Resolving Home Repair Issues with Buyer and Seller
Learn how to negotiate home inspection findings
Most real estate sales contracts contain inspection contingencies. An inspection contingency is a clause in the sales contract that states both of the buyer's and seller's options should repair issues be discovered during the home inspection. It is critical to understand the inspection contingency, because once an offer is signed, it becomes a legal and binding contract. Your real estate agent or attorney can answer additional questions you may have on this topic.
Sample Repair Contingency
For example, here is the inspection contingency concerning repairs from the standard real estate sales contract widely used in North Carolina. The wording in your state's real estate sales contract may be similar or very different.
13. (c) Pursuant to any inspections in (a) and or (b) above, if any repairs are necessary, Seller shall have the option of completing them or refusing to complete them. If Seller elects not to complete the repairs, then Buyer shall have the option of accepting the Property in its present condition or terminating this contract, in which case all earnest monies shall be refunded. Unless otherwise stated herein, any items not covered by (a)(i), (a)(ii), (a)(iii) and (b) above are excluded from repair negotiations under this contract.
This contingency clause spells out the rights and responsibilities of both parties clearly. The seller can elect to repair problems found by the buyer or pass on the option to do so. The paragraphs named at the end of the clause refer back to the home inspection contingency, which dictates items that are expected to be working properly at closing and to details about inspections for wood destroying insects.
There's a separate addendum, or attachment, that can be used to establish a repair agreement between the buyer and the seller.
Put Expenses on Hold
If possible, buyers should delay as many closing expenses as possible until repair issues are known and resolved. Why spend money for a title search, survey, and other expensive closing costs until you know the house will be yours? Get your inspections out of the way early so you can negotiate repair issues and get on with the business of closing.
Unresolved Repair Issues
Known problems become material facts: Unless the buyer makes unrealistic demands, it is often in the seller's best interests to negotiate and make repairs. Once a problem is known, it becomes a material fact that must be disclosed to all future potential buyers. If it is not a serious issue, the thing is a future buyer may not care. One buyer's hot button is a shrug of shoulders to the next buyer.
Sometimes sellers think they can increase the price of the house to cover the repair, but if the house is already priced correctly that doesn't usually work. An overpriced house sits on the market instead of selling and the sellers continue to make payments instead of moving into their new house.
Banks might not lend: Problems noted on an appraisal might throw up a red flag to the lender; such problems might cause the lender to ask for a structural inspection to verify that there are no problems with the house. The bank might refuse to finalize the loan until repairs are made.
Repairs made before closing: If the seller makes repairs before closing, take your home inspector back for a recheck as soon as you receive word that repairs are complete. Do not wait for the final walk-through, because you don't want to find out on the day of closing that repairs have not been made or have been made poorly. The home inspector may charge you an additional fee for the service.
Repairs made after closing: There are a few basic scenarios for repairs made after closing:
- The seller can give you a lump sum at closing to cover the cost of repairs you agree to initiate after closing.
- The seller can prepay a repair person to do the work.
- A portion of the seller's proceeds can be held in trust after closing and used to pay for repairs (usually computed on 1 and a half times the estimate). A signed agreement should be in place to ensure that repairs are made.
The method you use depends on the complexity of the repairs. Simple items, where you feel the estimate you've received is sufficient, could probably be paid as a lump sum. Extensive repairs often uncover more issues as they progress and nearly always cost more than anticipated.
Buyers should consult with an attorney to ensure their interests are protected before agreeing to make repairs before closing. When the buyer does not yet own the house, there are additional risks and liabilities to making repairs prior to consummation of sale.
Edited by Elizabeth Weintraub, home buying expert.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.