Unfortunately, buying a house rarely goes as smoothly as we hope that it will. It entails a long list of negotiations that sellers and buyers may not always see eye to eye on. When buying a new home, you want to make sure that everything is in working order. The last thing a new homeowner wants it to discover the house needs a brand new roof just weeks after moving in. In order to make sure everything is in working order, home inspections are an essential part of the buying process that you don’t want to overlook.
So, what happens if your inspection comes back with a long list of repairs? Furthermore, what if the seller won’t make repairs after the inspection? Sometimes they’ll offer the buyer a seller credit for repairs. This is often the case when the seller simply doesn’t want to have to coordinate the repairs themselves or if they cannot afford to make the repairs.
It’s important to know how to negotiate repairs with the seller to make sure that you’re getting the best deal possible. And, once these deals are arranged, it’s equally as important to have a thorough understanding of the ways in which the seller can pay for the necessary work.
Let’s start with the best-case scenario and assume that the seller agrees to make any repairs brought forth in the inspection process. How, then, does the seller cover the costs of these repairs?
There is usually a clause in the purchase agreement that is contingent upon inspection. This clause is important because it states that the buyer has the option to pull out of the sale if the inspection comes back showing the house needs serious repairs. However, oftentimes the buyer will still want to follow through and purchase the property but will ask that the seller foot the bill for all, or part of, the cost of the necessary work.
In situations where the seller agrees to pay the repair costs, there is then a seller credit issued. Seller credit for repairs can come in a few different forms, with the most common being the seller agreeing to pay some of the buyer’s closing costs (up to the amount of the repairs) so that the buyer has more of their own money to fix the issues with the house. This is commonly known as a seller assist; basically, the seller agreeing to assist the buyer with closing costs.
Another common method is for the seller credit to be tagged onto the final sale cost of the home. In this case, the cost of the house would be reduced by an agreed-upon amount that is equal to the cost of repairs needed.
Other options include the seller pre-paying for the work costs before closing, or a buyer may negotiate to keep certain items of furniture or appliances not included in the original contract in place of repairs.
If you want to have full control over any work done and the standard you expect as a buyer, it’s often advisable to request a repair escrow as a way for the seller to cover repair costs. A repair escrow is essentially a third-party account created at closing to pay for the repairs the property needs to reach its full appraised value.
The benefits of picking this option are that a buyer can hold off on repair work until after closing and complete them on their own terms and to the standards that they expect. Often, buyers and sellers have very different ideas on what is deemed an acceptable repair. By using a repair escrow, the buyer has a specific amount of money given to them by the seller to complete the work with but can finish the repairs on their own terms.
Sellers also benefit from a repair escrow as any unused funds from the seller credit will be returned to them.
Because these escrow accounts are typically set up to cover closing costs or a portion of them, they are not tax-deductible on the buyer's end. Before the seller agreed to provide credit, the costs were not tax-deductible and they remain that way even with the additional credit. The seller, however, is the one experiencing a loss. The credit itself is not tax-deductible, but the IRS views the credit as a loss against the home’s sale price. Since the seller would then receive less for the house, he or she will have a smaller tax payment for that income.
It’s generally frowned upon to get a cash credit for repairs at closing, and it may even be fraudulent or a violation of your mortgage. A buyer is not supposed to receive cash back from a seller, and in cases where a mortgage is involved, it can be seen as fraudulently inflating the price of a home.
There are numerous reasons why this is a bad practice, including the fact that it can artificially inflate property values and, in turn, result in higher property taxes, making housing less affordable. For these reasons, a seller credit is used instead of cashback.
The good news is that it’s usually in the best interest of the seller to agree with the repairs, as long as they are within reason. If a home inspection uncovers something not disclosed by the buyer, they are required to disclose it in any future listings. This means that they can’t just conceal any issues by backing out of the sale and re-listing the property. On the buyer’s end, a bank may also refuse to finalize the loan until repairs are made. Because of this, it’s in both party’s best interests to come to a mutual negotiation.
If, however, a seller refuses to make repairs and won’t back down, the buyer can then back out of the sales agreement contract without consequences based on unfulfilled contingencies. Alternatively, if the seller won’t agree to a seller credit for repairs, you can simply try to negotiate the sales price down accordingly.
Repairs can technically be completed before or after closing. In many situations (such as a repair escrow), buyers won’t receive the funds to complete repairs until closing. However, if an agreement is paid wherein the seller agrees to take care of repairs before the closing, the buyer should make sure to approve those repairs before the final walkthrough to make sure they are completed and up to standard in order to avoid further delays.
You want to make sure you get the best deal when buying a home, and disputes over repairs after a home inspection are a common issue that may arise during the buying process. It’s to the benefit of both parties involved to come to a mutual agreement regarding repairs. Keep in mind that you should always ask your lender what forms of seller credit are acceptable for your specific case.