First, a little background – after a buyer gets into escrow and conducts inspections, there is an opportunity to negotiate again with the seller if the buyer finds items they want repaired or if a credit is necessary. Every escrow is different, and finding the right negotiating strategy depends on the situation, but we wanted to mention one approach that might be beneficial to both the buyer and the seller.
Reducing the Purchase Price
Instead of asking the seller to give you a chunk of change based on repairs needed, you might consider requesting a reduction to the purchase price. This strategy allows the buyer to pay less money in property taxes! The buyer also might feel satisfaction knowing that they are not paying property taxes on items that needed to be repaired, but instead what they felt was the true value of the home. It might also benefit the seller if they would end up paying less in capital gains tax. Always seek guidance from your CPA with tax related matters, but we wanted to present an another way of negotiating the real estate transaction that might be beneficial to both principals.
Another benefit to this approach is satisfying a lender. If a buyer gets into contract at $500,000 with a $400,000 loan, then discovers $30,000 in necessary repairs, an underwriter – depending on the buyer’s financial situation – might not approve the loan if a giant seller credit is necessary, and the deal could fall apart because legally a credit can’t exceed the closing costs of a transaction. Conversely, if the purchase price is reduced the lender might not mind. The down payment remains the same, so a buyer might not feel the credit in the same way they would if they received the money directly from the seller. You just have to determine what strategy works best for you.
There are endless scenarios in a real estate transaction that can occur, so it’s impossible to make a blanket statement on the best way to negotiate a credit, but reducing the purchase price has worked well for some recent clients of ours in Carmel Valley, so we wanted to share. If you have any questions, we are here to help.