Part of the escrow process is the ordering of an appraisal by the buyer’s lender. Another major aspect is the ordering of a home inspection by the buyer themselves. It’s important to understand the goal and function of each of these. It’s also important to know what to expect as the home seller from each of these buyer-side actions.
Keep in mind, even if selling to an all-cash buyer, they’ll likely still require a home inspection prior to closing. They may request a home appraisal too, even though there’s no lender involved in the sale. While you can potentially negotiate for no contingencies, it’s rare that buyers will move forward without at least an inspection.
Thus, it’s important to be prepared for both a home appraisal and buyer inspection, regardless of the circumstances of the sale.
The Home Appraisal
The goal of the appraisal is to determine the market value of the property. This is because lenders will only lend up to a percentage of the value of the home. This is known as the loan-to-value ratio or LTV. For VA loans, the LTV is up to 100%, but for other loan types it’s anywhere from 80%-97% LTV. The remaining balance of the home has to be paid by the buyer. This is referred to as the loan’s down payment.
If the appraised value is less than the asking price for the home, the buyer will have to fund the difference out of pocket. This is one of the most common reasons that home sales fall out of escrow. It’s also a very clear reminder of how important it is to price your home properly and negotiate realistically.
The Buyer Inspection
The inspection is a form of due diligence that the buyer performs to ensure the home is in expected condition. The inspector will scour the home for any issues, large or small, and present the list to the buyer. This provides the buyer with the opportunity to ask the seller to repair any issues prior to escrow closing.
Alternatively, the buyer can ask for a repair credit/discount on the sales price. They would in turn fix the issue(s) themselves. It’s important to note that failure to agree to repairs or credits is another major reason that deals fall apart. We actually recommend most of our sellers order their own pre-sale inspection and communicate any issues upfront in the disclosures. This way, there are few (if any) surprises during the buyer’s inspection.
Handling Buyer Inspection Repair Requests
Unless you’re selling a brand-new home, you should expect at least a few issues to arise during the inspection. This is normal and unless it’s a major issue like a sinking foundation, shouldn’t be concerning. However, the results of the inspection typically result in a second phase of negotiations. This time, the question is what will be done to address these issues?
The buyer will likely ask that you either perform the repairs, or provide a credit for them to perform the repairs after the sale. However, they may only be interested in one or the other. If the buyer wants the home in perfect condition for move-in, they’ll likely ask you to fix the issues. Alternatively, perhaps the buyer doesn’t really care about the issues, but wants to use them as leverage to get you to reduce your sales price.
You’re free to fight either request of course. Just keep in mind that in doing so, you risk pushing the buyer away and causing the deal to fall through—assuming they have an inspection contingency of course.
Avoiding Escrow Headaches
Again, the best way to reduce the risk of inspection issues occurring is to perform your own inspection ahead of time. This way you’ll be able to unearth as many issues as you can, and price your home accordingly. By baking the repair costs into the home price as an upfront discount, you’ll avoid any last minute issues. A well-informed buyer is a happy buyer, and makes for a headache-free escrow.
Regarding the appraisal, take the time to research the value of your home before listing it. This will help you avoid an unexpectedly low appraisal value. In the event that an appraisal still comes in low, you can work with the buyer to request a review and second appraisal if needed. Your agent (and the buyer’s agent) should be able to help immensely with any challenge to an appraisal by providing evidence of the fair market value of the home.
Once the home appraisal and buyer inspection are completed and buyer requests have been satisfactorily negotiated, you should request the buyer to release the contingencies of the sale. In so doing, the buyer is signifying that they’re firmly committed to closing escrow. The sale can then move from “contingent” to “pending” status.
If you have any questions about home appraisals or buyer inspections, please let me know in the comments. You can also contact us if you’d like to discuss specifics of listing your home in more detail.