Most real estate sales contracts include home inspection contingencies—clauses that clearly state both the buyer's and the seller's options if problems with the property are discovered during the home inspection. Understanding the inspection contingency clause is crucial because it forms the legal and binding basis for resolving repair issues so the sale can close.
A Sample Contingency Clause
Contingency clauses can be customized, but the language is usually standard boilerplate, consistent with any state laws and regulations. This clause is widely used in North Carolina. The wording can vary from state to state, but the substance is typical:
"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. The seller can elect to repair problems found by the buyer, or he can pass on the option to do so. The buyer can elect to take the home anyway or cancel the transaction.
The paragraphs cited at the end of a contingency clause typically refer back to the home inspection itself, dictating what items that are expected to be working properly at closing and describing particular types of damages.
A separate addendum or attachment can be used to establish details of any repair agreement that might be reached between the buyer and the seller.
What If the Seller Won't Make Repairs?
It's often in the seller's best interests to negotiate and make repairs unless the buyer makes unrealistic demands. Otherwise, an issue becomes a material fact that the seller must disclose to all future potential buyers after it's been uncovered by an inspection. It can't be concealed by canceling this deal and relisting the house.
Sellers might think they can relist and increase the price of the house to cover the repair cost, but that strategy doesn't usually work if the house is already priced correctly. An overpriced house sits on the market instead of selling.
Issues noted on an inspection might throw up a red flag for the buyer's lender as well. Such problems might cause the lender to ask for a more detailed structural inspection to verify that the house has no further underlying problems. The bank might refuse to finalize the loan until any repairs are made.
Repairs After Closing
Repairs to be made after closing can happen in one of several ways:
- The seller gives the buyer a lump sum at closing to cover the cost of repairs, which the buyer agrees to carry out.
- The seller prepays a contractor to do the work.
- A portion of the seller's proceeds can be held in trust after closing and used to pay for repairs. The amount is usually computed at 1.5 times the estimated cost.
The method used generally depends on the complexity of the repairs. Simple items that won't take much time and have easily identifiable repair costs could probably be covered with a lump sum. Extensive repairs often uncover more issues as they progress and nearly always cost more than anticipated.
Repairs can be made before or after closing. The buyer should take his home inspector back for a recheck as soon as possible if the seller makes repairs before closing. Don't wait for the final walkthrough.
The home inspector might charge an additional fee for going back a second time, but it's almost always worth it. You don't want to find out the day before closing that repairs have been done poorly, or not made at all.
The Bottom Line
Buyers should delay as many closing costs as possible until repair issues are known and resolved. Why spend money on a title search, survey, and other expenses 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 consummating the sale.
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