When you buy a house, get a meets and bounds, and walk it off to see whose property it is on. If it is on the neighboors, verify with him or her that they own the Wall. If on the property you are purchasing, I would negotiate with the Seller more.
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You should have a survey of the property done BEFORE you close on the house and that will determine who owns the wall. If it is on the property you plan to buy, you will be responsible. If it is on the neighbors property you will have to rely on the neighbor to fix it. Keep in mind that the neighbor is not obligated to fix the wall just because you ask them too and if they refuse, that can cause problems as well.
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Yes, a collapsing retaining wall is an issue when buying a home.
The wall, if it collapses, may damage the home and cause drainage issues leading to water infiltration and damage.
As my colleagues indicate, you should obtain a survey to determine if the wall is located on the Seller's property or on the neighbor's property.
If it is one the Seller's property, you should ask that the wall be repaired and obtain an estimate to have it repaired.
If it is on the neighbor's side, and the neighbor refuses to repair, you are buying a lawsuit that could cost you in excess of $10,000 to $20,000 - should the wall fail and cause damage to your home.
Should you decide to buy the home, I would recommend sending a letter by regular and certified mail stating your concern with the condition of the wall and requesting that they repair it. Keep a copy of the letter for your records. In that way, if you end up in court, you can argue that you put them on notice of the problem and they ignored it.
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