Today’s question comes from Sue in Pennsylvania.
Sue asks, “I have a buyer who wants some debris removed from the property as a condition of closing. I’m worried that I won’t be able to get the debris removed from the property in time to close and that it might jeopardise the sale altogether. It doesn’t seem like a big deal that should hold up the closing and my attorney says the buyer is using it as an excuse to stall on the purchase. What do you suggest?”
Sue, that’s a great question.
You can’t really tell if the buyer is dragging their feet on the purchase with this. But there is a simple way to find out.
There is a concept in marketing called risk reversal. The idea here is to transfer the risk from the buyer to the seller, to eliminate the objection.
This is the same as what happens when a buyer finds a bunch of problems during the building inspection. They’ll complain that the bathroom window seal needs to be fixed and that the railing on the stairs needs to be tightened and that the old smoke alarms need to be updated because they no longer meet the building code.
When buyers come forward with these types of objections, they’re often looking to negotiate a discount on the property.
As the seller, you might be feeling a lot of pressure. You might be saying the discount is disproportionate to the cost of making the actual repairs. There might not be time to get all the repairs done by the closing date.
My suggestion is to not negotiate a lower price. Instead, offer the buyer what is called a hold-back. If the repairs would cost $2,000 to complete, and the seller is asking for a $5,000 discount, I would offer to put $10,000 in escrow with the title company. That money would remain in trust until the repairs have been completed. If the repairs are not completed by a specific deadline that you both agree upon, then the $10,000 would revert back to the buyer.
In essence you’re guaranteeing the performance of an item post-closing by pledging a bond that is many times the cost of the item in question. In truth, you’re not really going to risk $10,000 or $50,000 or whatever number you agree to pledge. You have zero intention of losing that money to the buyer and you make it clear to them that you are confident in completing the work by pledging a larger amount than is necessary to do the work.
You’re simply agreeing to get most of your money on the closing date, and you’re pledging to fix the listed defects post-closing. The key to not arguing over the holdback with the buyer is to make sure your lawyer does a great job of listing the terms under which the funds will be released to you with the presentation of the inspection report to the trustee who has received an irrevocable letter of direction on how the funds are to be disbursed.
The goal here is to eliminate the objection, and for you to maintain your negotiating leverage. When you can easily overcome any objection with a simple solution like this, you demonstrate to the other side that you have strength.
It discourages the buyer from chipping away at you with more objections. Some negotiators are bullies. When they smell weakness and they succeed in getting a concession from you, they often don’t stop at one concession. They keep coming back for more. If it worked once, maybe it will work again. You want to put a stop to behaviour where the buyer feels like they have the negotiating upper hand. You want to restore balance to the negotiation.
