“Second Bite of the Apple” — Housing Market Edition

[Editor’s Note:  The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway, or any other entity referenced.  If you need legal advice, please consult an attorney.]

Due to a chronic, ongoing shortage of listings, the Twin Cities housing market is once again experiencing a spate of multiple offers this Spring, especially at lower price points.

Predictably, that also means plenty of deals that hiccup on inspection, leaving the door open for one or more runner-up Buyers.

What’s the first question the runner-up Buyer’s agent should ask the listing agent (representing the Seller)?

A. Why did Buyer #1 back out?
B. Do you have a signed Cancellation from Buyer #1?
C. Can you send me a copy of Buyer #1’s inspection report?
D. Is the homeowner making any changes to their Seller’s Disclosure in the wake of the cancelled deal?

Correct answer: “D.”

Buyer #2: “So, What REALLY Happened?!?”

Here’s the explanation:

A. Nope. The agent for Buyer #2 (or #3 or #4) can certainly ask that question.

However, at least in my experience, the most common answer is going to be a variant of, “the Buyer got cold feet,” “the Buyer decided the house needed too much updating” (same difference), etc.

As opposed to, “the Buyer walked because their inspection showed that the foundation is cracked and the roof is shot” (or some other grave, material defect(s) came to light).

Isn’t it risky for the Seller to fudge that?

Yes, if the defect is black and white.

But, if instead it’s gray — or an aggressive Buyer is exaggerating the problem (known to happen in the wake of multiple offers, especially when the ultimate sales price is sky-high) — it may be perfectly legitimate for the Seller to deflect “So, what really happened?!?” questions.

Mountain or Mole Hill?

Of course, when it’s at least possible that Buyer #1 walked over legitimate concerns, a scrupulous Seller will divulge that, along with any exculpatory evidence they have — ideally, from a reputable, licensed contractor (“According to Buyer #1’s home inspection, the 16 year-old roof is failing. However, here’s a copy of our roofing contractor’s report dated April 3, 2019, stating that the roof likely has several years of useful life left”).

Of course, even if Buyer #1’s inspection raises a real issue, the deal can founder over differing repair estimates.

I represented an Edina seller years ago whose home was determined, upon inspection, to have numerous rotted window frames and mold due to defective flashing (the Seller was genuinely unaware).

The deal broke up when the Buyer wanted a $75k(!) reduction in the sales price, even though my Seller obtained quotes indicating the fix was likely one-third of that.

B. Nope.

The runner-up Buyer does need to explicitly condition their offer on deal #1 being formally cancelled — homeowners can only sell their home to one Buyer at a time.

But, that’s not the highest priority in the wake of multiple offers and a busted deal.

C. Getting warmer.

However, in practice, once it’s clear that Buyer #1 intends to cancel, listing agents typically don’t want to see Buyer #1’s inspection report.

“Speak Now, or Forever Hold Your Peace”

That’s because once they do, per above, the Seller arguably has to either: a) divulge the problem(s) to all future Buyers, and take the resulting financial hit; b) fix the problem(s), and disclose that; or c) explain why they believe any issues raised by Buyer #1 are unfounded.

Far simpler not to have possession of Buyer #1’s inspection report in the first place.

D. Correct.

The beauty of this question (or the equivalent) is that it sidesteps any potential Seller spin on Buyer #1’s motivation for canceling, while also avoiding an accusatory or adversarial tone.

Instead, it cuts to the chase, by neutrally asking (my paraphrase): “as a result of Buyer #1’s inspection, are you aware of any material defects in the home that render your current Disclosure inaccurate?”

Sellers who falsely answer “no” risk committing fraud.

Of course, if Buyer #2 and the Seller ultimately enter into a Purchase Agreement, Buyer #2 should carefully inspect the home for themselves.

Call it, “trust but verify”** . . .

**Ronald Reagan’s credo, once upon a time, during the U.S. – Soviet Union disarmament negotiations.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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