PAYING FOR REPAIRS | Know The Contracts

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So there is a repair…

Though the NAR Settlement has certainly felt like one of the biggest challenges in this business, I contend that inspections and repairs take the cake. Even if it’s not, I am ready to discuss something other than NAR for a change.

(1) AS-IS Contracts:

NABOR and FR/BAR each have an AS-IS contract. Though the Seller is not obligated to make repairs, they may still agree to them to keep the Buyer from terminating.

To negotiate a repair, the Buyer would execute an Amendment which language such as this: “Seller shall repair or replace _______ prior to Closing.”

If the repair isn’t made by closing? Seller is in default, and the parties will have to negotiate a solution. This could be a credit, closing delay, or an escrow. There is always the possibility of the Buyer terminating. The language you put in your Amendment matters… a lot.

Pro Tip 1: Lenders will require that any credits be for “closing costs and prepaids.”

(2) NABOR Standard:

If a repair is not made by Closing, the NABOR contract gives two solutions: Seller shall provide a credit or escrow 200% of the estimated costs (see above). This actually works pretty well in most circumstances, as Closing still happens and everything keeps moving. No delays.

I find this language particularly challenging when the repair is a safety or health issue (i.e. Radon, mold, air conditioning). Even though not ideal for these scenarios, Buyers ultimately accept the reality due to its clarity in the contract – they can read it for themselves.

Pro Tip 2: Calculating the cost of the repair can still be challenging.

• Line 315 (see above) limits the cost to the fair market value of the item if it were in working condition. Therefore, if the air conditioner is 20 years old, the Buyer cannot expect to have 200% of the cost of a new Air Conditioner held in escrow.
• Sellers don’t HAVE to provide receipts or use licensed contractors. However, I would encourage every Seller to provide this wherever feasible as it assures the Buyer that they can trust the work being performed.
• Deposits on the repair do not count towards the 200% of escrow. Though most Buyers do not require 200% plus the contractor’s deposit that has already been made (possibly totaling 300% of the repair), the contract doesn’t make exceptions for the amount already paid. Yikes!

Having an experienced attorney or Realtor in these negotiations is critical.

(2) FR/BAR Standard:

Think 200% is too high? FR/BAR only requires 125%, not to exceed the repair limits the Seller was obligated to.

Pro Tip 3: If you or your customer want receipts, I would add to the contract when first making the offer. For example, you could include an Addendum stating: “Seller shall provide receipts for repairs, if applicable.”

• How long is the escrow? The contract doesn’t say. I typically negotiate a firm deadline (i.e. 30 days) depending on the work and circumstances.
• FR/BAR limits the total liability to the limit agreed to in Section 9 – its capped. NABOR, however, does not have a cap… at all. You will notice this distinction when attorneys draft escrow agreements.

The contract matters. The details matter.

I don’t feel that one contract is necessarily better than the other, but understanding how your favorite works is key to serving your customer.

As you need help on these items, please reach out to us – we would love to work with you on your next closing! As always, thank you for using Ross Law | Ross Title.