“Good faith” negotiations and the Inspection Contingency

One of my great challenges as I build my RE broker practice is learning how to develop positive working relationships with other brokers. I’ll admit, a broker is a different animal than a lawyer. I think the difference flows from the fact that brokers to a certain extent are on the “same team” while lawyers are not. Brokers need each other to keep their clients on track towards closing, or neither broker gets paid. Lawyers, in contrast, get paid whether the deal closes or not. Transactional attorneys are not adversarial per se — at least not the good ones — but they retain their own self interest independent of opposing counsel. I think an absence of this “mutual interest” can foster a degree of conflict between brokers.

Since I don’t have that mutual interest with the opposing broker, I’ve tried to come up with a “work around,” some style that is consistent with what is expected of a broker. In that vein, it has been my understanding and experience to date that everybody expects the parties to negotiate in “good faith.” That term is of course extremely slippery and not susceptible to an easy definition. Its sorta like porn — hard to describe, but you know it when you see it. As a general rule, I think “good faith” requires the parties to negotiate realistically with the understanding that each side is genuinely interested in consumating the transaction on terms that are fair to all. If one side fails to live up to this standard, then the other side will perceive that they are not negotiating in good faith.

To date I’ve operated under the assumption that if I can faciliate good faith negotiations, then I’ll keep to a minimum any conflict between me and the other broker. What does that require in the context of the inspection contingency? Once the inspection has been performed and the defects noted, is that an opportunity to essentially renegotiate the price? Or should the negotiations focus strictly on the specific defects, their respective importance (e.g. safety issue vs. cosmetic), and the costs to repair? Or is even that too aggressive?

Any insight would be greatly appreciated. I just love “RCG University”…

8 thoughts on ““Good faith” negotiations and the Inspection Contingency

  1. Craig,

    I just noticed this as I was writing my post most of today and am writing an offer at the moment.

    Just wanted to mention quickly that “actual defects” are not always the issue. I just closed one where I did renegotiate the price after the inspection. I also closed one…a couple of months ago or so, where I did the same thing.

    The Due Diligence revealed many things that were not really specifically compensable or even fixable, and yet to proceed on the same basis without addressing them in some way was not appropriate either. A significant price reduction was the only answer in those cases.

    Is that reasonable? I thought so, and so did the sellers, as I was able to successfully negotiate the price change at time of Inspection negotiation.

    What is reasonable is different in every case. If you truly believe what you are asking for is reasonable, and you are a good judge of what is and isn’t reasonable as I am, you likely can accomplish that reasonable objective.

    Hope that makes sense…for now…

  2. P.S. Negotiating the Inspection in “good faith” requires that the inspectors write the report in “good faith” and not all do. I have heard Inspectors say, “this deck only needs a few hundred dollars worth of repairs, but I’m going to say it needs to be fully replaced for $12,000 so you have a bargaining chip.”

    It is not uncommon these days for inspectors to overstep their bounds in that way. It is also not uncommon for a buyer or a buyer’s agent to ask their inspector to do that.

    So the “letter of the report” as to inspection negotiations is not always the be all end all of how to proceed. Sometimes a contractor has to verify that what the inspector is saying or insinuating is broken…is indeed “broken”. Sometimes it is a CYA “may be” broken.

    Here’s an example of the opposite where what the buyer wanted from my seller was LESS than what was needed, and what we did about that.


  3. Pingback: Real Estate – “Proceeding in Good Faith” | Rain City Guide

  4. This is one of the biggest problems we’re dealing with in our markets in Virginia. It seems that buyers and sellers negotiate the purchase price and then the buyers come back and use the home inspection as another round to ‘beat up’ the sellers. Can they do it? I guess – it’s part of their right to atleast ‘ask’ for certain repairs to be done. That being said, in our areas, the home inspection is for mechanical, electrical, structural, etc…not dry wall pops and other cosmetic issues.

    Dealing with the agents on this is a fine line. Many times they understand that cosmetic issues aren’t covered in the home inspection. However, some agents take on the approach that the best way to represent their buyer is to squeeze the seller for as much as possible. It’s a point of frustration for a lot of listing agents out there. Hopefully, as the market levels out a bit, this will become less of an issue.

    • Thanks for the comment, Jonathan. Two thoughts: (1) From a macro perspective, our inspection contingency has no limitations whatsoever, so buyers can call out whatever defect they want. My suspicion, though, is that sellers are more likely to feel “squeezed” if the defects are purely cosmetic in nature. (2) from my personal perspective, I worry that my non-traditional business model/role as attorney compounds any perceived insult by the sellers or their broker.

  5. Is it just me or is there an incentive for a real estate agent to dissuade their buyer from negotiating a lower price during inspection? A lower price will mean lower commission for the buyer agent. Sounds crazy that they would be penalized for helping their client.

    That being said, how can you trust your agent is operating under ‘good faith’ when they advise you how to proceed during inspections?

  6. Dweezil,

    I just did that, twice, by substantial amount. It is generally rare that a major price negotiation is the result of an inspection, but seems to be more needed right now than ever before. Not quite sure why that is.

    The change in commission never crossed my mind, and in one case there was no change in my commission at all, even though the price dropped by $50,000 at time of inspection. On the other, I recommended (and eventually got) a price drop of $70,000. I guess my commission changed, but seriously, that was not the issue, was it? I didn’t blink. There were things that came up during the due diligence period in both cases that warranted that kind of price drop, so that’s what I did.

    I don’t work by “incentive”. In fact quite the contrary. If someone were to suggest to me that they would pay me more or less based on result, I would be highly insulted. I produce best result possible because that is what I do, not because I will make an extra hundred bucks or even an extra thousand bucks. That’s insulting. I do the right thing because that is what I do for my clients. That is what they hire me to do. To suggest I could do better or worse if the amount of commission changed would be like saying I work lesser for someone buying a home at a lesser price. That would not reflect my true level of integrity.

    You could say the same about an agent wanting you to overpay for the house in the first place. If you have an agent like that…run like the wind.

    I don’t understand all the fears and stories about bad agents. Who the heck hires those people? We know someone does. But why?

    The short answer is convert the commission to a flat dollar amount. I have what is called “a cap” which is the most I will ever charge any client. Once someone is buying in a price range over that, I have no stake in the price they pay, higher or lower, or a price change at time of inspection. But seriously, that is not needed, as I am always looking at the client’s best interest and not how that impacts what I am paid. I am clearly not the only agent who operates on that basis.

    If there are people who hire agents who are “bad” (and we know there are), well somehow that has to be partly the fault of people who continue to hire them.

    • That’s all well and good if you do several real estate deals, but the average home owner buys 1-3 houses in a lifetime. How would the average person be able to tell a “bad” agent from a “good ” agent until they hired them? I needed to sell a house (my 1st) that I had owned for 28 years. the house was in excellent shape and in a very desirable neighbor hood. The realtor told me it was standard to have a 6 months seller agreement. He then proceeded to show my house once in the first three months. He had closed his office near me right after we signed the agreement. He only advertised in his other area some 40 miles away. By the time the 6 months had passed he had shown our home 3 times. By then (early 2000’s) the interest rates had significantly climbed and the housing market bottom had fallen out. When we finally were able to hire a “good” agent our house had devalued by $40,000 due to the market change. The new agent showed the house over 20 times in the first month and we had several offers and a sale in 60 days.

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