The Last Steps: Final Conditions & Signing

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You Get What You Inspect (Not What You Expect) | 123

with one. Even if there are multiple offers for the same amount, if one offer has waived the inspection contingency, I assure you, the seller is going to go with that offer. That buyer is effectively saying, “Here’s our offer and we’re not walking away because of anything we discover in the inspection later.” It would be silly for the seller to choose otherwise.

That said, in most cases, the inspection comes after the offer is accepted. This means you’ll have a lot of leverage. Once the house is off the market (as it has been since you went “mutual”), the seller is not going to want to put the house back up for sale. Take advantage of your position. Make sure your agent is sharp enough to negotiate the greatest number of repairs on your behalf. In the case of smaller, less critical but still deficient areas, the seller might be willing to offer a concession on price. The point is: it never hurts to ask.

Again, on the flip side, if you’re in a seller’s market and have done an inspection prior to writing the offer so you could waive the inspection contingency as part of the offer and position yourself as a more attractive buyer, you will, in all likelihood, not be asking for any improvements or repairs. You’ll get the inspection report to know what it is you’re buying and make your offer price based on that information.

To be clear: It’s critical that you do an inspection at some point. Buying a house without an inspection is sort of a “Warning Will Robinson! Danger!” kind of risky thing to do. Yes, you’ll be investing a couple hundred dollars to make the offer, and, yes, that’s money you cannot recoup. But you’ll have a greater, and in my view, necessary, education on what you’ll need to fix in the house after you own it.

There are other inspections or feasibility tests that can also come into play at this point. These include a sewer scope, septic suitability tests, well testing, soil testing, etc. Ask your agent what tests make sense for the property you are looking at.

Sometimes the seller will have already done some of these and will provide the results, and for others, you will need to do them yourself. In fact, some savvy sellers provide a full inspection report up front to encourage multiple offers while taking the risk of a possible second negotiation off the table.

An inspection done by a licensed and bonded inspector, but paid for by the seller, creates an interesting opportunity for a buyer. You can choose to accept their inspection and make an offer that reflects the condition of the home as reported. Or you can choose to write your offer as if there had been no inspection, add an inspection contingency, and pay for your own.

Doing your own, in the face of the report you’ve already been provided, does create the situation I mentioned above. It might turn out to be unrealistic to expect that the seller will repair anything that the buyer knew about prior to writing the offer. Unless your inspector turns something up that is not listed in the inspection report you were provided prior to writing, you’re unlikely to get additional concessions. The decision on how to proceed in this case is between you and your agent and is dependent on the condition of the house and the condition of the market.

I’ve had more than one buyer back out after reading the inspection report. When anything moves from dream to reality, we tend to see the defects we missed earlier. With a home purchase, you’re handed a 25-page document with pictures and descriptions of every single one. If the buyer starts weighing the risks more heavily than the rewards, as Prospect Theory indicates we are likely to do, then there is a better than even chance the inspection report can sour the deal.

While I’ve already told you I approach the purchase of any home from the view that it’s not worth buying, if we get to this stage, we don’t want to be scared off by trivial or inexpensive problems. Every house has its physical deficiencies, new construction as

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well, so it’s all about relative value and a rational assessment of the risks.

Rationally speaking, as I’ve said before, every home is a money pit. There’s a never-ending list of improvements, upgrades and repairs to be done. The list you’re holding from your inspector is likely to be thorough, and yet, it will be incomplete. There will be more coming, if not now, then soon. Count on that. But you can also count on a list like that coming for any house you look at. You and your agent should take a long hard look at the list and at the market to determine if this house represents a value at the price offered or if there is likely to be something better out there. Don’t let your cognitive bias toward loss avoidance sway you toward or away from the house.

Less frequently, people have had some past, horrible experience with a remodel or some specific problem from a past home, and the Availability Heuristic comes into play. In fact, more often than having a horrible experience from the past, I find people have some image implanted from an HGTV reality show, and they are inappropriately emboldened to take on too big of a project for their own particular skills. Remember when I said every home is a money pit? Well, some are bigger than others, and if you walk into a foreclosed home that’s been on the market for months thinking you’ve found a bargain that every other investor and home flipper has missed, think again.

Both the irrational fear from a past remodel or the irrational confidence instilled from “reality” TV are a function of the Availability Heuristic. Running into either will wind up costing you so slow down, breathe, and take the time to create a rational plan.

Avoid Being Shortchanged: Shortcuts to Watch For

• Framing: Use this heuristic to your advantage during the second negotiation that occurs after the inspection report is delivered.

• Prospect Theory: Don’t let fear of loss, which could be instilled based on the inspection report, cause you to back away from what might be the right house for you. Every property will have its issues. • Anchoring: Conversely, be sure to avoid being so anchored to the property that you ignore giant red flags that the inspection may uncover. • Availability: Just because you see it repeatedly on

HGTV doesn’t mean that renovations are easy or are something you can realistically handle.

Points to Remember

• This house is going to be the most expensive thing you purchase, so don’t cut corners with the inspection. Use a qualified, licensed home inspector. • Be prepared for a very detailed report that may contain 100 to 150 items listed as deficient with the property. Don’t panic. • When your offer is contingent on the inspection, you can walk away and cancel the contract (with return of your earnest money), or you can work to renegotiate with the seller regarding making needed repairs. • Renegotiating at this point gives you a lot of leverage now because most sellers will not want to place the house back on the market. • In a seller’s market, you might need to have the inspection done prior to making an offer, so you’ll be aware of the property’s deficiencies beforehand but can avoid having your offer contingent on the results.

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Chapter Thirteen: Appraisals

“A nickel ain’t worth a dime anymore.”

– Yogi Berra

Your dream home has passed your inspection! Whether you conducted a pre-offer inspection or did it as a contingency with your offer and renegotiated any needed repairs, you’ve successfully negotiated the waiver of the inspection contingency and you’re ready for the next step. Now you’re on to the appraisal process.

Like the home inspection, you’re responsible for the cost of the appraisal. The expense will be similar to that of the inspection; however, you have far less say about this part of the process. Since the housing market collapse in 2007, neither you nor your lender can talk to the appraiser prior to appraisal.

The appraiser will walk through the house and report what they can see with the naked eye. They’re not privy to the inspection report, nor will they see the seller’s disclosure form. If there happens to be a roof leak that’s only apparent in the attic space, the appraiser is probably not going to know about it. (A leak that’s causing a water stain on the living room ceiling is another matter.)

After a quick walk through they’ll return to their office and pull the “comps” (comparables) of similar properties and adjust for the size and age of the property as well as the neighborhood, and tell the lender their opinion of the value of the house.

In essence, the lender is looking to confirm the house is worth the amount they are lending you.

Key Point: You wouldn’t want to spend the money for the appraisal until the house has been inspected. If the house doesn’t pass your inspection, you don’t need the appraisal. Be certain that if your Realtor is calling for the appraisal before the inspection is complete, you’re crystal clear as to what their thinking is about doing so. Paying for something you may not need is silly.

The appraiser is looking to come up with a value they feel a typical buyer would pay for the property that’s supported by recent sales. In other words, they’re looking for the market value of the home. The appraiser gets to choose which closed sales (comps) to use, and when comparing them there are factors that are not subjective in the comparison (such as the number of bedrooms and bathrooms) and there are factors that are subjective (such as the value of a view, the quality of construction, added value of landscaping, finished basement quality, etc.).

Honestly, 90 times out of 100, the value of the home comes in at what you paid for it. The market value of the house is what you paid for it because you are the market. If there were 11 offers and it drove the price well past asking, that could be said to be the new market price. While it doesn’t mean the bank will always validate it, the price you paid is market value.

However, if the appraisal doesn’t come in “at value,” (e.g., you paid $500,000 but the appraisal says it’s worth $450,000), it means the lender is only cutting you a check based on $450,000. If that should happen, you’ll be happy that your Realtor made sure you had a suitable finance contingency in place that allows you to renegotiate the price or annul the deal.

As the inspection contingency protects you from problems of a physical nature uncovered after the price has been agreed upon, a

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finance contingency protects you from problems with your financing. Under-appraisal is one such possible problem, and you need to make certain your contract has such a protection in it. Without that protection, you’d need to come up with the full amount of the difference between the accepted price and the appraised price, in this example $50,000.

In the above scenario, with a finance contingency in place, one of four things will need to happen: 1. You could make up the difference, so the seller gets the full amount you offered, or 2. You could negotiate some lower amount for the seller to accept and pay for the remainder, or 3. You could negotiate a sales price that matches the appraised price, or 4. You could cancel the deal and get your earnest money back.

Key Point: This should explain why cash is king. A cash offer is not contingent on lender approval, making it a much safer offer for a seller to accept. For this reason, cash can be worth a five to ten percent discount in some markets and at some price points. It’s also why, if you’re competing with a cash offer and you’re financing, it might be very difficult for you to win.

A cash buyer can be countered to a certain extent if you’re willing to state in the contract that you’ll cover the gap created by a low appraisal. Think about it. If you weren’t willing to make up this difference, it doesn’t matter what you offer. You could offer $800,000 in our example because the result is the same: The house doesn’t appraise for the amount offered and you’re not chipping in to make up the difference. What do you care? You might as well offer a million dollars.

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In this scenario, the seller isn’t likely to accept some wild, high offer that can’t be substantiated by comps. It’s a waste of everyone’s time. They’ll only accept if you, the buyer, are willing to make up the difference between the offer and the appraisal amount. This comes into play in a seller’s market all the time.

However, in a buyer’s market, it’s almost never an issue. In a buyer’s market, you probably already paid less than asking because you have the leverage. If the appraisal doesn’t come at the agreed-to price, you can go back to the seller and ask them to reduce the price to match the appraisal. “Well, Mrs. Seller, the house only appraised at $450,000 and I can’t get a loan for the $500,000 we agreed to, so how do you want to work out the $50,000?”

The seller might agree to reduce the price to match the appraised value. You could also come to terms on splitting the difference because, after all, you want the house. For this reason, you should look at the appraisal as a third negotiating opportunity. But only in a buyer’s market. In a seller’s market, you’ve likely already spelled out, inside the terms of the offer, your willingness to handle any low appraisal.

Appraisals are sort of a funny thing. The appraiser’s job is to protect the lender’s loan. That’s it. They provide a subjective value for the house that the lender uses as an objective value. But it’s not an objective value. There is no objective value. The house, any house, is only worth what someone will pay for it. You offered X dollars for this house because you decided that’s what it’s worth to you. The bank is making sure they can resell it for that amount (should you default) and wants a second opinion – but it’s still not an objective value.

I bring this up because I’ve seen people get anchored to the appraised value like it’s the “truth” and then make all sorts crazy decisions and second guess themselves. Do the work before you write the offer to make sure you a) know what the likely resale value will be and, b) you feel comfortable moving forward at that

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