Buying a Fixer-Upper? Think Twice Before Hiring the Seller as Your Contractor
Looking to buy a home needing some small repairs? Maybe a faucet is loose or some window seals are broken.
A home inspection might reveal a laundry list of little defects in your dream-home-to-be. Homebuyers are faced with two options when small defects require some repairs. The superior option is to negotiate a reduced price with the seller on account of the defects. Another option is to negotiate repairs with the seller.
To negotiate repairs, parties will amend the purchase contract to say the seller is responsible for these fixes. Sounds easy, right? Buyers then expect to turn the key on possession day to find their fixer-upper has been fixed-up.
Reality is often different. What exactly needs repairing? Who decides if repairs are adequate? Who decides which subcontractors to hire? Without more direction in your contract to say otherwise, these questions are usually answered by the seller. Effectively, the buyer hires the seller as general contractor to carry out the agreed-upon repairs. Perhaps the seller does high-quality repairs to every defect, in which case a buyer should count themself lucky. But remember the seller is most interested in selling a property and not in the business of repairing homes.
Some repairs may take longer than expected, leaving the home with unfinished repairs on possession day. The typical solution for this is a holdback, meaning some of the purchase money is held in trust and releasable to the seller only after they complete agreed-upon repairs. If repairs are not completed, the buyer keeps the holdback money.
But holdbacks must be negotiated, often at the eleventh hour before possession. Buyers aim to negotiate a holdback amount large enough to cover the cost of completing the outstanding repairs, in case the seller fails to.
If the seller doesn’t complete repairs, and the holdback amount is not enough for the buyer to complete repairs, then the buyer must demand further repayment from the seller to cover the cost. If the seller refuses to pay, the buyer’s last unpleasant and costly resort is to sue the seller for breaching the contract. Depending on the cost of those outstanding repairs, such a lawsuit is often prohibitively expensive.
The superior option
On the other hand, a buyer can negotiate a reduced price with the seller to account for the costs to repair all of the small defects. The buyer may then make repairs after possession at their own pace and direction, and with their contractors. However, this means the buyer needs enough cash to make repairs after they take possession, which may not be an option for everyone. But where buyers can reduce the purchase price and complete repairs themselves, they save the potential hassle of negotiations for repairs and holdbacks.To save some stress when buying your next dream home, limit the repair jobs that you ask of the seller.