A real estate transaction is usually a long and grueling journey that involves many procedural formalities and steps. The last step of the process is closing where documents are signed and homeownership is officially transferred to the buyer. However, nothing can be as disastrous as realizing that the seller did not complete repairs before closing. Imagine walking into a home you are about to close on and realizing that the plumbing is still faulty, the heating is still defective or the foundation is still flawed.
So, what should you do when you find that the seller did not complete repairs before closing? Do you walk away or give the seller another chance to redeem himself?
Related: What Happens at a Real Estate Closing?
The Importance of a Home Inspection Contingency
Before we look at how to handle incomplete seller repairs before closing, let us consider why a home inspection contingency is vital. A contingency clause refers to an action or condition that must be satisfied for a real estate transaction to be binding. For a contingency to become a part of the transaction, the seller and buyer must agree to the terms and append their signatures to the contract.
Also referred to as a “due diligence contingency”, an inspection contingency gives the home buyer the right to get the income property inspected within a specific duration. The home inspection helps the buyer identify any major problems with a home prior to closing. A typical home inspection lasts 2-3 hours and covers the following aspects:
- Exterior walls
- Carport or garage
- Heating, Ventilation and Air Conditioning (HVAC)
- Kitchen appliances
- Water heater
- Fire safety
- Laundry room
However, a typical inspection will not look at everything that might be wrong with a home. Some of the areas home inspectors don’t check include the following:
- Inside sewer lines or pipes
- Inside walls
- Behind electrical panels
- Inside chimneys
General home inspectors also don’t check for things like asbestos problems, mold, radon, site contamination, and termite damage. You will need an expert on these areas to perform a separate inspection.
Your Options After the Inspection
Once you receive a report from your home inspector, you have the following options:
- If the defects are too costly to fix or too pronounced, you can decide to walk away from the deal
- For small or large problems, you could ask the seller to repair them, lower the purchase price, or provide a cash credit at closing to repair the defects yourself
- If the above options are not viable (for instance, if the home is being sold as-is or is bank-owned), you can ask for estimates to make the repairs yourself
Why Sellers Fail to Make Repairs Before Closing
Is a seller refusing to make repairs before closing? There could be several reasons for this. At times, fixing problems could affect the closing date, which could be inconvenient especially if the seller is in the process of moving. Sellers could also skip repairs if they are unable to raise the money required within a short time. Quite often, sellers are working on buying another property and might not be able to pay for repairs right away.
In other instances, sellers could decide to skip repairs since they are hoping to relist their property and negotiate a better price. If such a situation arises, consult your agent to see if you should negotiate further or simply back out of the deal.
What to Do When Repairs Are Not Completed Before Closing
So, the seller did not complete repairs before closing. What do you do?
Consult an Attorney
If you have already closed on the home, you might want to consult a real estate attorney concerning the options for recovering your financial losses from the seller. For instance, you could file a claim against the seller in court. For this, you will be required to provide documented evidence. However, since court cases involve spending lots of time and money, this option should be your last resort.
Related: When to Hire a Real Estate Attorney
Put Off the Closing
Does the seller have the cash to make the repairs, but they don’t have the time? In such a case, it would be wise to push back closing by a few days or weeks. Generally, this is not an ideal situation since pushing back closing extends the sale process. However, if the seller needs more time to make repairs, then it’s a compromise you might have to make.
For this option, you will need a real estate agent to craft a well-written repair agreement. The requests and language on the contract should be very specific, not vague. For instance, let’s say there is a leaky faucet at the property. In the repair agreement, you could write down ‘repair leaking kitchen faucet’. However, in case the faucet cannot be repaired, the seller could argue that replacing it is not their responsibility. This will leave the buyer with an extra cost. Therefore, a better way would be to write ‘repair or replace leaking kitchen faucet’. When you are specific in the contract, you can hold the seller to what they agreed to in the repair agreement.
Your agent should also include an addendum in the contract that requires the seller to pay re-inspection fees in case repairs are not done properly the first time. With this addendum, the seller will be incentivized to do repairs right the first time.
Seller Prepays for Repairs to Be Done After Closing
If it is not possible to push back the closing date, the seller might be willing to pay a contractor to make the required repairs after closing. Though this is the seller’s responsibility after closing might appear a reasonable solution, you need to consult your contractor and do your due diligence on repair costs. Make sure the contractor receives enough cash to fully fix the problem.
Get a Closing Credit
This is a common strategy for compromising on repair costs when a seller did not complete repairs before closing. After estimating the cost of repairs, ask the seller to give you a credit of this amount which will be due during closing. Alternatively, the seller might be willing to reduce the closing price, lowering the sales price by the approximate repair cost.
Get Funds Held in Escrow
The seller might be willing to have a percentage of their proceeds placed in a separate escrow account, which will be transferred to the buyer at closing. This is a great arrangement since the seller doesn’t have to secure financing before closing. It also works for buyers since they receive about 1.5 times what is required for repairs, thus ensuring that underestimated repairs and surprise costs are covered.
Related: Escrow in Real Estate Investing: Everything You Need to Know
Closing can be an overwhelming and confusing time for a home buyer, especially if the seller did not complete repairs before closing. The good news is that there are several things you can do to deal with the situation. You could go to court and file a claim, put off closing, get a closing credit, ask the seller to prepay for repairs, or get funds held in escrow. If the seller agrees to make repairs at a later date, be sure to get a copy of the receipts for the work done. This will show you whether the repairs were completed by a licensed professional. Don’t forget to check if the repairs listed on the receipts match what is on the repair agreement.
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