Backing out after inspection

[Dalyn Hazell]

Hi all, 

Just wondering how often someone should/would back out of a deal after a scary inspection. Here's what happened:

I found a $75k, 100 year old in C+ neighborhood on the MLS. After running the numbers, it looked real good. So, I offered 15% below asking, or $65k.

They immediately accepted. I was happy, yet skeptical.

I had an inspection, and it came back pretty bad. 

Here were all the issues:

1) Sizeable roof leak into the living room and other areas of house

2) Large foundation crack 

3) Extensive termite damage on wooden foundation post

4) Outdated electrical, including aluminum wiring

5) WET crawlspace. Actually just a pretty wet house.

6) Some other minor issues (broken windows, urine smells, etc.)

I know so much more about doing a correct property walk through now.

Long story short, I backed out. Was I wrong though? Should I have at least offered less, or had the seller fix some things? After talking with my realtor, family, etc. they all insisted I back out. I'm still on the hunt for my first deal.

What would you do? Back out or pursue it?

[Daniel A.]

Backing out of deals is a part of the game. Oftentimes you find things that absolutely need to be replaced, and it's tough to want to back out. Outdated wiring, large foundation crack, big leak. Those are big things that should not be overlooked.

While backing out isn't an unwise option, another popular option would be for you to have a contractor come out and take a look at what needs to be fixed. Have him give you a bid and then convey that bid to the seller. (I usually try and get at least 3 separate estimates from three separate contractors - paying each for their time.) If the bid comes in at, say $25k, then let the seller know that you would need to have the sales price bumped down to $40k. I know that that price seems absurdly low, but what I would do is either tell the seller that that is the price you can work at (because, given its current condition, it's not worth more - to you, at least). Or you can tell the seller that you'd still buy the property assuming  they  fixed everything up to a standard that a contractor that your trust says is up to par.

You also want to consider the neighborhood. If it's a C+ neighborhood, you don't want to spend the time and the money making a B+ property. The comps of the houses sold around it will bring the value of your house down, assuming you want to sell. If you're looking to rent, then any optimal tenants would be dissuaded by the surrounding C+ houses. If you're just looking to bring it up to habitable C+ property, then it would be worthwhile to get some bids and see if the seller is willing to bring the price down. The key is to be as transparent to the seller as possible. If they know and understand where your low offer if coming from, they're less likely to get angry. And who know, they likely know what is wrong with their property and might feel like no one else will want it after an inspection, yet here you stand, an offer in hand.

I wish you the best of luck. And remember, if this property doesn't work out, another one will. I personally backed out of three separate offers before I landed on my first rental triplex. The first house was dated. Bad wiring. Foundation issues. Separating ceiling joists. I provided the owners with the inspection report and they promptly fixed what was seriously wrong with it, but by that time I had realized that that house was not right for me.

Keep your eyes peeled, keep your hopes up, and keep searching for a good deal.