How Does Insurance Affect the Negotiation of a Real Estate Deal?

Insurance, it’s a must have, a deal breaker, an opportunity maker. The power of insurance is irrefutable when it comes to closing a real estate deal. Whether you are the buyer or the seller this will affect negotiations and it is something you need to understand.

It sounds simple: you find the house of your dream, you put an offer on it, it gets accepted and you are under contract. This is an exciting time, but wait, before you start doing high fives and celebrating, you’ve got to get a homeowner’s insurance policy – and you can’t do this until you have an inspection. Almost immediately, your inspection period comes into play and this seemingly simple task can consume the remaining stages of the deal.  

WHY IS THE INSPECTION SO IMPORTANT?

In most cases, buyers have about 10 days to get an inspection completed and negotiated between the buyer and seller. An independent inspector, hired by the buyer or buyer’s agent, is brought in to review everything on and within the structure to ensure the systems and home are in sound condition. Here in Florida, however, insurance companies are most concerned about what the 4-Point Inspection says about the dwelling and if it is insurable. The 4-Point Inspection is only required for homes over 30 years old.  

WHAT IS THE 4-POINT INSPECTION?

The 4-Point Inspection looks at the FOUR major systems (Roof, Electrical, Plumbing, HVAC) to ensure everything is in solid standing.

Roof

• What type of roof covering (shingles, tile, rolled)?
• What is the age, condition and remaining life of the roof?
• Are there missing shingles, broken tiles, leaks, etc.?

Electrical System

• What type of wiring is in the home (copper, aluminum, knob and tube, etc.)?
• What is the brand of the electrical panel?
• What is the condition of the homes electrical system?

Heating and Cooling

• Is there central heat and air?
• What is the age and condition of the system?
• Are there signs of leaking—Ducts, Coolant?

Plumbing System

• What type of supply and drain lines are found in the home (copper, CPVC, galvanized, lead, polybutelene, etc.)?
• Is there evidence of current leaks?
• What is the age of the hot water heater?

WHY DO INSURANCE COMPANIES CARE SO MUCH ABOUT THE 4-POINT?

Living in the St. Petersburg area has many perks – including water access and historic communities.  But those two reasons are why the 4-point inspections are mandatory.  Both (coastal living and older homes) come with higher risks and insurance companies want to do everything possible to eliminate or minimize those risks.  

Basically the 4-Point exists because insurers want more information before they insure you. This is how they evaluate risks and determine whether a property meets eligibility guidelines. They want to know if an older home has been maintained and the major systems are in good working order. It’s a way for them to quickly say - “Yes, this house meets standards and we will insure you.” Or “This is a big risk and we don’t want to insure you.” If your home is over 30 years old, this becomes a mandatory part of the inspection.

BUYER VS. SELLER – WHO BENEFITS?

The 4-Point shouldn’t be seen as a hassle – it really is good to know what you are getting into. As a buyer, you should know what you are buying – it’s like looking under the hood. While some of what they find may sound bad or make it more difficult to get insurance, much of it is easily fixed and it isn’t always a deal breaker. Each Florida insurance company has slightly different guidelines on what they are willing to cover, so check with your Independent insurance agent.

This is however, why and how negotiations are still done after you go under contract. If the house has some severe issues, the buyer can ask for repairs, ask for concessions or get out of the deal altogether. As a buyer, you have to make that decision based on a few things:  1. In the current condition can you get insurance? 2. How much are you willing / able to fix on your own? 3. Is the seller willing to cover anything?

As a seller, even if you disclosed information and accepted a contract “as -is“ the buyer can still negotiate once the inspection is complete. You could accept to fix or give a concession on anything the buyer comes back with. You also have the right to say no. Your decision will be based on: the current offer, the investment of what needs to happen and how badly you want to get it closed.

It can be an emotional time no matter what side of the negotiations you are on. This is why it’s important you have an experienced agent who can help you interpret what the inspection says, discuss requests and negotiate the options. There is a lot to think about and determine – trying to do it on your own can be confusing and overwhelming.