Advice on Home Inspection Negotiations

Question: We just finished out home inspection and are a bit overwhelmed by the list of recommended repairs. How do we know what to ask for and what’s reasonable to expect from the seller?

Answer: As we head into the colder months and the market slows down a bit, buyers will start picking up more leverage to include home inspection contingencies with the right to negotiate, not just the right to void. I thought it would be helpful timing to revisit some tips, applicable for buyers and sellers, on home inspection negotiations.

Inspection negotiations can be frustrating for both parties so it’s helpful to establish some ground-rules heading into negotiations. Unless you’re buying a new home, you should expect the inspection to turn up at least a handful of items and you’ll need to quickly and reasonably determine which items are the responsibility of the seller or buyer.

What Is A Home Inspection?

After ratifying (signed by both parties) a contract to purchase a home, most buyers will hire a home inspector to inspect the entire home and produce a report of any issues/risks, from foundation cracks to missing door stops.

Depending on the contract terms, the buyer usually has the right to negotiate for repairs or credits, based on the results of the inspection, and the right to void if an agreement can’t be reached OR no negotiation period, just a right to void (aka a Pass/Fail Inspection). In either case, if the buyer voids under the terms of the inspection contingency, they will receive their full deposit back.

What Should You Look For?

In my opinion, the goal of an inspection is to ensure that the property is in the condition both sides expected while negotiating the purchase price. Items that have a material impact on the value of the home should be on the table for negotiation.

Generally, you can divide findings into big-ticket items that impact the value of the home and must be addressed and smaller punch-list items that are good housekeeping practices. The big-ticket items I look for during an inspection are:

  • Structural Flaws
  • Water Penetration
  • Safety Hazards
  • Inoperability (e.g. AC not working)
System Life Expectancy

You should also determine the age of major systems like the roof, windows, appliances, HVAC, and water heater prior to making your offer, and verify these are accurate during the inspection. Make sure you’re clear on the projected life expectancy of these systems while you’re negotiating the purchase price and factor this information into your offer. You’ll have a tough time convincing most sellers they’re on the hook for crediting you the cost of a 17-year-old water heater if that information was made available prior to your offer, assuming the system is working.

What Can You Ask For?

Negotiations can include all sorts of solutions, but most frequently the conversation is about whether a seller will handle the repairs or provide the buyer a credit (against closing costs) instead. Often times an inspection agreement includes both – a credit for some items and a request to fix/replace others. Sellers must use licensed contractors and provide works receipts for any work they do.

In general, if something you’re asking for involves personal preference or you want to have control over the quality of the result, it’s best to ask for a credit and handle it yourself. For example, if the deck is falling apart and needs to be replaced, you don’t want the seller managing the design and construction of a new deck so ask for a credit for the replacement cost and make sure you’re getting the deck you want.

Inspections Don’t Need To Be Contentious

Inspections are one of the most common points of contention between buyers and sellers, but with the right preparation and expectations going in, it can be a smooth process that both sides are happy with. Like the negotiations you had on the sale contract, the inspection period is also a negotiation that requires both parties to be understanding and reasonable to reach a win/win.

2020+ Interest Rate Predictions

Question: Do you expect interest rates to remain low in 2020?

Answer: Mortgage rates increased sharply in 2018, peaking at 7+ year highs in the fall of 2018, and most experts expected that trend to continue into 2019 and for 30yr rates to clear the 5% mark for the first time since spring 2010. However, changes in economic policy and financial markets pushed rates down at the end of 2018 and throughout 2019, coming close to all-time lows in the 2nd half of 2019.

Average 30yr Fixed Mortgage Rate Since 1971
Average 30yr Fixed Mortgage Rate Since 2010
Rates in 2020+

The Mortgage Bankers Association and Freddie Mac each predict that rates will remain low, right around current levels, through 2021 with an average 30yr Fixed Rate hovering around 3.7-3.8% through that period. The Mortgage Bankers Association predicts that rates won’t start increasing until 2022, when they’re predicting the average rate to increase modestly to 4.1%.

If these projections are accurate, it should support strong price growth over the next few years in Arlington, Northern VA, and the greater DC Metro.

However, keep in mind that just over 12 months ago, most experts predicted that mortgage rates would be over 5% by 2020 and, according to Freddie Mac, the average 30yr Fixed Rate last week was 3.64%. Changes in the global or US economy, the election, and the stock market can all change the course of rates in 2020 and beyond.

Lender Advice

If you’re considering purchasing in 2020, I wrote a column a few years ago about the value of a good lender that I’d encourage you to review. If you’d like to talk to somebody, I suggest reaching out to Jake Ryon of First Home Mortgage at JRyon@firsthome.com.

If you’d like to meet to discuss buying or selling in the area, don’t hesitate to reach out to me at Eli@EliResidential.com.

The 20% Down Payment Myth

Question: Is it possible to buy a home with less than 20% down?

Answer: I’m always surprised by the number of people who assume they have to put 20% down to buy a home and delay their goal of becoming a homeowner for years because of it. Studies show that the most common reason people give for not buying a home is that they don’t have enough for a down payment.

In reality, about 1/3 of Arlington buyers purchase a home with less than 20% down and for many buyers, especially first-time home buyers, they’re putting as little as 3-5% down.

Programs For Everybody

For those with good credit, there are popular Conventional Loan programs allowing for as little as 3% down and for those with lower credit scores, FHA Loan programs range from 3.5%-10% down. There are also some exceptional programs available to those with great credit and strong incomes allowing for 10%-15% down at great rates.

Specialty Programs For Military and Doctors

If you are an active-duty or former servicemember you likely know about VA Loans that allow purchases with zero down. Doctors also have access to special loan programs offering great rates with low down payments for large loan amounts.

Mortgage Insurance

Most loans with less than 20% down will include mortgage insurance, which I wrote about here. It will increase your monthly payment and generally represents a higher percentage of your loan amount the less you put down. However, there are options to get rid of the mortgage insurance fees by buying it out or applying for early removal after a couple of years. There are also some programs that do not include mortgage insurance at all.

Impact on Negotiations

Clients often ask me how much a lower down payment will impact their ability to negotiate, so last year I ran the numbers on the impact of different down payments on the percentage buyers were negotiating off the sale price. The results showed that only cash buyers (100% down) and buyers not putting any money down were materially impacted by their down payment, the negotiation leverage was pretty similar for everybody in between.

However, it would be misleading to suggest that down payment percentage doesn’t have any impact. Most sellers will respond more enthusiastically to higher down payments and this comes into play in competitive scenarios (multiple offers), which has become common in Arlington and the surrounding DC Metro neighborhoods. When sellers are choosing between multiple, similar offers, buyers with higher down payments have an advantage.

Buyers can combat the potential negative impact of a lower down payment in multiple offer scenarios by getting a strong pre-approval letter from a reputable local lender, offering to get pre-approved by a lender of the seller’s choosing, increasing the Earnest Money Deposit, or a number of other tweaks to the contract that will be looked at favorably by the seller, without increasing risk to the buyer or increasing the offer price.

Favorite Mortgage Programs

Here’s a link to an article I wrote with some of my favorite mortgage programs and contact information for great lenders who offer them.

If you’d like any additional information or recommendations on lenders or loan programs, don’t hesitate to reach out to me at Eli@EliResidential.com. If you’re thinking about buying a home in Arlington or the surrounding Northern VA/DC Metro neighborhoods, I’d be happy to meet with you to discuss your options.