Can sellers refuse to honor cost of repair contingency?

Asked by Goose, Raleigh, NC Thu May 28, 2009

I made an offer on a home "as-is" with a cost of repair contingency of $4,000. After the inspection a general contractor came up an estimate of over $4500 for the repairs the inspector had noted. The sellers are refusing to return the earnest money claiming that the estimate is not reasonable. The sellers agent also sent a general contractor out to the home who came up with a $3900 estimate for repairs but left out some of the items the inspector had noted because their contractor stated they were not required to meet "code". Can the sellers refuse to return the earnest money? Will I have to take them to small claims court?

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Paul Folmsbee, Agent, Cary, NC
Sun Jun 21, 2009
Here are some recommendations for your present situation, along with a suggestion to avoid this problem in the future.

1. It is not required that a property be brought up to the current Building Code. It simply must comply with the Code as of the date it was constructed--which is defined as when the Certificate of Occupancy was issued.

2. Carefully review the provisions in the INSPECTION/REPAIRS section of the Contract. In North Carolina, the items being inspected are spelled out very specifically. You also will see that the "acid test" is that an item or system "must be performing the function for which it was intended and is not in need of immediate repair". Your contractor's estimate should be written from this perspective. Other "improvements" he finds do not count toward the $4,000.

3. Consult with an attorney. With $4,000 at risk, an hour of a lawyer's time is very inexpensive by comparison. Ditto for filing an action in Small Claims Court (and paying the small extra fee to have the papers delivered by a Deputy Sheriff, which is a nice theatrical touch--Grin.) But first, see if the lawyer will write a demand letter on his/her letterhead.

So, how do you avoid this problem in the future? Simple. Use Alternative 2, instead of Alternative 1. You pay a small, non-refundable Option Fee. This gives you the right to inspect ANY aspect of the property (instead of only the systems outlined in Alternative 1). Equally important is your right, prior to the end of the Option Period, to withdraw the contract "for any reason, or no reason". In other words, you simply state that you are withdrawing. You do not need to specify why. (But, If you decide to continue with the transaction, the Option Fee is a credit to you, on the closing statement.)

Can the Seller refuse to return the Earnest Money under Alternative 2? Not if you are my client. It is my standard of practice not to turn over the Earnest Money until the end of the Option Period. The Seller can't lock it up, because it never was tendered. [Chuckle]

Say, that's pretty good for an agent's first day on the job, eh? Just kidding, of course. After twenty-three years in this profession, I've developed some techniques which bring some sanity to the practice of real estate brokerage. And I hope what I've written here is helpful.

Best regards,
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Kim Saylor, Agent, Raleigh, NC
Mon Jun 1, 2009
Your out, for this contract would indeed be the cost of repair contingency, based on the the estimate your contractor gave. However, the contract also clearly states that it takes a signature from both the buyer and the seller to get your earnest money back. It is a very sticky situation, but a situation that your buyers agent should have spelled out to you very clearly. There is always the possiblity of of a dispute over earnest money!!
Many times the earnest money will remain in a trust account while the dispute is arbitrated. If that does not happen, the Earnest Money may eventually be turned over to the State.
Another possibility is splitting the Earnest money with the Seller, cut your losses and get out of this, or as the others say small claims court.
Good Luck, and hopefully you have a great Buyers Agent to represent you in this difficult time.
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Daniel Eberw…, Agent, Clayton, NC
Thu May 28, 2009
Goose - this is one of the biggest problems with NC earnest money deposits. Either party can refuse to release the funds, and the broker can not turn the funds over to either party. Don't think the seller is going to get the earnest money, the broker holding cannot disperse the funds until both parties sign off on where the funds are going. After a certain time frame and proper notification, the funds will be turned over to the clerk of courts, who you'll have to petition for the funds to be turned over to you. (the seller would have to petition for the funds also) You as the buyer could get 50 estimates and all come in over $4000 while the seller could just as easily get 50 estimates that come in under $4000.
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Tim Burrell, Agent, Raleigh, NC
Thu May 28, 2009
Read the terms of the contract to the agent for the seller. It says if the cost is over $4,000 based on a "reasonable estimate obtained by buyer". The only way they can disput that is to say that your number is not reasonable. A competing estimate obtained by Seller is not the standard in the contract. The fact that the competing estimate is just barely under $4,000 shows how reasonable your estimate is.

Sheri has an excellent question. Are you represented by a buyer's agent? If not, you should be, as you get a consultant who is not paid out of your pocket. If you are represented by a buyer's agent, he/she should be taking care of this.

I am an attorney in addition to being a Realtor, so I can be more effective in this part of the business, but any buyer's agent should be able to take care of you on this one. Worse case, you go to small claims court, but I have a hard time imagining this going that far.
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Mike Jaquish, Agent, Cary, NC
Thu May 28, 2009
They can refuse. Yes. People can refuse to do anything, until faced with no other option.

And, Yes, you can take them to small claims court to recover earnest money.

Regardless, you are in negotiations and either your agent or an attorney should be advising you as to the stipulations and consequences in the contract.
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Michael Colv…, Agent,
Thu May 28, 2009
Hi Goose
The cost of repair cont. is part of the contract and as long as the specifics are met, reasonable estimate of repairs needed by a licensed contractor, they would have to return Earnest Money, but keep in mind the repair cont. is in reference to the specific systems listed on the contract, and refrences that they be performing the task for which they were designed, so not everything found on a home insp is included in that usually. However you could still get out of the contract if the seller is not willing to make those repairs, unless you specifly made the offer "as Is".
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Craig Fox, Agent, Chapel Hill, NC
Thu May 28, 2009
Dealing with repairs is one of the most nebulous aspects of the current contract. Bottom line is that the agency holding the earnest money in their trust account cannot release it to either party unless both parties agree. After a certain period (and I can't recall exactly what that period is right now), they can release the money to a clerk of court, where either party can then file to try to get it. The best advice I can give you is to consult an attorney to find out exactly what your possible remedies are.
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Sheri Moritz, Agent, Raleigh, NC
Thu May 28, 2009
Do you have a buyers agent?
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