In a balanced market, and frequently in this seller’s market, properties are sold twice. There is the original offer and acceptance and then there is the renegotiation that follows the inspection reports.
When a problem is discovered by an inspection, how should it be handled? Assuming that the agreement is contingent on the outcome of inspections, the buyer has the right to terminate. If, however, the buyer wants to move forward with purchase there are multiple options, as are suggested on the Change in Terms Addendum to Agreement of Sale. The parties can agree to a reduction in the purchase price, seller credit, repairs pre-settlement or just about anything imaginable. So, what is best?
There are some guiding principles to consider. Can you get the work done before the settlement? The seller is going to get the full purchase price, so why shouldn’t the buyer get the full property? Get the repairs done before settlement, so that they can be evaluated and determined to be complete. This makes a lot of sense, but there are some obstacles and other considerations if this approach. In today’s world, settlements occur much sooner after an agreement is executed than previously. Parties can negotiate a continued settlement date to accommodate repairs, but there is no guarantee that an agreement can be reached.
Another consideration is who will do the repairs? It makes a sense that the buyer selects the repair person and negotiates the terms of repair. The buyer, after all, is going to live with these repairs whereas the seller is off and running. Will the seller perceive that the buyer is seeking the “Cadillac” of repairs, as opposed to a repair that is perfectly fine, but less expensive? Will the buyer perceive that the seller is merely looking for the expedient?
Crediting the buyer with the reasonable cost of repair, assuming it is approved by the buyer’s lender, seems to be a good approach. The buyer can take what time is necessary to perform not only the reasonable repairs, but perhaps add to those repairs by including elective upgrades. As sensible as this seems, consider what was stated above about having the property put in shape before settlement, as highlighted by the following example.
Sellers and buyers reached an agreement and the buyers performed their inspections. An inspection of the synthetic stucco revealed a problem and a contractor was engaged to evaluate and provide an estimate. The estimate came in at $15,000 and the buyers and sellers agreed to a reduction in the purchase price by that amount. Timing and the contractors scheduled did not permit pre-settlement repairs.
After taking title and possession, the buyers took several months before they contacted the contractor. After multiple calls were not returned, they sought another contractor with expertise in the repair of synthetic stucco. This contractor, however, opined that the necessary repairs would cost a minimum of $40,000.
Assuming that the sellers revealed what they knew, how could be they be responsible for the overrun? As the “proposal” from the original contractor had an “out” in the event more problems were found as well as other similar language, how could that contractor be liable? And where is that contractor?
Who is left in the buyers’ gunsights? Yes, perhaps the buyer’s agent. But why? What did the buyer’s agent miss?
Buyer’s agents are frequently in the position of having to guide their clients when defects are found. When giving this advice, a buyer agent should review with their clients the “what ifs,” an analysis of the likely scenarios that may play out for each of the available choices. In our stucco example, what if the contractor is out of business or not available? What if additional problems are found once the work commences? What if the contractor is found to not be qualified? What if the contract with the contractor waives all warranties and expressly provides that the price is not guaranteed?
I don’t want to leave you thinking that the buyer’s agent is liable in the above example. Certainly, any reasonable buyer has the ability to assess the limitations of having repair work undertaken post-settlement and based on a contract not seen. It should be within everyone’s experience and/or knowledge that additional problems can be discovered once the work commences. Is the buyer any less aware of these potential problems than the buyer’s agent? Trial is where we would learn if the buyer’s contributory negligence bars her recovery.
A buyer’s agent is not required to get it right. It is enough to review the pros and cons of each of the choices available to a buyer who has discovered a problem. Getting the work done after settlement always involves the potential of discovering defects not previously revealed, as well as the additional cost of repair. While this may be obvious, advise your buyers accordingly and timely. Consider the “what ifs” to all choices.
