Asking Seller for Repair Credits

[Calvin Ly]

Do you guys typically ask for credit for repairs that need to be made on a property you are trying to purchase? If yes, how bad does the particular repair need to be (in dollars)? Or do you guys use it as a tool to get the overall purchase price down.  To date I have not asked the seller to give me credits for any repairs because they know I am a investor who is going to overhaul the property anyways. Am I short changing myself by doing this? 

[Shane Pearlman]

Hi @Jason Fender,

There are a few strategic reason for using a credit back as opposed to price reduction. I actually went through them and some other context in our 4th episode of built from scratch.

1) Lower cash out of pocket. When you buy a property using a loan, you will have to pay a down payment (often 20 - 30%) based upon the purchase price. The rest of the expenses are 100% out of pocket. If you are trying to minimize the dollars spent on day one, but have room in the cashflow, a credit back is a good solution. A seller credit can be applied to all closing costs, from inspections to loan points. In practical terms, what you are really doing is rolling your closing costs into the loan, and therefor only have to pay the down payment percentage on those closing costs. Now some loans let you add closing costs, but many won't and this is an easy way to get around that.

2) Bigger numbers look sexier. People like to brag. They are emotional. Real estate investing would be a totally different game if they weren't. When two investors make an offer, one at 700k and the other at 720k w/ a 20k credit back, the net is the same. Rational people would tell the seller they are identical. But time and time again, I found that the 720k offer got chosen. In a few cases it backfired as some people prefer a cleaner and simpler offer, but most people want to brag to their friends they got 20k over asking, even if it isn't the whole truth.

3) Consider the max. Credit backs, as opposed to price reductions, have a limit as to how much you can really spend. Closing costs (title, escrow, inspections), Loan costs (point on better rates) and up front Expenses (taxes, insurance) are the main ones. I've found myself having a hard time spending over 25k in credits historically - which is totally affected by deal size. More than that and you should probably go with a price reduction.

-S

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