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Mar. 16, 2011 - Should You Deduct Home Deficiencies From The Offer Price?

How much you offer on a home you are about to purchase, is somewhat influenced by whether or not you deduct it's deficiencies from it's value at the time of the offer. 

IF you can negotiate the item at inspection...then you likely don't deduct at time of offer.

IF you CAN NOT negotiate for that deficiency at inspection, if you do not account for it at time of offer, you may lose any potential to accommodate the deficiency prior to closing.

Basically, before you make an offer, you are doing a quick mental Reserve Study of the home's major components. Earlier today I did a Reserve Study for AFTER purchase of the home.

Below is an example of one done BEFORE you make an offer. This is usually done fairly quickly at the same time you are reviewing the home prior to writing the offer. It is one reason why you should view the home again after you decide you want to buy it, and before writing the offer, if and when there is time to do that. Most often I am mentally calculating this while my buyer clients are off looking at other things.

The Home Inspection should be primarily for NON-COSMETIC items that you could NOT evaluate prior to making the offer. Some things you can and should know are not going to be called by the inspector, before the inspection happens.

Here's a simple guide of how to set expectations.

Example of how to apply the above when making an offer.

1) RARELY will the Inspection Require a NEW ROOF! If the home is 18 years old, this can create problems as most people expect a roof to last at least 5 years from purchase. Consequently if the roof is 15 or more years old, unless it is a specialty roof that lasts 35 or more years, it is usually best to deduct a portion of the cost of a new roof from the offer price.

2) If the home was built in the early 90s, be sure to check for "class action suit" siding prior to making an offer! This is very important as a seller never puts on all new siding, or is willing to pay for all new siding, and a lender will most likely NOT ALLOW a credit of that size. Class Action Suit siding does not need to be defective in order to need replacement. It just does! Very important item. How you handle it is different from house to house, but most often you need to deduct $20,000 from the offer price if that type of siding is present, or maybe even not buy the house at all. 

You should not need the inspector to "find" this type of siding. It is fairly easy for you and or your agent to spot this, with few exceptions.

3) Look at the dates on the hot water tank and furnace. These are fairly obvious and easy to spot as to needing to be replaced now or in the near future. Problems occur when they are past their life expectancy, but in working order. So best to determine your stance on these in advance of making the offer. Maybe by building in a credit to replace them, if you know they are working, and also know that you will not have the money to replace them within a year or two of closing. A home warranty might hold you for awhile, but if the heater is 25 years old and the hot water tank is 14 years old, these can be touchy subjects at time of inspection.

BOTTOM LINE is no one should expect a $20,000 "credit" from a Home Inspection at time of negotiation, because your lender will not allow that. 

NORMAL MAXIMUM CREDIT AT INSPECTION is "up to" $5,000 BUT if you already "maxed out" your credits toward closing costs in the original offer to purchase, you CAN NOT get ANYTHING at all!

I am usually juggling all of this for the client, as it is fairly complex and you can easily back yourself into a corner if you don't foresee what is going to happen. The average home buyer is not able to foresee, and that is why so many transactions fail on inspection. Hopefully this post will give you a better feel as to what to expect, so that you are not expecting the impossible.

 Reserve Study for a Single Family Home (Comprehensive)

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ARDELL DellaLoggia of Sound Realty on Seattle Real Estate process and market including Kirkland, Bellevue, Redmond, Green Lake and most areas around the top of Lake Washington North of Downtown Seattle. Phone: 206-910-1000 - Mailto:ARDELLd@gmail.com

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