Down And Dirty 30 – Repairs and Seller Credits

ONE OF A SERIES OF 30 MINUTE TOPICS THAT GET RIGHT TO THE POINT

Repairs and Closing Cost Credits

Summary: It’s the never-ending tap dance… either you don’t want the lender to get in the way, or you need the repair done before moving in, or you need the money to do the repairs yourself. So, what’s the best course of action?? Let’s discuss!

THE OPTIONS |

1. Lower the Purchase Price;
2. Increase the Seller’s Credit to Closing Costs;
3. Have Seller do the repairs prior to Closing;
4. Have the repairs paid at closing and performed after closing?

THE ISSUES |

1. Timing
   1. Not enough time to have the repairs done prior to closing (i.e. windows on backorder, rain, etc.); or
   2. Buyers have small children and cannot or will not do it themselves; or
   3. Discover the issue at the walkthrough!
2. The Repairs Being Done Right
   1. Seller Concerns – don’t want the liability if not done correctly;
   2. Buyer Concerns – Sellers want it done cheaply; Buyer want it done correctly.
3. Having the Cash to Pay For it
   1. If getting a loan, reducing the price doesn’t allow for the same dollar savings at closing;
   2. Seller may not have the cash to pay in advance of closing.
4. The Lender!
   1. Don’t want it to be an appraisal or underwriting issue (i.e. value or safety concerns);
   2. Cannot provide more of a credit than actual closing costs.

My PREFERENCES |

1. If paying cash – Lower the price!
   1. Potential issue – if hoping to reduce the price via appraisal contingency
   2. Upside – pay less in taxes, closing costs.
      1. Note – if going this route, you may want to negotiate a commission based on the original price.
   3. If Loan – Have Seller pay for work from closing proceeds
      1. Potential issues:
         1. Lender may still need to approve this;
         2. Work is not done prior to closing.
      2. Upside – work doesn’t have to be done prior to closing!
   4. Buyer Repair Items or Seller Repair Items
      1. Buyer – best only if Buyer has the funds to do so… could change down payment from 30% to 20% to account for the out of pocket costs after closing;
      2. Seller – best in worst case scenario… do this first!

Special Note:: I would recommend not asking for any closing costs in the initial Agreement! This would allow you some wiggle room to negotiate credits in lieu of repairs and help avoid some of the issues discussed above.

For Example:

• Contract of $200,000, with a 95% loan (i.e. $10,000 down and ~$4000 in closing costs) for a total of $14,000 cash to close. During DD the buyer discovers repairs totaling about $3000, which the Seller agrees to pay as Seller’s Credit to Closing Costs.
  • New Agreement – $200,000 price, $190,000 loan, $1000 in closing costs ($11,000 cash to close). Allows buyer $3000 to pay for repairs after closing!

by: CNB Blog