What if the House Needs Repairs?
Resolving Home Repair IssuesSome of the most active conversations in the Home Buying & Selling Forum deal with repair issues, and I'm always surprised how little buyers and sellers understand about the way that topic is covered in their contracts.
Every offer to buy a home should contain a repair contingency, a clause that states both the buyer and seller's options if repair issues are discovered during the home inspections. It's critical to understand the repair contingency, because once an offer is signed it becomes a contract that's legally binding for everyone whose signature appears.
Sample Repair Contingency
Here's the repair contingency from the standard offer to purchase that's widely used by North Carolina agents (7/2004). Consider this a basic example, because the wording in your state is very likely different and clauses are always subject to change. In some states repair issues are handled before the contract is finalized.
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.
That spells it out very clearly. The seller can elect to repair problems found by the buyer--or not. 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.
If you do not understand any aspect of an offer, find someone who can explain it to you. Keep asking questions until you are sure you understand what you are signing.
Put Some Expenses on HoldIf possible, buyers should delay as many 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 that you can negotiate repair issues and get on with the business of closing.
Unresolved Repair IssuesKnown Problems Become Material Facts: Unless the buyer makes unrealistic demands, it's often in the seller's best interests to negotiate and make repairs. Why? Because once a problem is known, it becomes a material fact that must be disclosed to all future potential buyers.
Sometimes sellers think they can up the price of the house in order 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 a new house.
Banks Might Not Lend: Problems that are noted on an appraisal might throw up a red flag to lenders, causing them to ask for a structural inspection to verify that there are no problems with the house. The bank might refuse to lend until repairs are made
Scheduling RepairsRepairs Made Before Closing: If the seller elects to make 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.
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.
- 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. 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 make sure their interests are protected before agreeing to make repairs after closing.