When should home inspections be done in a short sale transaction?

A matter of debate is whether a buyer should conduct their home inspection right after going under contract with a short sale seller, or if the buyer should wait until a written short sale approval is provided.  In typical non-distressed sales, the buyer opts to conduct their home inspection within 10 to 15 days after all parties have signed the real estate contract.  However, when a short sale is involved, there are pros and cons of conducting a home inspection right away.  What is advantageous for the buyer may not be advantageous for the seller, and vice-versa.

Why a buyer should want to conduct inspections right away

–       If the buyer decides from the inspection results that they do not want the property, the buyer saves valuable time by terminating the contract.  They can then focus their search for a better home.

–       If the buyer decides that they need a repair credit or price reduction, they have a much greater chance of having the seller’s mortgage lender approve the concession.  The information from the inspection report can help with convincing the seller’s bank that the property needs to sell for less due to projected repairs.  Once a short sale is approved, it is extremely difficult to negotiate a concession with the seller’s mortgage lender.

–       In many real estate contracts, the buyer may forfeit their deposit if they attempt to back out of the transaction only days before a closing is set to occur.

Why a buyer should wait until they have short sale approval before conducting inspections

–       If the buyer’s offer price is not approved by the seller’s mortgage lender, then the buyer does not spend money on an inspection for a home they cannot buy.

–       The condition of the property may deteriorate from deferred maintenance while waiting for the seller’s mortgage lender to respond.  The buyer’s inspection report may more accurately represent the condition of the property as of the proposed settlement date.

Why a seller should want the buyer to conduct inspections right away

–       If the seller takes the property off the market for months while waiting for short sale approval, the seller takes a huge risk.  If the buyer terminates the contract due to inspection results, the seller will have wasted valuable marketing time.  Once a short sale approval is granted and the lender expects a closing in 30 days, the likelihood of finding another buyer who can purchase the property in that time frame is slim.

–       If the buyer walks away only a few days after signing the sale contract, the seller now has valuable information about the property thanks to that former buyer.  That knowledge can help with the short sale negotiation with the bank.  Furthermore, the listing agent may be better able to price the property in line with its condition.

Why the seller should not want the buyer to wait until they have short sale approval before conducting inspections

–       If the buyer needs a mortgage loan, they may run out of time.  If the seller’s lender demands that the settlement occur within 30 days, and the buyer spends 15 days on inspections, it leaves only 15 days for them to obtain the mortgage loan.  If there is a delay with the buyer’s appraisal or their bank’s underwriters, then the transaction is in jeopardy.  The seller’s lender may not extend the short sale approval, or if they do they’ll demand extra money for every extra day.  In such situations, an argument can ensue over who will pay the per diem to the seller’s lender.

–       The seller may have made preparations to move out, only to find that the buyer walks away just days before the projected settlement.  The seller has to move out, and many people need about four weeks’ notice to plan a move.  If the seller’s lender demands a closing in 30 days after the short sale approval is granted, and the buyer decides 15 days later to walk away, then the seller is stuck in limbo.  The seller may have already begun the move-out process when they find that the buyer decides to terminate the Agreement of Sale just days before the planned closing date.  Then the house will sit vacant for weeks, even months, as the listing agent works to procure a new buyer.

If either buyer or seller is not fully committed to the other party, there is a high probability that the transaction will fail.  When a buyer conducts their inspections right away, it demonstrates the buyer’s commitment since the buyer is willing to spend money up front.  The seller in turn should feel assured that they can take the property off the market to commit to that buyer.

In our opinion, it is best for all parties to have the home inspections conducted right after signing of the contract.  While the buyer has to spend several hundred dollars on inspections, that is the cost of doing business.  Typically a buyer can purchase a short sale at a discount to fair market value, and that discount justifies the expenditure of money up front.  In fact, the inspection results may benefit the buyer in that the report and any repair estimates can influence the seller’s lender to allow the house to be sold at a discount.

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