It does sound a tad extreme on the reports, but I will tell you that there are homes out there in need of a lot of work. And these are in all neighborhoods "good" and "bad". Without knowing the specifics of the property; such as location, current asking price and first visual impression I can only give you advice on similar issues I have seen. (Some houses that need a ton of work can certainly still look pretty)
I would say that you have your agent send the reports over to the seller for them to review along with an addendum that you would like to negotiate price or completion of work, or some of both. In my opinion if you don't ask, the other side doesn't have a chance to say yes or no to different terms. Of course you need to decide ahead of time what you want to do-- lower the asking price, try to negotiate work to be completed, or walk away. I personally have been working with a client who found a house in a neighborhood they loved and it needs a good $200,000 to $300,000 worth of work. My client is willing to do the work but only if the property comes at the right price. Every buyer and every situation is diferent so you will really have to evaluate where you think you are.
Also keep in mind these reports will stay with the property, so even if you do decide to walk away the seller will be required to disclose all the reports to the next potential buyer.
Alain Pinel Realtors
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Now if the $175,000 in repairs is for a home of $1,500,000 then maybe it's worth getting a "second opinion" on the reports and prices quoted. I know many times inspectors are looking for a "job" and like to make the quotes sometimes 20-40% above what a hungry contractor will bid! If the price is $500,000 then I might get a tad nervous! But are the reports concerned with issues which can be astronomical and somewhat problematic to resolve such as foundation, structural issues, ground slippage,etc.? If that's the case then perhaps a decline to proceed based on the reports is in order.
I would guess this would not be the right home unless you are ready to live with construction workers. You should share the reports with the other Agent and then the Seller must disclose them to any other potential Buyers. Jed has it correct - were there no reports when you made your offer?
I would, indeed, have your agent present the inspections to the seller and discuss with them verbally how to handle this as the home no longer is worth the listing price. Also I would talk to your mortgage broker as that large a credit will not go well with the lender. Your agent can advise you which direction to take that will make the Seller, the lender and you happy.
If it were me, I would probably walk away and chalk it up to a good lesson learned. On the next property, I would make sure your agent asks if there are any inspections recently done AND if it was a fairly recent purchase, ask for copies of the inspections the Sellers got when they were Buyers. Termite inspections are only good for one year but it will give you an idea of what needed to be done and you can ask if they did any of the work.
I'll assume no reports were available before you put your offer in. So you offered a price based on all the information available at that time. I also assume you have an inispection contigency. YOu can tell the seller that based on the new information the property is not worth what you offerd and that it is only worth (some new value) to you and that if the seller want that offer you are prepared to remove contingencies. If not then you are prepared to walk away and go buy some other property.
The seller will have to disclose to any subsequent buyer the reports done on the property. By the way be sure to share the reports with the seller when you send himthe new price in an addendum.