Asking Seller for Repair Credits

9 Replies

Do you guys typically ask for credit for repairs that need to be made on a property you are trying to purchase? If yes, how bad does the particular repair need to be (in dollars)? Or do you guys use it as a tool to get the overall purchase price down.  To date I have not asked the seller to give me credits for any repairs because they know I am a investor who is going to overhaul the property anyways. Am I short changing myself by doing this? 

Typically we just negotiate a price that ultimately works for us as the buyer.  If the seller accepts then we assume its a win win for us both. We buy as-is and dont ask for any sort of credit from the seller. 

Medium buymemphisnow stacksCurt Davis, Buy Memphis Now | [email protected] | 605‑310‑7929 | http://www.BuyMemphisNow.com | TN Agent # 00321765

All depends on a case by case basis.  On the whole though, usually the things that need repair and would be the basis for your repair credits are the same things that make a property discounted.  If its a good deal, dont get greedy and lose it, if you feel the requests are warranted, then go for it. 

Welcome to BP.

Without knowing all the details, it's hard to give a precise advise, having said that in general up to 6% of the selling price is the maximum credit you will get or you will have re negotiate the price before both the seller and the buyer sign. 

Hope it helps.

Medium decent properties logo jpeg  1 James Syed, Decent Properties, LLC | [email protected] | 618‑406‑9775 | http://www.decentproperties.com | IL Agent # 471018522

Thanks for the replies. I am on the right track then. So far on my deals I have not ask for repair credits from the seller since I am a rehabber. I can only see this happening if it was a major repair that was only identified upon a home inspection.  This question just popped up because I am looking for a house for myself to live rather than rehab and resale. 

@Calvin Ly  Nearly 1/2 the properties we have purchased ended including either an adjustment or a credit back to compensate for repairs. In some cases it has been minor, such as a couple thousand to fix termite damage. Last year we bought a fourplex that ended up needing to get resided and had a roof that was nearing end of life. We asked for the seller to drop 70k (50k off the price and 20k in credits) to account for the work (we got estimates from multiple contractors to demonstrate the expense) and they accepted.

I have also asked for a credit towards expenses on EVERY deal I have ever done. They see a higher number, but it is the same net to the seller. To me, it makes a huge difference in cash outlay. When I get 10k in credits towards closing costs, that is 10k I don't have to spend VS getting a 10k price reduxtion saves me 2.5 - 3k depending on the downpayment percentage.

Shane. Those are kind of the same lines I was thinking when I came across this deal that was going to be my home. I had to ask myself why am I acting differently when it comes to my own home I am purchasing (as oppose to investment property)? Anyways, this particular house I am looking at has definite electrical and possible plumbling repairs that I did not account for in my initial walk-thru with my contractor. I am going to ask for credits. The worse that can happen is they say no and we move on with the deal and close at the original agreed price.

Originally posted by @Calvin Ly:

Do you guys typically ask for credit for repairs that need to be made on a property you are trying to purchase? If yes, how bad does the particular repair need to be (in dollars)? Or do you guys use it as a tool to get the overall purchase price down.  To date I have not asked the seller to give me credits for any repairs because they know I am a investor who is going to overhaul the property anyways. Am I short changing myself by doing this? 

Sometimes. Some banks won't even consider such things (HUD, Fannie and Freddie for example). I never go into a deal planning on asking for seller credits or a price reduction after we come under contract, but if I ever find something noteworthy that wasn't disclosed, or if couldn't have been found on initial walkthrough (i.e. broken sewer line, bad HVAC if you turn the power on and test it, etc.). I would also do it if I made a big mistake and simply missed something important, although I would be very apologetic about that.

I've had some sellers tell me they need an accepted contract before I can view the property. I always tell them in those cases that if it's not as described, I will be re-trading. Such deals rarely work out.

Medium apartment logoAndrew Syrios, Stewardship Investments | http://www.StewardshipProperties.com | Podcast Guest on Show #121

@Shane Pearlman

Hi Shane, I'm trying to better understand seller credits. In your example, why not just ask for the full $70k price reduction as opposed to the $50k price reduction and the $20k credit?

Hi @Jason Fender ,

There are a few strategic reason for using a credit back as opposed to price reduction. I actually went through them and some other context in our 4th episode of built from scratch.

1) Lower cash out of pocket. When you buy a property using a loan, you will have to pay a down payment (often 20 - 30%) based upon the purchase price. The rest of the expenses are 100% out of pocket. If you are trying to minimize the dollars spent on day one, but have room in the cashflow, a credit back is a good solution. A seller credit can be applied to all closing costs, from inspections to loan points. In practical terms, what you are really doing is rolling your closing costs into the loan, and therefor only have to pay the down payment percentage on those closing costs. Now some loans let you add closing costs, but many won't and this is an easy way to get around that.

2) Bigger numbers look sexier. People like to brag. They are emotional. Real estate investing would be a totally different game if they weren't. When two investors make an offer, one at 700k and the other at 720k w/ a 20k credit back, the net is the same. Rational people would tell the seller they are identical. But time and time again, I found that the 720k offer got chosen. In a few cases it backfired as some people prefer a cleaner and simpler offer, but most people want to brag to their friends they got 20k over asking, even if it isn't the whole truth.

3) Consider the max. Credit backs, as opposed to price reductions, have a limit as to how much you can really spend. Closing costs (title, escrow, inspections), Loan costs (point on better rates) and up front Expenses (taxes, insurance) are the main ones. I've found myself having a hard time spending over 25k in credits historically - which is totally affected by deal size. More than that and you should probably go with a price reduction.

-S

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