When buying a resale home, real estate agents often think of the purchase transaction as going through two different negotiation phases. It’s like buying the home twice. The first time, is when all parties agree on the purchase price, close of escrow date, and earnest money, along with other details, like who pays closing costs, home warranties, etc.. And the second negotiation is over the list of repairs.

Once the home is under contract, with all parties agreeing, escrow is opened and the inspection period begins. The boilerplate residential real estate contract for Arizona reads the “Buyer’s Inspection Period shall be ten (10) days after Contract acceptance.” In some cases this will be lengthened or shortened, but it is still commonly referred to as the 10-day inspection period.

During this time, any and all inspections which the buyer wishes to perform need to be performed. The two most common inspections are a home inspection and a termite inspection. The home inspector is a somewhat general purpose inspector, and does a very good job identifying issues with plumbing, heating, cooling, electrical and other items, but at a certain point, he may recommend a more specialized inspector come out for any area of added concern. For example, the home inspector may recommend further pool, roof, land survey, mold, and/or foundation inspections be performed by someone with additional expertise in those areas.

If additional inspections are needed/desired, the 10-day inspection period doesn’t automatically extend, which is one reason why we like to schedule our initial home inspection for as quickly as possible - hopefully within the first couple of days.

Once the buyer has performed all of the inspections they desire, they are then afforded the opportunity to send a notice of disapproved items to the seller. The notice of disapproved items lists both warranted and non-warranted items, which the buyer requests the seller to fix. The list of warranted items, as defined in section 5 of the contract, includes “heating, cooling, mechanical, plumbing, and electrical systems (including swimming pool and/or spa, motors, filter systems, cleaning systems, and heaters, if any), free-standing range/oven, and built-in appliances”.

One thing that is not a warranted item, which surprises many Arizona home buyers is the roof. The roof is not a warranted item, primarily because we get so little rain in Arizona (today aside), that it is difficult for a typical inspector to determine if evidence of a past leak is a current problem, or perhaps one that was fixed long ago.

If an item is warranted, and found to be non-functioning, the seller is required to repair that item. For example, if the home has an air conditioning unit, which does not blow cold air, that unit must be repaired. Of course, the buyer and seller could mutually agree to waive the warranty on the AC unit (which is often the case with bank owned and/or short sale properties), but that withstanding, it needs to be repaired. For a non-warranted item (for example, a cracked tile in the kitchen), the seller may elect to make the repair, but can also choose not to repair the item, leaving it as-is.

If the seller chooses not to repair any of the items requested by the buyer, the buyer is given the choice whether to cancel the contract and receive all of their earnest money back, or move forward, accepting the item as-is.

This back and forth, between the buyer and seller over repairs is essentially a second negotiation. One thing to keep in mind is this is not intended to be a re-negotiation of the price of the home. It is common that credits are offered in lieu of repairs, but often that is done because the seller doesn’t want to deal with the hassle of making the repair, or to allow the buyer greater control over who makes the repair. As well, credits in lieu of repairs have limits based on how much down payment the buyer is making, and thus may not be possible for every situation (for example, if buyer and seller agree a new roof is needed).

Credits in lieu of repairs should NOT be used as a way to renegotiate the price. If, during the inspection period, the buyer decides the home is not worth the purchase price, that should be used as justification to cancel the contract. And then if the buyer still likes the property at a lower price, write a new contract. This approach solves a lot of potential mortgage fraud problems.

The notice for disapproved items is perhaps the most emotionally charged phase of the purchase. It is often the case that a seller begins to take offense at a long list of items on the inspection report. As well, buyers (particularly in today’s market) expect the home to be perfect when they move in. Further, many buyers are planning to use all of their saved money for the down payment on the home, and thus do not have extra money for making repairs to non-warranted items, which they hadn’t expected to find. When that is the case, deals can and do fall apart over repairs.

In fact, I’m writing about inspections today, because a deal I’m working on almost fell through last week. I’m representing buyers that are purchasing a home with essentially no money down. The seller has agreed to pay nearly all of the closing costs, and the buyers are using VA financing to get into a small, practical home for them. The seller has improved their property over recent years, and as a result, the home is in good shape, with respect to its price and surrounding properties. The sellers should be Because of that, the sellers have an offer on their home. Without those improvements, quite honestly, they probably don’t have a deal.

But because of the improvements, the sellers are more emotionally attached. They feel their home is worth more than the contract price, so they aren’t as inclined to want to make further repairs. This is countered by the buyers that aren’t happy that some of the improvements weren’t made in accordance with today’s building code. A fine balancing act then ensues, as both agents involved seek to find that common ground where buyer and seller get what they need. This is the art of negotiation, as we work to eliminate the emotional impact of selling a home to keep a deal together that everyone wants to stay together.  It’s the second negotiation.  The one that really counts.

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