Repair credit best for fixing home defects

REThink Real Estate

Q: I decided that this was a good time to buy, and found this really great house at a great price. It’s an older home, and very charming, but there is about $10,000 worth of various electrical and termite repairs that the inspectors have found that need to be done. I know that’s not that much compared to the $300,000 I’m paying for the place, but I’m going to be pretty house-poor after escrow closes. I’m afraid I’m going to lose my dream house over these issues. What should I do?

A: As always, the lawyer in me has to say, "It depends." Did the original contract have an as-is clause? If so, it may be unethical to demand that the seller pitch in to fix these defects, though he might offer to if the other alternative is for you to back out of the deal. Are the repairs required by your lender or your city/state to be completed by the seller? Is the seller an individual or a bank? A bank is highly unlikely to contribute to these sorts of repairs, unless required to do so by law. How badly do you want the place? All of these things impact how you should proceed.

Mindset Management

If you love the house, feel that you’re getting a good value, and the proposed financing will work for you on a long-term basis, look at ways to resolve or work around the problems, rather than instantly fearing that you’re going to lose the house around this. In life, generally, what we fear we often create. If you approach this problem from the perspective of losing the place, you will. If you approach it committed to working this out, you almost certainly will.

If you are attracted to the charm of older homes, understand that this level of repair (or more) is liable to be required on any older home you consider buying (and in many of the newer ones, which have often been less well-cared-for). In fact, I know home inspectors who feel that older homes are often a better bet, conditionwise: The quality of materials and craftsmanship when they were built was often superior to those of newer homes, and any major functional or structural issues will have usually emerged by now, so the chances of a major surprise occurring are much smaller.

Home inspection reports can be worded very strongly, in the interest of protecting the inspector from liability. Don’t let the verbiage freak you out — there are lots of answers and clarifications you need to get before you can determine whether the repairs needed are potential deal-breakers.

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Need-to-Knows

In the world of home improvement and repairs, things are not always black and white. For example, opinions will vary on what specific repairs are necessary — some electricians prefer to actually ground two-pronged outlets, while others prefer to install ground-fault circuit-interrupting outlets. I know that’s gibberish, but these are basically two solutions to the same issue of ungrounded outlets — the first solution costs thousands, while the other costs $50 per outlet.

Also, every item that the home inspector points out may not, strictly speaking, need to be done (or may not need to be done with any urgency). Inspectors’ professional standards require them to call your attention to recommended upgrades and other items that, when you ask them, they would either never complete if they were buying the house themselves or they would complete over a number of years, rather than trying to get them all done up front. Pest reports, for instance, are actually inspections for all sorts of wood-destroying organisms and conditions, not just pests. So, if your pest report comes back indicating actual termite infestation, that is an item you need to ensure gets handled urgently. However, if it comes back indicating a fence with dry rot, that may be a much less urgent repair — and may even be duplicative of a fence rebuild that you were wanting to do irrespective of the pest report.

As a homeowner-to-be, it’s time for you to learn the art and science of obtaining multiple repair bids. If you have one bid for $10,000 and you go out and get two more, you’re very likely to end up with three totally different amounts and even three totally different recommended courses of action. Whether you buy this particular house or not, take this lesson with you throughout your career as a homeowner: Always get multiple bids for repairs or home improvements. You may not always want to take the lowest bid, because professionalism and quality of work vary along with pricing, but that’s another story. Until you have multiple bids, you don’t truly know how much the repairs will cost.

Finally, your Realtor will help you obtain a home warranty policy before close of escrow; in many markets, the seller will even pay for this item. While home warranty plans don’t cover everything that could ever go wrong with your home, they do dramatically limit your potential exposure for when things break. Ask your Realtor to help you review your home warranty policy coverage and exclusions right now. Generally speaking, if any of the items you’re concerned about are, for example, systems or mechanisms that are currently working but may need repair or replacement soon, those items may be covered by your home warranty — but only after escrow closes and only when they actually stop functioning.

Action Plan

If you are committed to trying to resolve these repair issues so that you can move forward with the purchase of your dream home, here’s the plan of action I suggest:

1. Get multiple bids and opinions on the necessity, cost and urgency of the recommended repairs. Get contractor referrals from your Realtor and friends, and also ask them if they would recommend an alternative course of action.

2. Ask the seller for a closing-cost credit or repair-credit holdback. Most lenders won’t let you get cash from a seller credit without the repairs being done before closing, so you have two options. You can either (a) ask the seller to pay for some of your closing costs, so you can reserve your closing-cost funds and use them to have repairs done after closing, or (b) you can ask the seller to give you a repair credit, and leave that money in escrow after closing until your licensed contractor submits an invoice to escrow. I prefer either of these to having the seller complete the repairs, as I think few sellers will have the work done the way that you, the new homeowner, would. Consult with your Realtor and mortgage broker about which of these options your lender will allow, and stay flexible — if the seller agrees to pay for only half of the repairs, then you can evaluate whether that’s enough to allow you to move forward.

3. Ask seller for repairs. If you can’t get credits for whatever reason, like the seller already giving you the maximum credits your lender will allow, ask the seller to complete the repairs. Ask for an invoice from a licensed contractor, and ask if you can select any cosmetic or finish materials.

4. Ask seller for price reduction. If the seller can’t do the repairs or offer you a credit, ask them to reduce the price for some or all of the costs you’ll be incurring for repairs. A price reduction is not ideal, as it doesn’t result in you having the cash to get the work done, and will often not reduce your down payment or monthly payment amounts enough to allow for the repairs, but it’s certainly better than nothing!

Once you have completed this action plan and have the results of your negotiation with the seller, only then do you have the full information you need to make a decision about whether to move forward with this purchase. While it is true that sellers are more motivated now than in the last generation to help with repairs, if they have already given you a great price, they may or may not be able to afford to add credits on top of that. Look at the help the seller can (or cannot) offer in the holistic context of the price, property, etc., rather than as an isolated potential deal-breaker.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online.

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