offering an additional contribution towards closing costs in exchange for not doing the work is actually better for the buyer. This is especially true for buyers who are using financing. Lowering their out of pocket cost (by paying for closing costs) can free up money that they can then spend on their own upgrades.

With so many buyers in the market just teetering on the edge of a loan approval, it’s riskier than ever to simply assume that your buyer will close on a property.  Just last month I had a deal fall apart at the last minute because my buyer’s appraisal didn’t quite come in. There are so many different variables that can derail a closing and as an investor it’s of utmost importance to always consider these possibilities.

As such, it’s important to understand the risks involved with spending a lot of money on specific repairs and upgrades prior to closing. Learning how to navigate this scenario and decrease your exposure as much as possible is key to maximizing your profitability as a seller.

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{ 6 comments… read them below or add one }

Brandon Turner November 29, 2012 at 6:11 pm

Hey Ken – this was an excellent post. I’m actually going through the very thing right now. The buyer wants a lot of things and I’m trying to find the best way to make that work! I appreciate the advice! I think I’m going to try to use the escrow agreements. Have you had any experience doing this with USDA loans? (That is the kind of loan she’s getting)

Thanks Ken!

Reply

Ken Corsini November 29, 2012 at 8:15 pm

Hey Brandon – I’ve done escrow agreements with conventional loans, but got pushback on an FHA loan recently. I’ve never tried one on a USDA loan, but I’d be very curious to know what kind of feedback you get from the USDA underwriter if you try.

Good Luck! Keep us posted! -Ken

Reply

Keith and Kinsey November 29, 2012 at 8:29 pm

Brandon,
I’ve worked with several buyers doing USDA loans (although never had an escrow agreement with one). I do think USDA will allow escrow agreements. Although, if there are safety issues with the property it’s likely USDA will want the repairs done before closing. Good luck with your deal.

Reply

Keith and Kinsey November 29, 2012 at 8:32 pm

Ken,
Great post! Your absolutely right, in a buyers market, the buyers definitely seem to feel entitled to things. Our Madison market started to get really active 8 months ago though. Buyers who were still of the I want it all mentality, started getting stuck in bidding wars and realizing they may have to give a little. In my opinion, as a listing agent, you just have to negotiate hard, and make sure the buyers realize that some repairs or upgrades are priced into the sale price.

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Ann Contorno December 4, 2012 at 3:03 pm

True – the entitlement mentality is hard to swallow! But yes, those expectations have been creeping up and up for well over a year! Nice article!
We all just have to take a deep breath and smile!!! :)

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Matt R July 11, 2013 at 11:06 am

As someone who is going through the buying process myself (and having never sold a property before), I’m finding that I should ask for stuff, because if you never ask, you’ll never receive. The worst the seller can say is no, right?

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