Can a Seller Credit a Buyer for Repairs?

Yes, a seller can credit a buyer for repairs. In fact, receiving a monetary credit in lieu of actual repairs is the most expedient and common outcome during real estate transactions. Often times, a buyer will discover broken items in the prospective property during the inspection and will understandably want those fixed.

In New York where inspections are typically done prior to contract signing (so that all parties enter into the transaction with “eyes wide open”), a buyer can renegotiate before contract signing to get certain items fixed. The seller will most likely counter by offering a monetary credit at closing in lieu of actual repairs since most sellers aren’t professional contractors, and performing repairs might delay closing. Alternatively, if the seller has lots of other interest or offers, he or she may simply state that the property is being sold as is and the buyer can take a hike.

In Florida where there is a customary inspection period (typically 10-15 days) after the standard Realtor purchase contract is signed, a buyer will typically ask for certain things to be fixed during the inspection period when they actually hire an inspector to come review the property more thoroughly. Remember that the buyer can back out for any reason during this inspection period, but the seller cannot. Therefore the seller can either refuse and risk the buyer walking away (or taking the full inspection period to think about it before walking away), or agree to repairs or a monetary credit.

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Purchasing a property can, unfortunately, be a complex process fraught with potential disagreements between buyers and sellers. This can be particularly true when it comes to issues identified during a home inspection. The prospect of investing in a home that soon requires significant repair work – such as a new roof, for instance – can be a daunting one. Consequently, home inspections are a vital facet of the purchasing journey that should not be ignored.

But what if your inspection reveals a litany of necessary repairs? What if the seller is unwilling or unable to undertake these repairs themselves? Often in these cases, the seller may offer a seller credit for repairs. This typically happens when the seller either lacks the funds to execute the repairs or is not inclined to manage the repairs personally.

Understanding how to negotiate these repairs with the seller to secure the best possible deal is crucial. Similarly, understanding how seller concessions for repairs function is fundamental in ensuring that you’re fully aware of the various ways in which the seller can contribute towards these necessary renovations.

Ways for the seller to credit the buyer for repairs

Let’s consider a scenario in which the seller agrees to undertake all necessary repairs. How do they fund these renovations? Normally, the purchase agreement will feature a clause contingent upon inspection or an inspection period (i.e. Florida). This is a key provision, stating that the buyer can opt to withdraw from the sale if the inspection reveals a need for serious repairs. Yet often, buyers will still wish to proceed with the purchase but will request that the seller finances some or all of the repair costs.

In such cases, a seller credit is issued. This can take several forms, with the most prevalent being the seller agreeing to cover a portion of the buyer’s closing costs equivalent to the repair costs. This leaves the buyer with more funds to rectify any issues with the property. This arrangement, known as a seller assist, essentially sees the seller helping the buyer with closing costs.

An alternative method involves adding the seller credit to the property’s final sale price. Here, the price is reduced by an agreed sum equal to the repair costs.

Other concessions can see the seller prepaying for the repair costs prior to closing. Or, the buyer may negotiate to retain certain pieces of furniture or appliances not included in the initial contract in lieu of repairs.

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How to ensure a repair is completed

As a buyer, to ensure full control over the repair work and the standards you expect, it may be advisable to request a repair escrow. This is a third-party account established at closing that covers the repair costs necessary to achieve the property’s full appraised value.

The benefits of this approach are twofold. Firstly, buyers can delay repair work until after closing and execute it to their own standards. Secondly, any funds not utilized from the seller credit are returned to the seller.

It’s important to note that these escrow accounts are typically established to cover closing costs, or a portion thereof, and are not tax-deductible for the buyer. The seller, meanwhile, is the one experiencing a loss. While the credit is not tax-deductible, the IRS considers the credit a reduction against the property’s sale price. This reduction equates to a smaller tax payment for the seller.

While it’s generally frowned upon, and possibly fraudulent or a mortgage violation, it’s possible to secure a cash credit for repairs at closing. Receiving cash back from a seller, especially in a mortgage scenario, can be seen as fraudulently inflating the property’s price. This practice can lead to artificially increased property values and consequently higher property taxes, decreasing housing affordability.

If a seller refuses to undertake the necessary repairs, the buyer can withdraw from the contract without penalty based on unfulfilled contingencies. Alternatively, the buyer can attempt to negotiate a reduction in the sales price.

Arranging repairs can occur before or after closing. In many cases, buyers won’t access funds for repairs until closing. However, if the seller agrees to conduct repairs prior to closing, it is incumbent upon the buyer to approve these repairs before the final walkthrough to ensure their completion and adherence to the agreed-upon standards.

Ensuring you secure the best deal when purchasing a home necessitates careful negotiation around post-inspection repairs.

To the mutual benefit of both parties, reaching an agreement on these repairs is key. Always consult your lender on acceptable forms of seller credit for your specific case.

Pro Tip: You can negotiate credits from the seller for anything, not just repairs, depending on the negotiating leverage that you have. For example, if the seller is encountering issues because the transaction turned out to be an undisclosed short sale, and the seller has blown by the expected closing date, you can probably negotiate some sort of daily credit for each day the closing is delayed. Just be careful as the seller may say no, then what will you do?

Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided.

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