Repair or reduce: a seller's dilemma

REThink Real Estate

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Mar. 25, 2010

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REThink Real Estate

Tara-Nicholle Nelson
Inman News

Q: I own a home that I inherited from my grandmother, so I don't owe very much on it ($30,000). I've always kept it up and my grandparents did, too. I'm engaged now and need to buy a bigger home, so I am in the process of selling my house for about $250,000.

The buyer's pest inspection report quoted about $70,000 worth of repairs that needed to be done! Most of that was to replace framing they said was bad behind the stucco. I don't have that kind of money, and I was counting on the money from the sale to put down on my next house. My agent says that any buyer is now going to want the work done or they'll want to pay a lower price, but I can't really afford to do it. What is your advice?

A: Older stucco often has cracks that allow water to breach the surface and rot out the structural framing beneath. Strangely enough, it is often the "pest" inspectors (who, more precisely, actually look for all wood-destroying organisms or conditions, including water and rot) who discover these issues. Be grateful the repairs came to light now, and not later. It may have saved you from years of legal wrangling, although if you weren't aware or on notice of the problem, you couldn't have been expected to disclose it.

Mindset Management

I want you to work on expanding the realm of what you believe is possible in your life and in your situation. You seem attached to getting top dollar without shelling out for repairs, so that you can have the amount you expected to put down on your next home. But you know that objectively it would be unreasonable for this -- or any -- buyer to pay the same price knowing the place needs $70,000 worth of structural work that they were willing to pay before the hidden repairs came to light.

Rather than getting frustrated and stuck spinning these seeming impossibilities in your head, revise your beliefs about what's possible here. I would submit to you that perhaps it is possible for you to afford your next home with less of a downpayment than you expected. (You might buy a lower-priced house, for instance.)

Perhaps it is possible to get the work done for less than the full $70,000, or even to strike a deal with the buyer to cover less than the full cost of the work. Maybe it is possible to find a contractor who will do the work with just a deposit and wait until escrow closes for the remainder of his payment.

Don't assume that you either have to write a check for $70,000 tomorrow or you won't be able to move on. The world is much fuller of possibilities than that, if you flex your thinking. And don't "awfulize" this -- be grateful that you had grandparents who loved you enough and were able to leave you this level of home equity so that you'll have something with which to start your new family's life.

Need-to-Knows

Your agent is correct that now that you are aware of the problem, you will be required to disclose it -- essentially, providing the inspection report -- to anyone whom you contract with to purchase your home. And boy oh boy, at this price point, $70,000 in structural repairs scares potential buyers all the way off -- in a hurry! Unless you want to scrape the dregs of the lowball buyer pool, you should do what you can to make it work with your current buyer, if they're still game.

But, again, you have options. You can offer to actually have the work completed before closing, which also affords you the option of attempting to find a contractor who can do the work for less than the buyer's pest company bid on it, and who will wait to receive their full payment until the transaction closes.

It also avoids any issues getting the home's condition OK'd by the buyer's lender, which is increasingly a problem that causes sales to fall apart.

However, the downside is the possibility that when the contractor opens up the stucco or goes to get permits from the city, more needed repairs come to light, and you've put yourself on the hook for it. If you go this route, make sure you use a licensed contractor and obtain permits for the work -- ask your agent for referrals.

Alternatively, you can negotiate a price reduction with the buyer in consideration of the needed repairs. Everything about this is negotiable, so you might offer some portion of the amount of the repair bid, or all of it.

You might even go so far as to obtain some repair bids from alternative contractors to the buyer's pest company, and use those to justify a price reduction less than $70,000. If you go this route, make sure that you get the buyer's acknowledgment that they are aware of the needed repairs, and add an as-is clause to the contract.

In earlier lending eras, it was possible for the seller to offer the buyer a closing-cost credit, which the buyer would recoup as cash at closing, with the intention that the funds would go toward the repair. So many times these situations ended up with the money going to other things that banks have entirely stopped the practice of allowing buyers to get "cash at closing."

Additionally, home equity lines and funds to repair homes are pretty tough to come by these days. So stay open to an extension of escrow, if the buyer needs it to obtain a rehabilitation loan, like the FHA 203(k) loan. They take longer to close than a normal loan, but are one of the only readily available fund sources for home repairs available on today's market.

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