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