The first thing to know about the home inspection process is that it is a process for the benefit of the buyer.  However, the standard contingency form and negotiation document typically used in our market are balanced documents that respect the needs and priorities of both the buyer and seller.

The Context

When making an offer on a property, a buyer negotiates the price and other terms based on their understanding of the property at the time of the offer.  However, often buyers will include a home inspection contingency to allow themselves an opportunity to learn more about the property with the help of a professional home inspector. 

Thus, if a buyer negotiates a contract on a house that has two broken windows, it would not be reasonable to try to negotiate for the repair of the windows during the home inspection process, since that fact was already known about the house --- but if a leaky sink is discovered, it would be perfectly reasonable to request that repair.

The Substance

The standard inspection contingency references a long list of areas for inspection, including: geotechnical inspections, inspections of the structure, foundations, roof, flooring, HVAC systems, electrical system, plumbing system, appliances, exterior insulation finishing systems, drainage, windows, well and septic systems, and lead-based paint and radon.

Yet at the same time, the inspection contingency specifies that the buyer may only request the repair of "material defects" which is described as "those items that could affect the decision of a reasonable person to purchase the Property" and would not include "cosmetic items, matters of preference, or grandfathered systems or features that are properly functioning but would not comply with current building codes if constructed or installed today."

The Flow

Post-inspection, a buyer may provide the seller with a list of requested repairs.  The seller would then respond by offering any of the following:

• agreeing to make all repairs
• offering to make some repairs and/or provide some sort of credit to the buyer
  
• declining to make any repairs or monetary concessions

If the seller agrees to make all repairs, the buyer must proceed with the purchase.  Otherwise, the parties attempt to negotiate the terms of repair and/or monetary concessions.  At the end of this negotiation, the buyer makes the last decision of whether to proceed with the purchase by accepting the last offer of the seller, or to terminate the contract and receive a refund of their earnest money deposit.

The Problems

Potential pitfalls during the inspection and re-negotiation process include:

• the buyer unreasonably requesting the repair of non-material defects
• the buyer unilaterally deciding they do not want to buy the house because of what is discovered through the inspection process --- while the seller agrees to make all repairs
• an inspector who in his/her efforts to provide the best possible service to the buyer ends up providing a detailed inspection report that makes the buyer overwhelmed by the needed repairs
• the seller thinks the "deal is done" when the contract is ratified, and doesn't realize that further negotiation might be necessary as the buyer learns more about the property during the inspection process

The home inspection process can be complicated, but unless a buyer has has the expertise to thoroughly understand a property inside and out, it is a very helpful contingency for ensuring a wise purchasing decision.

A statistic that can be very helpful in understanding the state of the real estate market is the ratio between the list price and sale price of a home.  For example, 216 single family homes sold thus far in 2007 (1/1/2007 - 12/30/2007), with an average list to sell ratio of 97.81%.  This means that Sellers are getting, on average, 97.81% of their asking price - - - or are they??

When I (or any other Realtor) runs these calculations in the MLS, the statistical analysis compares the sale price to the final list price, not the original list price.  Unfortunately, comparing the sale price to the original list price is a manual process.  But let's see what it would show us . . .

Because of the tedious nature of this research, I have limited this to Harrisonburg single family homes that sold in the 4th quarter (9/1/2007 - 12/30/2007).  There were 39 homes, that sold at 97.24% of the final list price.  When looking at the sale price compared to the original list price, the ratio drops to . . . . . . . . . .  94.20%. 

Interestingly, of the 39 homes, 8 of them sold for less than 90% of the original list price.  Let's put a few of these numbers in perspective, with the lowest ratios in the set . . .

977 Summit Avenue
Original List Price = $498,000
Final List Price = $424,900
Sale Price = $375,000  (75% of original list price)

740 Collicello Street
Original List Price = $150,000
Final List Price = $145,000
Sale Price = $125,000  (83% of original list price)

60 Shenandoah Avenue
Original List Price = $182,500
Final List Price = $169,900
Sale Price = $156,000  (85% of original list price)

A few interesting take away points:

• On average, buyers seem to be willing to negotiate prices down 3% (to 97% of the asking price), but not 6%.  
• Thus, as a seller, it is important to stay within 3% of the market value, or your "bottom line".
• A seller can't pick any asking price out of the air and assume that their home will sell for 97% of that price (or even 94% of the price).
• When preparing to sell your home, don't just look at sale prices and final list prices of comparable homes -- check the original list prices as well!
  

Each month I run the same series of calculations to determine how supply and demand relate in several price ranges --- less than $200k, $200k - $350k, and $350k and up. At the start of December, there were 20 months of supply of homes priced $350,000 and up.

One of my readers posed the question of whether there might be more of a story to tell in what could be a very large price range --- $350k and up encompasses many hundreds of thousands of dollars. So, let's take a look --- please note, I updated the "Available" numbers to reflect current availability.

	EVERYTHING Over $350,000	$350,000 - $600,000	Over $600,000
	Sold in September: 4	Sold in September: 4	Sold in September: 0
	Sold in October: 10	Sold in October: 10	Sold in October: 0
	Sold in November: 13	Sold in November: 11	Sold in November: 2
	Avg Sold / Month: 9	Avg Sold / Month: 8	Avg Sold / Month: 0.7
	Available: 179	Available: 136	Available: 43
	Months Supply: 20	Months Supply: 17	Months Supply: 61

So --- it is somewhat interesting --- there are only 17 months of homes priced between $350k and $600k --- and a whopping 61 months of homes available priced above $600k.

But to give the $600k+ homes a fair shake, let's make sure September, October and November weren't unusually low sales months. From January 2007 through November 2007 (inclusive), there were 16 sales of homes above $600k. This is 1.45 sales per month --- which would make the current inventory (43 homes) equivalent to 30 months of supply. Better than 61 months --- but this is still the most oversupplied price range by far!

Negotiating a contract can take place verbally, or in writing -- there are advantages and disadvantages of each strategy. 

Almost always, the (prospective) buyer makes the first move in negotiations -- I suggest that it takes place in written form.  A buyer can certainly make a verbal offer on a property, but putting the offer in writing has several benefits:

• All of the details of the offer (price, financing terms, closing time line, etc) can be clearly explained in a written offer.  Some details are often omitted in a verbal offer, which can lead to friction or negotiation failure later in the process.
• Taking the time to put an offer in writing demonstrates a level  of seriousness to a seller, which can add negotiating strength for a buyer.

The only advantages of making a verbal offer are the potential for faster feedback from the seller after deciding to make an offer, and the lack of commitment --- a verbal offer is not legally enforceable.

When it comes to further negotiating the terms of a contract -- after the offer has been made -- oftentimes it can be more helpful to do so verbally.  A few things to consider:

• PRO-VERBAL:  Especially if the buyer and seller go back and forth several times on price (or other terms), negotiating verbally can help immensely by speeding up the process.  If each party is making their counteroffer in writing, it can take days, instead of hours, to come to a conclusion.
• PRO-WRITTEN:  Since a verbal agreement is not legally enforceable, even if the buyer and seller agree on terms, either party can revoke their agreement at any time prior to when the agreement has been signed by all all parties.

Beyond the generalities above, either verbal or written offers or negotiations can be appropriate in a given situation.  As with almost everything in real estate --- the context is the key!