Use incentives to sell house with defects

Price cut, buyer credit can work wonders

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Oct. 17, 2011

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Price cut, buyer credit can work wonders

Dian Hymer
Inman News™

Buyers who purchased during the bubble market often paid too much in competition for a home that needed a lot of work, and then they did few or none of the repairs. In a rising market, buyers were willing to ignore defects and buy "as is" rather than miss out on rapid appreciation.

The opposite is the case today. Home prices have declined an average of 30 percent nationally from the peak. Buyers usually don't overlook defects, even though the house is still standing and the defects have been there for years.

Today, homes are well-inspected. Defects are taken seriously. Buyers either ask the sellers to do repair work, reduce the price, or credit money to them at closing to help with renovations.

Disclosing property defects is required in most states. The timing of compliance with this requirement is an issue with some sellers.

Sellers don't want the information made available to buyers before they make an offer for fear that the buyers won't offer at all if they know the condition of the property. This approach will backfire when the buyers receive the information and the deal falls apart if no agreement is reached on who pays for what.

HOUSE HUNTING TIP: A better approach is to make known as much information as you can about the property condition to the buyers before they make an offer. If you want an "as is" sale, which means you don't want to take care of any of the recommended repairs, make sure your list price reflects the work that needs to be done.

For instance, if your home has a market value of $450,000 and requires $30,000 of repair work, list it for $415,000. This gives the buyer a $5,000 incentive to take on the project.

There is always the possibility that the buyers' inspections will find defects that weren't revealed by the sellers or in any presale reports they provided. But, at least there's less chance that the deal will fall apart.

A relatively small credit or price reduction will be easier to deal with if the buyers are applying for a mortgage to complete the purchase. Lenders have limits on how much they will allow a seller to credit a buyer at closing.

Check with your loan agent or mortgage broker about the amount of the credit. The lender will probably need an addendum to the purchase price that says the sellers are crediting the buyers a certain amount toward their closing costs.

One way to improve your sale prospects and bypass any lender concerns about property condition is to have work done before you put your home on the market. This requires time and money, so it's not an option for all sellers.

Items to consider repairing are ones that might keep the sale from closing on time. For instance, if your front porch or back deck is rotted to the point of being a hazard, the lender's appraiser will indicate this on the appraisal report. The lender will probably require that the work be done before closing. If you can't line up contractors to complete the work quickly, this could delay the closing.

To save money, some sellers hire unlicensed workers to repair defects. There is potential liability if the work requires a city building permit. Make a list of all the presale work you had completed, who did it and when. Indicate if the person who did the work was licensed or unlicensed. Give the list to the buyers far enough in advance of closing so they can have the work inspected by a professional of their choice if they want to.

THE CLOSING: Selecting less expensive contractors to save money can end up costing you more if they don't do a complete and proper job.

Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."

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