Closing concessions? What is your strategy?

Question

After flipping a few homes, we have found that buyers can be pretty aggressive in their requests for "repairs" during the due diligence process. Unless we note otherwise in the listing information or disclosures, we fix everything that is broken or not functioning properly, but we have had several recent requests that are expensive and I'm interested in your experience in handling things like:
- this roof is old and we're worried that we may have to replace it (was inspected by roofer and determined to be functioning properly)
- there are screens missing from some of the windows and we would like you to add them
- we're concerned about the drainage and would like you to add gutters
- the AC unit is old (age disclosed in disclosure docs, was tested by HVAC guy and running fine)

So do you budget for this type of concession, do you "meet in the middle" or do something else?  Typically the houses we rehab are 20 - 50 years old.

John Arendsen · Answer

Interesting and timely thread as we're going through that at this minute. In fact we have an 8:45am conference call with the listing broker on this very subject. Here's how it plays.

• Asking price 6.999m
• Negotiated sales price 6.7m
• Negotiated closing date Nov. 30th
• Buyer wants additional 60k in misc reparations i.e. mold, dry rot, termites, etc
• We accept counter but want Oct 31st closing due to the timing of a 1031 exchange app.

Stay tuned for the next exciting chapter after our teleconference this morning. It's all such a  predictable game. That's why you always have to anticipate these nuances and build them in to the asking price from the get go.

My 3 cents worth adjusted for inflation.

Teri Feeney Styers · Answer

@Alex Yost here is a different approach. I do a lot of flips and we try to do as many of the big ticket items as are reasonable because it is easier for a buyer to pay that extra in their monthly mortgage than it is for them to save up the money after the fact. Around here, $1000 on your mortgage balance costs about $5 per month. In the case of a roof, etc. you could renegotiate a higher sales price (amend the contract) to cover the cost of the upgrade (if the market will bear the increase). All of this occurs before the appraisal. An appraisal can be done "subject to" and you can even hold out funds at closing made directly payable to ABC Roofing, etc. so that you don't have to dig into your pocket again. The buyer gets their roof and you don't absorb the cost.

Mike Cumbie · Answer

Hi @Alex Yost,

In my experience it really comes down to the market you are in and your motivation. There are many factors at play.

1) How long have you had it listed?

2) How many offers have you had?

3) How much is it costing you to hang on to the property?

4) Do you have the ability to get your next one now or do you need this closed out?

5) How much profit is left in the deal?

6) Are school taxes coming up and going to cost you another chunk soon?

7) How likely are they to walk if you say "no"

So I think each one will be different. I will say though when you accept an offer initially remember you still have gateways to pass through (Inspection, Mortgage appraisal) that have the opportunity to cost you. So make sure you leave enough gas in the tank to make it to the finish line.

Good Luck!

Aly W. · Answer

We just went through this. 2 small leaks were discovered in the condo we're selling, and we fixed those. The A/C is old but works perfectly. The buyers wanted a credit for it. We said no. As others have said, if it's not broken, don't fix it....unless you get a concession from the buyers for something else, like a quicker closing date. If you say yes to even one thing, it opens the door for them to keep asking for more.

James Mc Ree · Answer

The buyer behavior described by the OP does not seem surprising at all.  The buyer seems to be exploring how much of a deal can be had.  I've done it with all of my purchases.  This is a negotiation.  The buyer is really asking, "What will you agree to?"

An inspection contingency allows the buyer to exit the deal if material defects are found.  Those two words are important: "material" and "defects".  As a poster noted above, "defects" are things that are broken versus just worn.  A leaky roof is broken.  An old sound roof is not broken.  It would be hard to argue that nonexistent features are defects (ie. house w/o gutters).  You can say "No" to these requests and be on relatively solid legal ground so long as the thing works as expected.

"Material" is a gray area, but generally means that a reasonable person would find this defect to be important.  That gives a wide latitude for interpretation, especially for a buyer looking to get out of a deal.  A door that doesn't open is probably a material defect (safety issue, if nothing else).  A door lacking a screen might not be material.

The real question is, "How much, if at all, will you as a seller yield on your price for these items?"  "Not at all" is a perfectly acceptable answer.  It might just mean your buyer exercises the contingency and exits the deal.  You have to decide what the negotiation is worth to you.

Jim.

Matt Motil · Answer

If it is functioning, they should know going in that those kinds of things are the case. If it's obvious when they make the offer, then I don't agree to taking care of it later. If it's a latent defect that's uncovered during a thorough inspection and the buyer wouldn't have been able to determine it before that time, then I think those are reasonable requests - even if they are expensive.

Alex Yost · Answer

@Teri S. Thank you, I can think of a couple of times when that might be really useful!

Aly W. · Answer

You're welcome @Alex Yost

Closing concessions? What is your strategy?

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