Seller credits help cover closing costs or repairs, reducing the amount of cash buyers need to bring to the closing table. This approach not only helps the buyer manage repair costs but also facilitates a smoother transaction.
Table of Contents
What Is a Seller Credit for Repairs?
How Does a Seller Credit for Repairs Work?
Requesting a Repair Escrow
Seller Credit for Repairs Tax Implications
Can You Get a Cash Credit For Repairs At Closing?
What if the Seller Won’t Make Repairs After the Inspection?
Seller Credit for Repairs Scheduling
Seller Credit for Repairs Bottom Line
What Is a Seller Credit for Repairs?
A seller credit for repairs is a concession that a seller will offer a buyer if the home they are selling needs repairs. Seller credits for repairs are usually offered if a home inspection turns up issues or necessary repairs that the seller doesn't want to deal with. Rather than making the repairs themselves, the seller will offer a seller credit, which the buyer can use to make the necessary repairs.
Benefits of getting a seller credit for repairs:
Flexibility for Buyers: Buyers have the flexibility to choose how to allocate the seller credit, whether towards repairs identified during the inspection or other closing costs associated with the purchase.
Faster Closing Process: By offering a seller credit for repairs, sellers can help expedite the closing process by addressing repair issues upfront, reducing the likelihood of delays or complications.
Cost Savings for Buyers: Buyers can save money on repairs by receiving funds from the seller to cover the cost of necessary fixes, reducing the financial burden of repairs after purchasing the home.
A credit for repairs is one of the most common types of seller concession and is offered when the seller simply doesn’t want to coordinate the repairs themselves or if they cannot afford to make the repairs.
How Does a Seller Credit for Repairs Work?
When a home inspection reveals the need for repairs, the buyer and seller can negotiate a seller credit to cover these costs. Here's how it typically works:
1. Inspection and Agreement
After the buyer conducts a home inspection, any necessary repairs are identified. - The buyer then requests the seller to cover these repair costs. If the seller agrees, this is documented in the purchase agreement.
2. Contingency Clause
The inspection contingency clause in the purchase agreement often states that the buyer can withdraw from the sale if the inspection reveals serious issues. However, if the buyer still wants to proceed, they can ask the seller to cover all or part of the repair costs.
3. Forms of Seller Credit
Closing Costs Credit: The seller agrees to pay a portion of the buyer’s closing costs, up to the amount needed for repairs. This method, known as a seller assist, helps the buyer save their own funds for the necessary repairs.
Price Reduction: The seller reduces the final sale price of the home by the agreed-upon amount for repairs. This reduction compensates the buyer for the cost of fixing the issues.
Pre-Paid Repairs: The seller arranges and pays for the repairs before the closing date. This ensures the work is completed to the buyer’s satisfaction before they take ownership.
Additional Concessions: The buyer and seller might agree on other concessions, such as the seller leaving behind certain furniture or appliances that were not included in the original contract, in lieu of completing the repairs.
4. Finalizing the Agreement
All agreements regarding seller credits for repairs must be documented clearly in the purchase contract. The lender must approve the credit, ensuring it does not exceed allowable limits and fits within the loan guidelines.
5. Post-Closing Repairs
Once the sale is closed and the credit is applied, the buyer uses the credited amount to complete the necessary repairs on the property.
In summary, a seller credit for repairs is a flexible solution that allows both parties to address repair needs without delaying the sale. This arrangement can take various forms, including covering closing costs, reducing the sale price, pre-paying for repairs, or offering other concessions.
Requesting a Repair Escrow
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.
Seller Credit for Repairs Tax Implications
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.
Can You Get a Cash Credit for Repairs at Closing?
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. So getting a seller credit at closing in the form of cash is quite rare, even if it is for repairs.
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.
What if the Seller Won’t Make Repairs After the Inspection?
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 doesn’t agree to a seller credit for repairs, you can simply try to negotiate the sales price down accordingly.
If you're a seller and wondering what might happen if you don't agree to a credit for repairs, check out our article on how often contingent offers fall through to get a better idea of the potential consequences.
Seller Credit for Repairs Scheduling
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.
Seller Credit for Repairs Bottom Line
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.
If you are unsure if the seller will make the necessary repairs in an acceptable fashion, you can opt for a repair escrow. With a repair escrow, the buyer receives a designated sum of money from the seller to address the repairs. This approach allows the buyer the flexibility to manage the repairs according to their preferences and timeline.
Before closing on a deal, it's beneficial to know your rights as a buyer. This can make the process easier and prevent you from closing on a deal where you have to spend more money trying to fix the property.