by Holly Hurd
Should I back out of the deal? Would I write a check for 5,042 in order to do so... Thoughts on The Northville, Michigan Home Inspection period for our clients, future clients and colleagues.
Snowy days lead to time for writing, reflecting and thinking. Moving into the New Year, we always look forward, however, not all things change when the Ball Drops! One thing, I got to thinking about today was calculating the true cost of "backing out of a Real Estate Contract due to a home inspection."
Over the past year in Real Estate, prices have come up, inventory has been very tight and interest rates have remained low, which keeps homes affordable despite the shift into a sellers market. Overall, its been a great ride for sellers in Northville & Novi Michigan over the past two years. However, one interesting thing we've noted that we believe works against home buyers and sellers interests are some of the practices and procedures, negotiating tactics and responses to the home inspection or due diligence phase of the Real Estate transaction.
As most of you know, in the Northville & Novi Michigan Purchase and Sales agreement every buyer, unless they waive the right, (which contrary to popular belief is a strong move regularly employed by Real Estate investors who are able to assume certain risks as "cost of doing business) is entitled to bring the home inspector of their choice into the home to inspect the mechanical elements, windows, attic, electrical, septic, well, basically the guts of the house to determine if the property is safe and functional and/or to request repairs or credits from the seller to alleviate unexpected issues. The other option for buyers is they can elect to terminate the agreement due to a bad inspection or inability to agree with the seller about repairs. With prices coming up and more millennial's entering the market (*read up on entitlement issues with millennials) this has been an increasingly sticky point in the transaction, human nature dictates that very often for people, winning or "not getting screwed" supersedes common sense or reason. Its become at times, Custer's Last Stand, to get something, anything oftentimes due to an overblown issue or just having to feel like you "won".
For starters, not every home inspector arbitrates a fair process. Much like a referee in sports, the best games are officiated by referees who do not "make themselves the star of the show". In the worst games the officials are the center of the action and everyone is screaming at them to put the whistle away! Most if not all home inspectors have pet issues they love to pick on in older homes, whether it is cast iron waste lines, chimney caps (still not required for brand new 2018 homes), tree work (recent odd situation), new vents in old plumbing etc etc. etc. Its worth noting that home inspectors are required to point out what they see and liable if they do not do so, but are not generally licensed in any of the trades they are inspecting for, so much like a referee they aren't then qualified to truly recommend how something should be fixed, just to point that they noticed something that should be evaluated by a licensed contractor in that trade. Furthermore, most inspectors are pretty good people who will also explain to the buyer client that every old home (and most new ones) have some issues and that home ownership is not a free ride. Becoming the landlord has one million benefits, but being able to call the landlord when something breaks is not one of them.
(*as a side note, one of my very best friends and several of my contacts and friends are home inspectors)
Most problems with a home can be fixed and issues that are not structural usually have a fixed range of cost attached to them. (ie 800-1200 dollars or 1500-2000 etc) Figuring out that cost requires some skill but your Realtor should be able to help you by providing referrals to local contractors who can help you determine the cost as well as whether its necessary to repair right away or even necessary to repair at all (refer back to "pet issues" of home inspectors). Furthermore, many issues of deferred maintenance, you can plan for future replacement versus making the repair immediately. If something is openly faulty and failing at the time of inspection, most sellers will fix or credit for a repair, unless it was agreed upon and disclosed prior to contract. So a leaky pipe, fire hazard, moldy attic etc. are usually things the Agents will be able to convince the seller to fix or credit you for the repair of.
However, there are inspectors and even some real estate agents who routinely "kill the deal" due to inspections and while ultimately, the decision of whether to move forward or not in a transaction is up to the buyer and some homes are nightmares that are better off being let go after the inspection, all too often, the buyer who backs out is just wasting their own and everyone else's time due to being misinformed and not having the right expectations about what their budget affords them in the town they wish to live in.
Below is a quick calculation on the hidden costs of backing out versus resolving the sale with the seller. Its something worthy of consideration before you back out of a 250,0000 purchase over a $700 plumbing upgrade the seller is unwilling to make for you.
True Costs of "backing out" using 250,000 purchase price
1. Market appreciation. Using a conservative rate of appreciation of 5% yearly and an estimate that after backing out it will take about 3 months to locate and move into the inspection phase on another home. That means on using this model the next home you purchase will now cost you about 1.25% more than it would have 3 months prior.
3,125 expense (1.25% increase in values)
2. 1,046 (3 months of principal paid on 4% interest loan versus continuing to pay rent and starting amortization schedule 3 months later)
3. 500 inspection fee at next property (or more if septic, well etc. Also worth noting that the handful of inspectors we know who intentionally kill off every deal they can, also charge the most for their "service")
4. 371.70 lost wages/opportunity cost (estimating 7 more homes viewed at 45 minutes per viewing 4 hours more searching online and 3 hours at your next home inspection x 26.55 which is the average American hourly wage) This variable is very "lowball" because it also fails to account for the fact that most home shopping is done during your free time, time off from work, weekend/family time and its a commitment you make to better your lives by becoming a home owner, so the time is probably worth more than the low end of what you might earn for an hour of labor.
Average cost to buyer for terminating contract
3,125 + 1,046 + 500 + 371.70= 5,042.70
This formula also does not take into account things like dings to your credit (whether your fault or not), changes to your employment status (you might get a better job offer in a different field which hurts you if you're applying for a mortgage product that requires 2 years employment history) or just stress, being distracted at work and other things that go along with a home search. All of these things also impact the picture and your quality of life and could cost you the opportunity to become a home owner in the first place. But lets just assume that in a pure mathematical model, if we were purely logical beasts, when purchasing a 250,000 home we'd need to see at least 5,042 worth of "unexpected" downside to truly make it worth our while to back out during the due diligence period.
The other thing to consider is that if a buyer routinely backs out due to normal and customary issues, then ultimately the best way for them to get what they want is to increase their budget and look at newer homes in better condition. If you're reading this, are engaged in a home search and have backed out a few times please don't take offense to this post. Instead consider that in order to get something that meets your criteria, you might have to increase your budget 10-15% and look at newer homes.
So oftentimes, the third home a buyer picks has just as many issues as the first one, but they are finally worn out and have learned that they are not going to get a home in perfect condition so the 5,042 in loss, might be more like 15,126, but the client/buyer is worn out and just happy to finally have the process over with, get into a suitable home and many buyers at this point are even happy to see their also worn out Real Estate Agent get compensated for the hundreds of hours of work they've done.
At the end of the day, a good agent is also a good person and always happy to see their client accomplish the dream of home ownership, even if its been a long road filled with lots of backing out! We look at this as opportunities for us to also get better at educating our clients, resolving issues and streamlining the process for our buyer clients, so that they can get into good homes faster and with less headaches. Yet, none of this changes the formula, the loss of time and money and its very clear that in the case of home shopping, time is money, as the old saying goes.
The home buying process can be stressful and as a final rule thumb, hire an agent or company you can trust to look after your interests and then do yourself a favor and listen to them. Be as logical and business like as you can. A repair of less than $1000 should never truly compromise a 300,000 sale, it just doesn't make economic sense. Buying a home is about landing a great place for you and/or your family to live while building equity, its not about winning or tunneling (*reference "Thinking Fast and Slow by Daniel Kahnemen) and if you are purchasing a home for 250,000 and in negotiation you'd had to pay 251,000 you'd probably have done it. But all too often, that 1,000 repair is more real to the buyer and they get overwhelmed by it, become emotional and pull the plug on a good deal. A house is wood, shingles, windows, sheet rock, pvc, insulation and a home is the memories you make there. Keep in mind, it won't be your home, until you move in, make the changes cosmetic and otherwise that you desire and start creating those memories.
Fixing a non structural issue is not a "money pit" but losing 5,042 would hurt just about anybody! So keep it in mind, that every action has a cost attached to it and consider resolving your differences when you're purchasing an old home versus creating an unrealistic expectation and wasting a lot of time in the process. Good luck and God Speed to home buyers, looking forward to showing you all of our great new listings in 2019! And keep your eyes on www.Northvillehomes4sale.net for all the newest listings in the Multiple Listing Service!
happens to be the norm in the area. Local expert was also suggesting very stylized lighting fixtures, that may not be plain enough to appeal to a broad range of buyers. She was also suggesting the darkest hardwood flooring Jane could find to replace the well worn floors. Great idea in a big open floor plan. Not so much in a very compartmentalized home where that will make the space feel even smaller. Had this local expert ever sold a home?
Store Before Thanksgiving (and shortly after Halloween!) 
3.Don’t forget that curb appeal is still important even during the holidays
