How to Get a Better Real Estate Deal by Using Inspections to Your Advantage

by | BiggerPockets.com

As a real estate agent for over 30 years, I can promise you that the home inspection is one of the biggest fears of most real estate agents. Of course, an agent on either side of the transaction could be waiting in anticipation of the result, with their paycheck potentially on the line. If it doesn’t work out for any reason, they aren’t getting paid. So, basically, it’s the fear of the unknown.

The home inspection can also be a big fear of the seller, especially since they often don’t know what to expect. But if your agent is smart, it may even pay to get some inspections done up front, especially if there are any potential concerns.

For example, if I were an agent for a homeowner in a neighborhood that sold mostly FHA and there were a lot of homes on the market, I might even recommend for them to get an FHA appraisal and the repair list done in advance. That way, we’d know the repairs and value in advance. Thus, no surprises. If the results are unfavorable, though, anyone else who wants to purchase the property using FHA financing in the next six months will still have to use that appraisal even if it’s a different FHA buyer.

Another strategy as a listing agent is to get the seller to offer a home warranty in order to alleviate the fears of the future buyer towards having any repairs. It makes perfect sense since most first-time homebuyers have limited funds after spending all their cash on their initial purchases.

In fact, sometimes buyers don’t even get a home inspection because they don’t want to pay for it, and they bring a relative or friend who’s handy out to the property instead. However, I’d say it’s better to have a third party come out who is certified and has been trained on exactly what to look at. Plus, who wants to talk about the surprise repair that wasn’t noticed while you’re all sitting around the dinner table?

Remember that as a buyer, the home inspection is your friend. If the results are a nightmare, maybe it’s best to move on. After all, sometimes the best deal is the deal you didn’t get.

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Related: Newbies: Want to Start Closing Deals? Consider Using the 10/4 Rule.

Investor Real Estate Agents

For me, as an old investor real estate agent, I welcome the home inspection as an extremely useful negotiating tool. I found it especially useful when one of my real estate investors was trying to buy a retail deal. Yes, you heard me correctly. A retail deal.

Certain retail deals can make perfect sense for investors, especially if they’re looking for a 1-to-4 family, primary residence or if it falls into the 4-10 investment properties that one can pick up with a conventional mortgage in their own name.

These are often deals that are found on the MLS, including estates, properties needing some love or work, properties with long market times or DOM (days on the market), properties that have been listed with multiple brokers, or even houses where the seller is an administrator. For example, if it’s a situation where the retirement/nursing home was getting any and all proceeds from the sale, the administrator may be more concerned with unloading the property than with the price.

Another example, which is one of my favorite types of properties, is the functionally obsolete house. It may look too outdated for a retail buyer or owner-occupant, but may still work well for a tenant who is more concerned about location than condition. Besides, they may only be looking for a temporary housing arrangement. Often, the home inspection would reveal updates that should be made but do not necessarily need to be made now to satisfy a tenant.

Investor Strategy

The best retail investor strategy I can think of is pretty straightforward: low money down but still cash flows. We’ve always asked for a seller assist even when we’ve had to raise the price over asking after counteroffer. And, of course, we’ve always requested a home inspection, where we’d have our super thorough home inspector go through, and they’d be sure to include estimates for any suggested work or repairs they’d recommend. It was always great letting the inspectors, or any third party for that matter, be the bad guy.

As part of our strategy, we’d make an offer fairly close to asking price with a nice assist and then ask for the inspection. When the report would come back, we would never negotiate anything that we thought would get picked up by the use and occupancy or township inspector at a future inspection, only the items that wouldn’t. We’d also keep specialty inspections — such as wood infestation, mold, swimming pools, HVAC certifications, roof certs, septic inspections, well tests, and, of course, radon gas — separate.

Keep in mind, most inspectors will give you a list of what they look for or look at prior to completing the inspection. If you’re purchasing with FHA financing, of course, they have specific guidelines for appraisals and property requirements. When it comes to the township inspection, you may be able to educate yourself somewhat on their process if they have a manual available.

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Then, it would come down to how we’d negotiate the repairs. Of course, we would always prefer repair credits or our contractors doing any and all work instead of the seller’s contractors whenever possible. This was especially true for any items that weren’t deemed necessary to get a mortgage. There’s nothing like getting a repair credit and being able do the work on your own timeframe since it’s really not stopping the process of renting out the property.

Related: Your 48-Point DIY Home Inspection Checklist

Also, it always helps to get estimates quickly because many sellers may not have a large network of repairman. And be sure to try to send your home inspectors report to the listing agent and seller. This can possibly work in your favor because if the seller is balking at fixing a major defect or repair and your deal falls through, he still may be on the hook for full disclosure of any material defects to a new buyer. This can be very detrimental, and they’d probably have to make the repair in the future anyway. Thus, it’s a no-brainer for them to just fix it now and make the sale to you.

Let’s recap. If you’re buying a retail deal, try to go in with low money down, always get an assist (at least 3%), be sure to still cash flow, and let the inspector be the bad guy. With FHA or conventional financing, this should enable you to get a pretty good deal and a property that’s in good shape — or at least get you the money or repair credit to get it in good shape.

So, how do you utilize inspectors to negotiate a better RE deal?

Let me know with a comment!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. – an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

10 Comments

  1. dane joyce

    Ryan and Joe,

    What Dave means by “”try to get a seller assist (by at least 3%) is the buyer of the property gets the seller to agree to pay at least 3% of the closing costs. This can also be called seller concessions. If you have a VA loan, you can get up to 4%. There are products (loans) with companies like Navy Federal (I’m not plugging them) out there that will allow up to 6% of seller concessions. If you look around online you can see what is typical for sellers, and buyers to pay for in the closing procedure. Some states even waive the First time home buyer from paying certain costs, like the state tax, or recording fees.

    Best,

    Dane

  2. It\’s interesting that home buyers will often bring a friend to do the inspection rather than hiring a professional. It makes sense that this could be a way people think they could save money while in reality, it\’s costing them. It\’s something to remember because, with a proper home inspection, the negotiating power, knowledge, and comfort that comes with it is worth the cost to me.

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