In the course of a typical real estate transaction, the buyer will hire a home inspector come inspect the property, produce a written home inspection report, and then the buyer and seller will negotiate based on the inspector's findings in the report and the items in the home that need repair. Essentially, this is the second round of negotiations in the real estate transaction, following the initial negotiation of the contract terms (such as price, closing date, financing, etc.).
There are two different ways the buyer and seller can come to an agreement based on the findings of the home inspector. They can either:
- negotiate repairs that the seller will complete prior to closing, or
- negotiate compensation the seller provides to the buyer in lieu of repairs
Which is better? Repairs or compensation in lieu of repairs?
There's not one right answer to this question, as every real estate transaction is different. However, in most cases, it's our opinion that compensation in lieu of repairs is better for both the buyer and the seller.
Here's why:
Most sellers will want to get any agreed-upon repairs done for the lowest possible price, and most buyers are going to want any repairs to be completed to their own standards and expectation. The contract does call for all repairs to be done "in a good and workmanlike" manner, but that phrase is potentially open to interpretation and may lead to work that is done merely to meet a minimum standard. This may lead to a disagreement prior to closing -- a picky buyer may not like the way the repairs were completed, even if they can be shown to be done "in a good and workmanlike manner," which may lead to a dispute at the final walk-through, a time when everyone should be happy to be almost to the closing table.
Additionally, if there is a short contract period, the seller may have difficulty with scheduling contractors and may have to choose the one who is available rather than the best one for the work, which can also lead to work completed to a lower, but still meeting the minimum, standard.
When compensation is offered in lieu of repairs, the parties each have an opportunity to obtain quotes -- actual dollar amounts that several different contractors might charge for the same job. With the help of their REALTORS®, the buyer and seller can then come to an agreement as to the amount the seller will credit the buyer at closing (often in the form of seller-paid closing costs) -- all parties end up happy, because a fair agreement is reached. The seller can sell the home as-is, with this agreement of compensation, and the buyer can choose their own contractor to complete the work after closing and be the sole decision-maker as the final standard of work he or she will accept before the job is considered done.
When might it be better for the seller to complete the actual repairs, rather than offer compensation?
Having said that, there may be instances in which it's better -- for one or both parties -- for the actual repairs to be completed prior to closing.
Here are a few of those possible circumstances:
- If the buyer is asking for a higher-than-reasonable amount of compensation in lieu of repairs, the seller can return the negotiation to actual repairs and hope to bring the buyer to agreement, ultimately costing the seller less for the same work
- If the repairs needed are major and the cost of the repair will exceed the amount of compensation the lender will allow from the seller (with certain types of financing, the lender can cap the total amount of concessions the buyer can receive from the seller)
- If the repairs needed are major and can be covered by the seller's homeowner's insurance. A good example of this is if the home is found to need a new roof. If the seller's homeowner's insurance will approve a claim for a new roof, the cost to the seller may only be their insurance deductible, rather than the full cost of a new roof, in which case everyone wins.
Again, every real estate transaction is unique. When you choose to buy or sell a home with us, we create an individual strategy for your particular real estate needs -- in real estate, there is no one size fits all!
To discuss buying or selling a home with us, please call us today at 404-994-2181 or email Ben(at)BuySellLiveAtlanta.com.
