Whats Fair ? Market value vs. market condition

By
Home Inspector with Final Analysis Home Inspections

Lately these days it seems the old addage "all's fair in love war and politics" has become part of the real estate transaction too.

Most every offer to purchase a home will contain an inspection contingency. The contingency will outline the options for seller and buyer, in the likely event that repair issues are discovered during the buyer’s property inspection.

Before we begin to address the repair issues, remember that there is no perfect home. Every house, new or old, will most certainly turn up a list of discrepencies. If you are a buyer searching for a perfect house, you can stop searching. There are no perfect houses.

The purpose of home inspections is to identify safety issues or serious (ie: expensive) problems that are in need of repair, before the buyer complete’s the home purchase. The buyer will use an inspection report to compile a list of repairs that they want the seller to fix, before closing. Since both parties desire to maximize their cash, sellers and buyers are often left to make a decision about which repairs are necessary or reasonable, and which are not.

As a home inspector I see a lot of "round two" negotiations and often I'm asked "what should I expect to get fixed?".  In broad terms I look at a house in terms of "fair market condition". Since the industry has "fair market value" I take that a bit futher and try to apply what I think is fair market condition. My guidlines in defining this are the thousands of home I've inspected and looking at what on average is typical market condition for a home that's selling for fair market value. From there you can factor in other variables like, brand new roof or needs a new roof. 

The three basic test on the question of what should be fixed are this. 1. Is it broke? 2. Is it on borrowed time? 3. Is it a health or safety concern?

Typically most average homes are in what I would define as "good repair" That simply means that generally speaking there is nothing catostophically wrong and most or all of the systems are functioning as designed. That is not to say that there aren't any significant concerns. A 20 year old roof may be in "good repair", functioning as designed, But that doesn't mean it's ok. So secondly I look at what can have a potential impact on the properties "fair market value". So if you need a new roof and most of the avearge competing homes of that age and market have already had new roofs, then could add to the true purchase price of the property and should be considered.  Thirdly there is evrironmental safety and health concerns. A home built in 1940 that is full of asbestos pipe insulation may be of average market condition, good repair and still appraise at full value. But it can obviously impact a families well being and turn into extra cost for abatement so it should be disclosed.

Here are some helpful guidlines for what's fair and what Buyers and sellers should expect when negotiating repair requests?

  1. First, all Buyers should have an independant, professional home inspection and seller’s should only accept inspection reports done by a qualified, home inspector.  Sellers are not obligated to accept the opinions of the buyer, the buyer’s friend or cousin, or any non-professional, for that matter.
  2. The Buyer should provide a copy of the inspection report, along with the list of items they want the seller to fix.   If the seller hasn’t received a copy of the report, they should ask the buyer to provide it, before responding to the buyers repair request.
  3. The Buyer should not “nit pick”.  A request for repairs should focus on major problems and safety issues.   The buyer should not ask the seller to fix cosmetic problems, such as a bad paint job or peeling wallpaper.  The buyer should have addressed those issues in the purchase offer, during their initial walk through.
  4. If a seller receives a long list of repairs, they can consider offering a home warranty that covers major defects.  This insurance can save a deal by easing the buyer’s fear that the home is a money pit.  For a few hundred dollars, companies such as American Home Shield, provide an insurance policy at closing, which  covers major items and gives the buyer peace of mind.
  5. In a buyer’s market, they often want everything fixed.  Sometimes the seller can ascertain inside information about which “big ticket” items are the most important to the buyer, but the seller should always keep in mind that they risk the buyer walking, if they don’t agree to complete the entire list of repairs.
  6. When a seller is presented with a lengthy repair list, they should remember that known problems become material facts.  If a seller declines to fix buyer requested repairs, the problems are now “known” and must be disclosed to any future purchaser, in the event the buyer walks and the deal falls through.
  7. If a seller wants to cooperate with a buyer, but is unable or unavailable to oversee repairs, the buyer might be willing to accept a cash credit at closing to cover the expense estimates.   Many buyer’s are comforted by the fact they can use the seller’s money and hire their own contractors to make the repairs in a way the seller may not have done.

What Repairs Requests are Deal Breakers?  Which are Reasonable for the Seller to Refuse?

  1. Lender Required Repairs-Any problem noted on an appraisal, such as a bad roof or structural problem, is grounds for the bank to refuse to lend money on the property until the problem is fixed and the structure is properly protected.   Sellers are advised to make all repairs noted on an appraisal.  They affect the buyer’s ability to borrow funds and complete the purchase.
  2. Leaking Pipes-It is not unreasonable to ask a seller to repair water leaks and the damage which the leaks may have caused.  Unrepaired leaks raise mold issues and other problems seller’s don’t want to have if the deal falls through.
  3. Water Penetration-Sellers should address water penetration issues.  Most are caused by improper drainage of water away from the home.  Adjusting the grade or installing a french drain is usually the fix. 
  4. Roofing System-As stated in item #1, the seller should expect to repair or replace their roof, if deferred maintanence has caused water penetration issues.   If your roof is in good shape, sellers can aleviate problems ahead of time, by providing the buyer with a roof certificate, since most inspectors do not cover roof inspections.
  5. HVAC and Hot Water Heaters-Usually, age is a good indicator of whether the seller should replace these systems.  The average life expectancy of a HVAC system is about 20 years, and about 10 years for a water heater.  It is not unusual for the buyer to ask for new systems, if the existing ones are on their last legs, but these are big ticket items for the seller to repair, so no easy answer here. 
  6. “Tar Paper” Sewer Lines, aka “Orangeburg” Sewer Pipes-These pipes, which are made from tar paper, are famous for collapsing.  Generally, they last about 30 years before they disintegrate.  While replacing sewer lines is expensive, they are an item most sellers will replace.
  7. Unsafe Decking or Handrails-Sellers should generally fix any items that effect the safety of the occupants, or are matters of local code enforcement.
  8. Galvanized Water Pipes-Many homes built 30 years ago have galvanized, steel water pipes.   These pipes become clogged with minerals overtime, which is often the cause of low water pressure.  These type of pipes are also prone to rust and leaks.  While it isn’t unreasonable to expect the seller to fix leaks, few sellers are willing to replace all the plumbing lines.
  9. Electrical System-The electrical panel should be safe and not overloaded.  The breakers should be marked with the name of the area of the home that they service.  Sellers, again should expect to repair any safety or fire issues that are found during the inspection.   If your home was built before 1960, it is likely the electrical service is Ungrounded, meaning the plugs have only two outlets.   Most sellers will refuse to rewire a house, simply because the service is Ungrounded, since it does not cause any problems.  A tip might be for the seller to offer to run “Romex” from the electrical panel to any new receptacles that the buyer intends to use for sensitive electronics and large appliances.  As a general rule, buyers who require grounded wiring should be looking for newer homes.
  10. Foundation or Wet Basement-These are difficult issues that effect the very structure the home is built on.  These homes are best purchased “as is” at a steep discount.   Buyers should always think twice about purchasing a home with this type of problem.  Problems with or repairs to these systems never go away.  These are material defects and must be disclosed to any future purchaser.

Comments (1)

Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

One thing I always advise buyers (and sellers) about is that disclosed and/or obvious defects aren't a subject for negotiation after the inspection.  Those should be dealt with in the initial negotiation. 

Oct 10, 2008 02:17 PM