Section 1 Repairs

Asked by N C, Fremont, CA Thu Jan 22, 2009

The seller (or seller's agent) has put this clause in the counter offer contract - Section 1 Repairs to be limited to $2500.

Does it mean that sellers expect that there will be major repairs exceed $2500?
Is the house a lemon?

Makes me nervous...

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The Medford…, Agent, Fremont, CA
Fri Jan 23, 2009

There can be a number of reasons a limit might be put on repairs. As an example, the seller could have little or no equity left and doesn’t want to get into a negative cash flow situation.

Section 1 repairs in excess of $2,500.00 do not make a house a lemon. I’ve encountered MANY homes with extensive Section 1 damage that, once repaired, have been marvelous homes. There are, however, two concerns I would have if I was representing you:

1. If the purchase agreement specifies that Section 1 repairs are to be paid by the seller and that a Section 1 clearance is to be a part of the contract, your lender may require a Section 1 clearance before they will fund the loan. Many lenders in today’s lending environment will not accept a partial clearance. If the repairs exceed $2,500.00, you would have to pay the difference to have the repairs completed before escrow can close.

2. If the seller is only willing to pay $2,500.00 for Section 1 and the amount of repairs is higher, you have a right to walk away within the Inspection Contingency time period. HOWEVER … you will have already paid for the Termite, Property and Roof Inspection reports and possibly the appraisal. This can come close to a thousand dollars paid out by you.

The question you personally need to answer is this: “Based upon the two concerns listed above, is this a risk you are willing to take?”

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Rhonda Fee, Agent, Pleasanton, CA
Wed Apr 1, 2009
Hi N C,
Just so you know, I prefer to answer these questions without reading what others have written so I'm not swayed in my answer to you, so here goes. When you make an offer on a house, the contingency period agreed to in the contract allows for negotiations to remain open until the contingency periods are closed. That means you can get your inspections and continue negotiating once you have the reports in hand. If the counter states that the seller will pay up to X amount of dollars, even if you agree to that and then find that the repairs are just too costly, you can renegotiate the terms or withdraw from the transaction. I wouldn't let that make me nervous at all. Your only issue at that point would be the cost incurred to get the inspections. Make the decision before you move forward in spending the money on the inspections. Your agent should be able to guide you through the process.
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CJ Brasiel, Agent, San Jose, CA
Fri Jan 23, 2009
NC -

I agree with Carl that making any repairs a part of the contract can raise flags for the lender. Particularly if you are obtaining an FHA loan. I normally suggest simply getting a credit for closing cost in the amount of $2500. Then paying for the repairs out of the $2500 you saved in closing costs. Any inspection that is a part of the contract can be enough for the lender's underwriter to require X items be repaired before funding. If the seller only provides $2500 and the final bill becomes $10,000 you can attempt to re-negotiate or be required to come up with the money -yourself- to make the repairs. You or the seller may not believe the extended repairs are necessary but if it is in the contract, it is up to the underwriter to decide.

There are a lot of variables here that can come into play in how I would advise my clients. ( I agree with Steve's comments to this point.) Who hired the pest inspector, you or the seller? It is not uncommon to have a variance between different inspectors on the extent of the damage. Also, the nature of pest reports many times will lead to "further investigation" comments. This means that they may find more damage once they remove XY or Z. For example, there is apparent water damage around the toilet. Until they lift and see how extensive that damage is, they normally only offer an hourly rate to investigate further.

The seller limits the money for all the reasons stated below and they simply don't want to be open to "creep" expenses on the repairs. This is a situation best managed between you, your agent, and your loan officer.

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Scott Godzyk, Agent, Manchester, NH
Fri Jan 23, 2009
Not necessarily.... With all this new mind set that a buyer negotiates out the price, then has a home inspection and wants to renegotiate the price, the seller may agree to the lower price up front letting you know they only have $2500 to give and may not have any more money or equity to use for a credit or reduction. Now as a buyer you will want to insist on and review the seller property information report carefully. look for any problems they state they have or had. Also when walking through the hous edo a twice over checking with your naked eye, roof, siding, windows, circuit breakers, plumbing (look under sinks for leaks) run the shower and faucets) look in the baemenst for sighns of insects and check the ceilings for leaks. A little checking ahead will usually point out anything that sticks out. good luck with your purchase.
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Steven Ornel…, Agent, Fremont, CA
Thu Jan 22, 2009
NC, the fact of the matter is that if you do inspections and those inspections uncover repairs that are greater than this amount you can still hold the removal of your contingencies dependent on the Seller making all requested repairs, and if not that, a reduction in sales price to compensate. It really depends on what is uncovered during your inspections - if major issues are found walking away may be your best move.

This topic is really something you should be talking about with your Agent. Nobody in this forum knows the house, what the Seller's disclosures currently disclose, or any other pertinent details.

Best , -Steve
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