What do they mean by giving credits when buying a home?

Question

I'm in the process of buying a house and we agreed between counters that they would pay for section one termites and some other misc items, but the repairs would not exceed $8000 and be finished prior to close of escrow. They put this house up on the market in Sept and these reports are from then. So, we agreed that we would get our own inspections and they would repair per their findings. They agreed. We got the inspections done and the roof hasn't been replaced or repaired in over 20 years and termite damage was more excessive than their original inspection. We asked them to credit us for some of the roof repairs as well. They are now saying they will credit us for all repairs in the amount of $11000 and we buy the house as is. Does that mean it comes off the top dollar of the house? Why are they willing to credit rather than have the repairs done? I'm afraid I'm buying a money pit and don't know it yet.

Answer 1

You could be. They are saying that they will pay only up to $11,000, no matter how much it costs. At closing they would have $11,000 placed into an escrow account. You could draw from that account with paid bills and I am sure that they would also place a time limitation on it too. The price of the house doesn't change. If the repairs don't cost the full $11,000 the seller will get whatever remains.

If the are that eager to pony up the $11,000 they might know of other things wrong. I would be very careful.

Answer 2

Wow...I wish I knew the state in which you reside. I'm well versed in Ohio and Florida, so this could be a sticky one.

It's nice to hear that they are giving you "credits," but keep in mind that in most real estate transactions these "credits" are referred to as "seller concessions." If you are obtaining a loan for your new home, most lenders are now limiting "seller concessions" to 3% of the selling price.

For example, if the home you are buying is selling for $300k then you would be allowed "seller concessions" of $9,000. (Few lenders...and I mean VERY few...will allow up to 6%.) Now, back to the example...the first part of the $9,000 will be chewed up by your closing costs; therefore, if you have $7,800 in closing costs you'll walk away at closing with a check for $1,200.00. But of course you still have in your posession the $7,800 that you had set aside for your closing costs...unless you don't have that money set aside and had planned on rolling the closing costs into the loan, in which case you would only have $1,200 to fix your roof...Problem!

So here's my suggestion (assuming that you have placed earnest money in escrow for the seller): By signing a purchase agreement you own the house. You just haven't paid for it yet nor has the title trasferred; therefore, since the seller is protected by the contract, I would ask them to pay $11,000 in advance of closing escrow for the repairs. They should agree to do this under your supervision and on your behalf with the repair orders in your name so that you are privileged to the workmanship warranties. (Materials' warranties stay with the product regardless of ownership, in most cases.)

If the seller insists on simply offering you concessions at closing, make sure that your lender approves of the $11,000 amount of concessions. Once you've made this decision, you certainly don't want any surprises! ;o)

To directly answer your questions: The concessions are a deduction from the seller's proceeds at closing...not a discount from the selling price. This is what puts the cash in your hand for the repairs, because it's actually proceeds from your own loan.

Secondly, they would rather give you a credit than agree to do the work in advance so that they can avoid "opening a can of worms" with this roof issue. My best guess is that they just want this transaction behind them without potential delay.

Nothing ventured, nothing gained! Enjoy the experience and your new home with the new roof! I hope that I've provided adequate food for thought! ;o)

Answer 3

Credit for repairs means at closing the price you pay is reduced by the credited amount (it is like an added down payment).
I also suggest to clients when there are major repairs, accept a credit and pay the contractor of YOUR choice to do the repairs. This serves two purposes. One you can pick who you believe is credible to do the repairs and second, if you have a problem after the repairs are completed (and you own the house) you can sue the contractor. If the seller pays for the repairs, you do not have a contractual relationship with the contractor and can not sue them.