Inspection Problem Option

By Dian Hymer

Recently a home buyer in Oakland, Calif., discovered during the home inspection that there were foundation problems. After consulting with an engineer, he learned that the problems would cost approximately $10,000 to repair.

The buyer was not discouraged by the engineers report, but the new information had not been taken into account when he made his offer to buy the property. So, in consideration for removing his inspection contingency from the contract, the buyer asked the sellers to credit him $10,000 toward his nonrecurring closing costs. The sellers agreed and the transaction closed.

Of course, most sellers would prefer to have a clean inspection contingency removal without any conditions attached. But, when defects are discovered during inspections that the buyers and sellers were unaware of at the time the contract was negotiated, a credit for nonrecurring closing costs can be a relatively easy way to resolve the problem.

House Hunting Tip: The benefit of this solution is that its quick. Often defects arent discovered until a few weeks before closing. In the case of a significant problem, like a foundation defect, there probably would not be enough time to get the work done before closing. Using a credit instead passes money from the seller to the buyer.

Heres how it works. The sellers net proceeds are reduced by the amount of the credit. The money is used to offset some of the buyers closing costs. The money the buyers save at closing can be used for repairs. The buyers take responsibility for making the repairs after closing.

Lenders have requirements regarding the amount of money they will allow a seller to credit to a buyer. Most lenders will only permit a credit against the buyers nonrecurring closing costs.

Nonrecurring closing costs are those settlement fees that are paid on a one-time-only basis at closing. These fees include such things as title insurance, fees paid to the person handling the closing, inspection fees, transfer taxes and loan origination fees. Recurring closing costs include homeowners insurance premiums, interest and impound account payments, and property taxes-all of which are paid on a recurring basis.

Before asking the seller for a credit for nonrecurring closing costs, make sure you total the amount of your nonrecurring closing costs. Your real estate or closing agent can help you estimate this figure.

One buyer asked the sellers for a credit of $15,000 for nonrecurring closing costs to cover the cost of a new roof. When it came time to close, the buyer discovered that his nonrecurring closing costs totaled only $11,000. The buyers lender wouldnt allow a credit for more than the amount of the buyers nonrecurring closing costs. The seller felt he shouldnt have to credit more than the $11,000 that the lender allowed. The discrepancy was ultimately resolved, but not easily.

There are pros and cons to using the credit method to resolve inspection issues. The biggest problem is that some buyers never actually get the work done. This can end up costing the buyer much more down later when he decides to sell. 

Also, lenders restrict the size of the credit. Many lenders will only allow a credit for 3 percent of the purchase price, or for the actual amount of the nonrecurring closing costs--whichever is less.

The Closing: An alternative to asking the seller for a credit is to ask the seller to lower the purchase price by the amount of the required work. But, if the buyers are short of cash, a credit will generate immediate cash that can be used for repairs.

Copyright 2002-2006 Dian Hymer. Distributed by Inman News Features