As real estate agents, we'd like every home we show our home buyers to be in perfect condition. Unfortunately, even homes that appear to be in pristine condition can have serious problems under the hood. This is why we even recommend a property inspection on every home we sell, including new builds.
Colorado's Contract to Buy and Sell Real Estate Contingencies
Contingencies represent short spans of time that afford the home buyer an opportunity to perform investigations or "due diligence”. These are clauses within the contract that protect the home buyer and they cover the following:
- Home inspections
For this discussion, we will take a look at the “Property Inspection” contingency. In short, the Colorado Contract to Buy and Sell Real Estate provides the home buyer an opportunity to perform inspections in order to assess the condition of the property. From The Colorado Contract to Buy and Sell Real Estate:
Inspection. Unless otherwise provided in this Contract, Buyer, acting in good faith, has the right to have inspections (by one or more third parties, personally or both) of the Property and Inclusions (Inspection), at Buyer’s expense. If (1) the physical condition of the Property, including, but not limited to, the roof, walls, structural integrity of the Property, the electrical, plumbing, HVAC and other mechanical systems of the Property, (2) the physical condition of the Inclusions, (3) service to the Property (including utilities and communication services), systems and components of the Property (e.g., heating and plumbing), (4) any proposed or existing transportation project, road, street or highway, or (5) any other activity, odor or noise (whether on or off the Property) and its effect or expected effect on the Property or its occupants is unsatisfactory, in Buyer’s sole subjective discretion, Buyer.
We have discussed the real estate inspection process at length in previous articles, so we won’t rehash that here. The purpose of this article is handling the results of that inspection.
What Happens When Property Inspections Show Unsatisfactory Conditions?
If you have followed our previous advice, you will have done your inspection with a certified professional inspector. This type of inspector will provide you and your Realtor with a report of the inspection. This inspection report should contain a list of items that require attention. These items generally fall into one of the following four categories:
- Repair/Replace: This is for broken or damaged items.
- Mitigate-Hazardous Conditions: Radon, Mold, odors or pests.
- Provide Historical Background: This is used when the inspector sees something that appears to have been damaged and/or repaired in the past. If the inspector cannot make an assessment without further damaging walls or flooring, they will ask the seller for more information.
- Further Evaluation-The inspector is a generalist. If something on the inspection raises a red flag but falls outside of the inspector's “field of expertise”, he will recommend further evaluation by a licensed professional. This usually pertains to electrical, plumbing or structural issues.
After a thorough review of the inspection report, the homebuyer should meet with their Realtor in order to formulate a plan of action.
The buyer and their Realtor should sit down and go over the inspection report. The idea is to establish a couple of different things:
First of all, we are looking to establish the overall condition of the home and property. There are times we have this discussion and decide there are just too many issues and choose to terminate the contract without any further negotiation or attempt at finding a resolution, this is rare.
Once we establish the overall condition, we start to delve into those items on the inspection report the buyer feels are “unsatisfactory” These items begin to form the list which they will ultimately present to the seller's agent. We first look at health and safety issues, things like radon, mold or asbestos. Since mitigation on things like this can be so costly, we look at them first. Next, we look at things like building code violations, construction defects, and materials that may have been part of any class action suits. At this point, we are trying to protect the buyer from getting stuck with any serious financial burdens down the road.
The next we look at things like deferred maintenance; things like furnaces, exterior grading, and roofs. These are items that can cause problems down the road due to replacement costs or uninsurability.
From these discussions, the homebuyer and Realtor will put together a list of items ranging from most serious to least serious. At this point, they decide what to ask the seller to address and what if anything to take care of themselves. This discussion is always conducted in light of the current market conditions.
Once the buyer decides on those items that need to be addressed, the Realtor puts together a document named “Notice of Unsatisfactory Conditions”. This document outlines any concerns the buyer voiced as well as proposed remedies. Many times the Realtor will include a copy of the actual Inspection Report, this helps the seller's agent clarify any misunderstandings the seller might have as to what the request is addressing. All of this needs to be delivered to the seller's Realtor prior to the Inspection Objection deadline.
The Ball is in The Seller's Court
Once the “Notice of Unsatisfactory Conditions” is delivered, it’s time for the Seller to meet with their Realtor. At this point, the Realtor should break down the requested items for the Seller. In order to present this material, the Agent must have a good grasp on what repairs or remedies will cost. In many cases, the agent will need to get bids in order to realistically give the seller an idea of how much money the inspection items will cost.
Once the seller understands the cost and scope of the requested inspection items, they have some decisions to make. The seller can either accept the objection and proceed with repairs, reject the request in its entirety or further negotiate with the buyer by proposing an alternative resolution. This means the seller might be willing to do items: 2,4 and 7 but not 1,3, 5 and 8. This is negotiation is done with a form entitled “Sellers Alternative Resolution”.
If the seller accepts the Inspection Objection and chooses to move forward with the repairs, the deal remains intact and the Buyer is still ”Under Contract”. If on the other hand the seller chooses to reject the request or looks for an alternate resolution, the buyer then has the choice of:
- Rejecting the "Alternative Resolution". This means walking away from the deal with their earnest money intact.
- Accepting or rejecting the “Alternative Resolution”.
- Moving forward knowing the seller will not do any repairs
Note: If the Buyer rejects the “Alternative Resolution”, they are not in default so they do retain their earnest money.
While the overall process seems clear, it is often emotional. The property is the seller's home, and the buyer is pointing out problems. Granted, some buyers nit-pic just to get a better price but most are just trying to minimize the money and time they will have to spend once in the house.
Sellers on the other hand often feel like buyers are asking for too much. For example, if the seller came off of their price, they feel like the buyer is just hitting them for more money, or that they have already discounted for these types of issues in the asking price. In short, the process can be problematic.
A good Realtor will prepare their clients for this beforehand. Experienced Realtors will help both sides find a balance that works for each party. By being willing to help both the buyer and the seller to navigate this process, they keep the deal intact. Hopefully, both sides agree on a solution.
The best strategy when approaching a property inspection is almost always dependent on the kind of market we’re in. For example: if we are in a strong buyer's market, (this means market times are greater than six months) it's unlikely there is a lot of interest or multiple offers for a property. In this case, home sellers are more inclined to thoughtfully consider a buyer's inspection objection requests. On the other hand, if we are in a strong seller's market, the chances are pretty good there is a lot of interest in the property. In this case, the sellers are likely to be less inclined to deal with lengthy repair lists.
No matter what type of market we're in It's always important to treat the home sellers with respect. Buyers often forget they are looking at resale homes. It often feels unreasonable to bring a laundry list of repairs to a home seller that address normal wear and tear or cosmetic issues on a home that is 15 to 20 years old. The reason this becomes difficult is that the Realtor addressed or should have addressed wear and tear and cosmetic issues when they priced the home before listing it. The inspection is intended to discover issues that weren't disclosed by the seller, presumably because they didn't know about them.
Another important point to consider is structuring the items you asked for by considering how to measure quality. For example, if there is a plumbing issue the buyer's Realtor can write in the objection: “Seller to have leaking pipes under kitchen sink repaired by “licensed plumber”. Asking for a repair like this makes a lot of sense, in the first place the house shouldn't have leaking pipes. Secondly, this kind of repair isn't something the home seller should necessarily do period. By stipulating “licensed plumber” if there's a problem with the work the home buyer can subsequently ask the plumber to come back and make it right. Conversely, let's say the buyer objects to the condition of the caulk in the shower. The Realtor can't really put teeth in a request like this, primarily because there's no license for someone that does caulk. This is something the homeowner should maintain. Home buyers often regret making requests like this because the quality of work isn't something they're happy with and they end up wishing they'd have done it themselves.
In summary, it's important to be reasonable and pragmatic when preparing your inspection objection request. It's also important to consider the condition of the market in conjunction with the severity of the items you're considering asking for. Your Realtor should be able to counsel you as to what's appropriate and what's inappropriate. Often home buyers feel like their Realtor is advocating for the home seller during this negotiation. If you feel this way it's really important to discuss this with your Realtor in a non-confrontational manner. For example, you might ask questions like: ”You seem to be uncomfortable with the things I'm asking for. Am I being unreasonable”? “ if this was your house what would you ask for?"
At the end of the day, inspection objections are difficult. Market dynamics and human emotions just throw fuel on the fire. All of that aside next to negotiating the price, inspection is the most important hurdle to get over in order to have what the home buyer will ultimately consider a successful transaction. We think it's important to discuss this with your Realtor before making an offer. When it comes time to negotiate with the home sellers, you and your Realtor should have an understanding of what's reasonable as well as what's important to you.
One final thought, it's essential that you has the home buyer feel like you have been treated reasonably as well. During strong seller's markets, buyers often feel like they got the short end of the stick. Once again this is it a good topic of discussion to have with your Realtor. Ultimately, If you're not going to be happy with your purchase, you probably shouldn't buy the house.
Here are some additional resources from other real estate websites about property inspections:
- What to Expect From Your Home Inspection-Mark Brian
- How To Negotiate Issues After A Home Inspection-Bill Gassett