{"id":176419,"date":"2024-08-16T12:52:14","date_gmt":"2024-08-16T18:52:14","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=176419"},"modified":"2024-08-16T13:17:11","modified_gmt":"2024-08-16T19:17:11","slug":"dealing-with-resolutions-of-unacceptable-conditions","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/dealing-with-resolutions-of-unacceptable-conditions","title":{"rendered":"Investors: Make Sure to Capitalize On “Resolutions of Unacceptable Conditions”"},"content":{"rendered":"\n

Sometimes, you\u2019ll see a question in <\/span>the BiggerPocket<\/span><\/a>s<\/span><\/a><\/em> forums<\/span><\/a> about whether it\u2019s worth doing <\/span>inspections<\/span><\/a> when you get a property under contract. The answers are invariably yes for new investors, and usually for seasoned investors <\/span>too<\/span>\u2014<\/span>the reason being that<\/span> you need to know what you are getting into.<\/span><\/p>\n\n\n\n

There is a second equally important reason, though, especially when buying from homeowners or investors: You can usually get a credit or additional work done based on the results of the inspection report. <\/span>This<\/span> amounts to the second negotiation in any property purchase: Negotiating the Resolution of Unacceptable Conditions. What this is (and the name might differ in some states) is a demand from the buyer to the seller to either address a variety of defects or offer a credit to the buyer (i.e., reduce the sales price). <\/span><\/p>\n\n\n\n

For example, here is one we recently received on a property we sold a few months ago (the numbers refer to the inspection report). Don\u2019t bother reading it for now; we\u2019ll work our way through it later. It looks like a lot, but most of what\u2019s listed was relatively small and cheap.<\/span><\/p>\n\n\n\n

\"visual<\/figure>\n\n\n\n

We\u2019ll return to how we responded and why<\/span>, but for<\/span> now, I\u2019ll <\/span>just<\/span> note that not only did the inspection ensure the buyer wouldn\u2019t <\/span>be completely blindsided<\/span> by something like all the floor joists having <\/span>been torn apart<\/span> by termites, but what we ended up agreeing to more than paid for the cost of the inspection (usually $300 to $500).<\/span> <\/span><\/p>\n\n\n\n

Most real estate sales have two negotiations: The first before the contract is signed, and the second during the \u201c<\/span>inspection period<\/span><\/a>.\u201d <\/span>This<\/span> is spelled out<\/span> in the contract and usually <\/span>10<\/span> days for your typical 30-day close on a single-family <\/span>residence,<\/span> and 30 days <\/span>on<\/span> the typical 60-day close for an apartment or <\/span>commercial<\/span><\/a> building. <\/span><\/p>\n\n\n\n

If you skip the inspections, you <\/span>are concluding<\/span> the second without getting a penny. You\u2019re simply conceding that negotiation to the seller.<\/span><\/p>\n\n\n\n

When Not to Use Resolutions<\/span><\/h2>\n\n\n\n

First, I should note that when buying a fixer \u201cas is,\u201d <\/span>it\u2019s expected<\/span> there will be no such resolution. And back when we <\/span>bought<\/span> REOs from banks after the 2008 crash, they wouldn\u2019t even consider one.<\/span><\/p>\n\n\n\n

Of course<\/span>, with such properties<\/span>, I <\/span>would<\/span> still recommend doing an inspection, especially for new investors.<\/span> If it\u2019s worse than you anticipate, you<\/span> can always back out of the deal.<\/span> And <\/span>there\u2019s nothing stopping<\/span> you from asking for a price discount. Just because the seller says \u201cas is\u201d doesn\u2019t mean you can\u2019t ask for a price reduction to buy what is, as is. <\/span><\/p>\n\n\n\n

With <\/span>larger<\/span> deals, this <\/span>is referred<\/span> to as \u201cretrading.\u201d While not uncommon and often necessary, you don\u2019t want to get the reputation as someone who gets a property under contract and starts trying to knock the price down further for no good reason, just because you are the only one the seller can negotiate with. It\u2019s bad form and will eventually stain your reputation, making sellers want to avoid you. <\/span><\/p>\n\n\n\n

The market is also something to consider. My wife and I bought our <\/span>personal<\/span> residence in September 2021. At the time, interest rates were at historic lows (we got 3%, which is higher than many others I know of)<\/span>, and it<\/span> was an unparalleled seller\u2019s market, with houses routinely getting multiple offers in the first week they were listed. <\/span><\/p>\n\n\n\n

A house went more than $1 million over asking in the <\/span>Washington, D.C. area<\/span><\/a>, and another in <\/span>Berkeley, California<\/span><\/a>, did the same. <\/span>Viral videos<\/span><\/a> would show lines around the block to <\/span>look at<\/span> a house for sale. We made offers on eight houses\u2014going over asking on five of them\u2014before finally getting the one we did. <\/span>And by the way, <\/span>the only reason we got it was<\/span> because the seller needed to move in <\/span>exactly<\/span> 44 days, and we didn\u2019t care when we closed.<\/span> We weren\u2019t even the highest offer.<\/span><\/p>\n\n\n\n

Needless to say,<\/span> this<\/span> was not the time to ask for repairs after getting a house under contract.<\/span> Indeed, every seller at the time demanded we waive the right <\/span>to <\/span>even<\/span> conduct<\/span> inspections for our offer to <\/span>be considered<\/span>.<\/span> <\/span><\/p>\n\n\n\n

(In Kansas, buyers submit an In Present Condition Addendum, which can either permit inspections and the right to request repairs, permit inspections but waive the right to request repairs, or waive inspections entirely, and most states have something similar).<\/span><\/p>\n\n\n\n

Had this been late 2008, it would have been the exact opposite: A buyer might as well have asked for a new roof, HVAC system, driveway, etc. <\/span>during<\/span> negotiations. <\/span><\/p>\n\n\n\n

The post-2008 and the mid-2020 to mid-2022 <\/span>market<\/span> were exceptional. Typically, it will be a matter of degrees regarding how much to ask for and what to accept. Also, markets are local. Buyers can be more aggressive in places like <\/span>Detroit<\/span><\/a> and sellers stingier in <\/span>places like<\/span> Austin, Texas<\/span><\/a>.<\/span><\/p>\n\n\n\n

How to Approach Submitting a Resolution<\/span><\/h2>\n\n\n\n

The first thing I <\/span>would<\/span> recommend is to try to be quick.<\/span> You don\u2019t want to waste your time or the seller\u2019s, so <\/span>get the inspection scheduled right away<\/span>, along with scoping the sewer line.<\/span> You also need to get the resolution to the seller before your inspection period ends (usually <\/span>10<\/span> days for a single-family residence).<\/span><\/p>\n\n\n\n

The next point is that an inspection report can be rather intimidating to a first-time homebuyer. With anything other than a new house, there will often be a lot of items. One recent inspection we had that went decently still listed 44 items on a 1,400-square-foot house built in the 1950s. The reason is that many of the items listed look something like this:<\/span><\/p>\n\n\n\n

\"Status<\/figure>\n\n\n\n

This \u201cdeal killer\u201d could take upwards of 15 seconds to fix!<\/span><\/p>\n\n\n\n

This<\/span> will become a theme, but the size of the problem is much more important than the number of <\/span>problems<\/span>.<\/span><\/p>\n\n\n\n

Still, there are <\/span>probably<\/span> two minds on this.<\/span> But <\/span>my opinion is that<\/span> you should not ask for many things, but instead ask for the more expensive items to be fixed or to receive a credit for them.<\/span> I\u2019ll elaborate on this further when discussing tips on responding to a resolution<\/span>, but the<\/span> main reason is that I don\u2019t want to bicker over small things, and I don\u2019t want the seller to feel like they are conceding a lot in terms of price and the number of items to <\/span>be addressed<\/span>, despite the latter being close to irrelevant. <\/span><\/p>\n\n\n\n

That said, definitely ask for more than what you want. Expect there to be some pushback. <\/span>And<\/span> including a handful of small items you can drop as a negotiating tactic is a good idea.<\/span><\/p>\n\n\n\n

Don\u2019t go crazy, but I\u2019ve never seen a negotiation <\/span>straight up end just because of a resolution being<\/span> too ambitious.<\/span> We once had an absurd resolution asking for a $50,000 price reduction on a house under contract at $180,000 for repairs that amounted to about $7,000. (And they wanted a firewall built between the garage and house, despite that it was \u201cnot required when <\/span>the home was built<\/span>.\u201d) <\/span><\/p>\n\n\n\n

Even amid that madness, we didn\u2019t reject. Instead, we offered to do most of the work ourselves. <\/span>They<\/span> responded by countering for a $50,000 price reduction. We told them to send a cancellation.<\/span><\/p>\n\n\n\n

Such wastes of time are unusual, though. Ask for more than <\/span>what<\/span> you want, and stick predominantly to the higher-cost items. <\/span><\/p>\n\n\n\n

Three big-ticket items <\/span>in particular<\/span> are essential for the property\u2019s livability and insurability and can almost always merit a substantial repair and discount: the roof, sewer line, and foundation. Here\u2019s a look at each:<\/span><\/p>\n\n\n\n

    \n
  1. Roof:<\/span><\/strong> A roof <\/span>that has<\/span> a few years left on it may be fine for a rental but is often uninsurable. <\/span>This<\/span> is the <\/span>easiest<\/span> big-ticket item to request and very <\/span>often<\/span> get.<\/span><\/li>\n\n\n\n
  2. Sewer line:<\/span><\/strong> Whenever buying a house, always scope the sewer line. If there is a <\/span>major<\/span> offset, large amounts of root infiltration, or a break, you want to know about it, but you should also request a repair or credit. <\/span>With roots, you can <\/span>probably<\/span> keep the line clean by regularly snaking it, so I <\/span>would<\/span> lean toward asking for a credit.<\/span> <\/span><\/li>\n\n\n\n
  3. Foundation: <\/span><\/strong>A lot of things could be wrong with a foundation, but if the inspector finds a problem, it is <\/span>likely<\/span> worth asking for a structural engineer to evaluate it (this could require <\/span>asking for<\/span> an extension to your inspection period).<\/span> Remember that you want the property to be sellable once you own it, so it\u2019s <\/span>important<\/span> for a structural engineer to give it a clean bill of health.<\/span><\/li>\n<\/ol>\n\n\n\n

    Lastly, I <\/span>would also<\/span> recommend a pest and dry rot inspection.<\/span> It\u2019s important to know, and you can almost always at least get a termite treatment out of the seller if there are signs of termite damage.<\/span><\/p>\n\n\n\n

    Responding to a Resolution<\/span><\/h2>\n\n\n\n

    As you should when buying properties, expect the buyer to ask for more than what they want. Generally, <\/span>you should <\/span>be<\/span> knocking<\/span> off at least a few of their requests. <\/span><\/p>\n\n\n\n

    Of course, if the market is <\/span>really slow<\/span> or if<\/span> you need to sell fast to raise cash and don\u2019t want to risk the contract falling through, you should probably be more accommodating.<\/span><\/p>\n\n\n\n

    If you get an absurd resolution like that $50,000 credit we got, <\/span>do not<\/span> counter on price.<\/span> The reason is<\/span> when an absurd number <\/span>is thrown out<\/span> in a negotiation, it tends to create a psychological anchor that biases our perception of how much the cost will be to repair those items. You\u2019ll almost certainly counter too high. <\/span><\/p>\n\n\n\n

    Either counter with the repairs you\u2019re willing to do or tell them they need to submit a reasonable resolution for you to consider a counter. Don\u2019t let the anchor stick. <\/span><\/p>\n\n\n\n

    Next, I would <\/span>try to<\/span> give the buyer all or most of the little things.<\/span> More things feel like a better deal, even if what <\/span>really<\/span> matters here is the price <\/span>of those things<\/span>. <\/span><\/p>\n\n\n\n

    So, for example, on the resolution I showed earlier, here is how we responded (again, you don\u2019t need to read all this\u2014I\u2019ll give you the highlights):<\/span><\/p>\n\n\n\n

    \"seller<\/figure>\n\n\n\n

    Generally speaking, the items we agreed to, such as a new GFCI outlet and cover for the electrical panel, were <\/span>rather<\/span> inexpensive. <\/span>The costlier ones, such as removing the tree, installing insulation in the attic, and installing duct vents to the addition (it has a baseboard heater and window AC)<\/span>, were rejected<\/span>.<\/span> <\/span><\/p>\n\n\n\n

    They accepted our counter with no revisions, and I believe this was at least <\/span>in part<\/span> because we agreed to do a lot of items, even if the ones we did weren\u2019t <\/span>particularly expensive<\/span>. <\/span><\/p>\n\n\n\n

    Sometimes, the buyer will ask for those big-ticket items I mentioned. <\/span>And it\u2019s hard to see how you can <\/span>simply<\/span> reject anything for the roof if it\u2019s uninsurable or brush off the sewer line if it\u2019s broken.<\/span><\/p>\n\n\n\n

    If<\/span> the roof or sewer line problem is minor<\/span>, we\u2019ll reject a replacement<\/span>.<\/span> Maybe instead, we\u2019ll offer a small credit <\/span>or <\/span>to<\/span> snake<\/span> the line or something like that.<\/span> If not, we\u2019ll usually offer to replace the roof <\/span>as long as<\/span> we increase the price\u2014in other words, split the cost. <\/span><\/p>\n\n\n\n

    We justify this by saying <\/span>that<\/span> they knew the roof was older when they got it under contract and, therefore, shouldn\u2019t expect a new <\/span>roof<\/span>.<\/span> With sewer lines,<\/span> we try to do the same, assuming it\u2019s not <\/span>completely<\/span> destroyed and could <\/span>be babied<\/span> along with routine treatments and an occasional snake.<\/span> A brand-new line is an upgrade and should <\/span>be partially compensated<\/span>. <\/span><\/p>\n\n\n\n

    So<\/span>, <\/span>for<\/span> example, we may increase the price from<\/span>, say,<\/span> $150,000 to $153,000 and pay to replace the roof for $6,000.<\/span> <\/span><\/p>\n\n\n\n

    As for the foundation, I want to nip this problem in the bud before it comes up. If there are any issues with the foundation beforehand\u2014including minor ones, like some settling in old houses or the like\u2014I get a structural engineer to look at it. Then, I do whatever is necessary <\/span>to <\/span>at least<\/span> get<\/span> the engineer to say the property <\/span>is stabilized<\/span>. <\/span><\/p>\n\n\n\n

    Having such a report in hand will usually stop demands to fix or compensate for foundation concerns before they <\/span>come up<\/span>.<\/span><\/p>\n\n\n\n

    Indeed, this can help get the property under contract in the first place. Any sign of a foundation issue causes most homebuyers to run for the door in fear. A structural engineering report stating whatever <\/span>issue<\/span> has <\/span>been addressed<\/span> both<\/span> puts (many) homebuyers\u2019 minds at ease and takes the foundation out of the equation for negotiations. It might be worth doing this with sewer lines, too. <\/span><\/p>\n\n\n\n

    Lastly, <\/span>there\u2019s<\/span> whether to do the repairs yourself or offer a credit. If your contractors are busy on other projects or you are <\/span>under the gun<\/span> to sell, I would lean toward <\/span>offering<\/span> a credit. The same would apply if there could be a drawn-out permitting process that could delay closing. <\/span><\/p>\n\n\n\n

    On the other hand, if the repair needs to close (say, a roof replacement, so it’s insurable), doing it before closing is <\/span>basically<\/span> a necessity.<\/span><\/p>\n\n\n\n

    We do a lot of deals, meaning we tend to get contractors cheaper than homeowners, so the credit they would request is <\/span>most<\/span> often higher than the cost to us of doing the work. Assuming that\u2019s true for you too, I would lean toward doing the work yourself if you can.<\/span><\/p>\n\n\n\n

    Lastly, if the buyer has a <\/span>major<\/span> preference, go with that, as everyone is willing to pay for (i.e., take less) to go with their preferences.<\/span><\/p>\n\n\n\n

    Final Thoughts<\/span><\/h2>\n\n\n\n

    Property inspections are essential to figure out what\u2019s wrong with a property before you buy it. We all know this. But they\u2019re also a critical negotiating tool. Don\u2019t skip them or neglect their importance. They can often be worth thousands or even tens of thousands of dollars. Trust me: That adds up in real estate real fast.<\/span><\/p>\n\n\n\n

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    \n \"\"\n <\/div>\n <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"

    Inspections are important because you need to know what you’re getting into, but they’re equally important for the negotiations that can occur after.<\/p>\n","protected":false},"author":1689,"featured_media":176421,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7390],"tags":[],"class_list":["post-176419","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-acquiring-property"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/176419","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/1689"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=176419"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/176419\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/176421"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=176419"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=176419"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=176419"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}

    If you work with contractors you trust, <\/span>it<\/span> would probably be<\/span> better <\/span>to ask for <\/span>a credit<\/span> than to have<\/span> them do the work.<\/span> If you do allow the seller to do it, make sure to vet their contractors to make sure they\u2019re legitimate. <\/span>Have the property reinspected after the work <\/span>is done<\/span> to <\/span>make sure<\/span> it was done<\/span> right,<\/span> and get paid invoices or <\/span>lien<\/span><\/a> releases from the seller to <\/span>make sure<\/span> each contractor was paid<\/span> and nothing will come back on you.<\/span><\/p>\n\n\n\n