Should home seller fix a defect, credit money or lower the price?

Each resolution has its pros and cons
By: Dian Hymer: Inman News
Inspections invariably reveal defects. Often, buyers and sellers find themselves back at the negotiation table trying to work out an agreeable solution. Determining who is going to pay for what is one part of the resolution process. The other is figuring out how and when the defects will be repaired.

There are three options. The seller can do the work before closing. The seller can credit money to the buyer at closing and the buyer can take care of fixing the defect later. Or, the seller can reduce the purchase price by the amount of the negotiated resolution.

There are advantages and disadvantages to each approach. For example, if the sellers agree to repair a defect before closing, the work is done. The buyers don't have to worry about fixing a problem after they take possession.

A disadvantage is that there may not be sufficient time to complete the work without delaying the closing. Also, the sellers, who are moving on, may not take the same interest in overseeing the work as the new home owner might.

A related issue is that the sellers may agree to complete only the bare minimum to get the job done. If the buyers prefer to upgrade the work project, they should consider taking a credit at closing.

In cases where the seller is completing work before closing, the buyers should ideally have the right to reasonably approve the work order before the job is done. The seller should provide a copy of a paid invoice when the work is completed.

The buyer should also make sure that the contractor who is performing the work will guarantee his work for the buyers as well as the sellers. This is so that the buyers can turn to the contractor, and not the seller, if there is a problem with the job after closing.

HOUSE HUNTING TIP: Sellers often prefer to credit money to the buyers at closing to satisfy inspection-related issues. This relieves them of the responsibility for having work done while they're in the midst of moving. If you're having trouble convincing a seller to repair defects, you might make headway by agreeing to accept a credit in lieu of an actual repair.

A credit for defects can be a cost-effective way to solve a problem if the buyers are planning a larger renovation. For example, it would be a waste of money for the seller to repair a shower if the buyers plan to completely remodel the bathroom. In this case, a credit would benefit both parties.

Also keep in mind that there are often several ways to fix a property problem. Who better to decide how to fix a defect than the new owners? Just make sure if you do take a credit that you follow through and have the work done.

Also, be sure to check with your lender before finalizing your negotiations with the seller. Lenders have limits on how much money they'll allow a seller to credit to a buyer at closing.

Credits generate cash to repair defects, which works well for buyers who are cash-strapped. Buyers for whom cash isn't an issue might prefer a reduction of the purchase price. A lower price can help both buyers and sellers if there are closing costs that are based on the purchase price, such as transfer taxes and title insurance.

THE CLOSING: In areas where property taxes are based on the purchase price, a lower price could result in a sizable savings over time.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.