Avoiding the Monster: The Repair Limits Contract
In last month’s article, The Monster on the Front Porch, we talked about the challenges that arise when the Buyer attempts to renegotiate an As-Is contract, threatening to cancel the contract at the end of the inspection period if the Seller doesn’t meet the Buyer’s new terms. If you missed the first article, you can find it here: www.stpete.pro/blog
In the As-Is contract, a the Buyer has a period of time, typically 7-14 days, to conduct any and all inspections on the property and then choose to either proceed with the contract or cancel it if the Buyer discovers anything whatsoever about the property that is unacceptable, and it can be virtually anything: a broken window, an ungrounded outlet, or just a change of heart.
As we mentioned in the last article, before the As-Is contract became the go-to form, almost all of our local residential real estate transactions used what we refer to as the “Repair Limits” contract. In the Repair Limits contract, the Seller agrees to make repairs to any of the major systems of the property, including structure, plumbing, electrical, A/C, etc. that are found to be not functioning properly at the time of inspection. A maximum amount is set, typically 1.5% of the purchase price for general items and another 1.5% for termite issues, and as long as the cost of making the necessary repairs is less than that amount, the Seller is bound to perform the repairs prior to closing, and the transaction proceeds.
From the Buyer’s perspective, the disadvantage of this contract is that it can’t be canceled for just any old reason whatsoever, so it’s incumbent upon the Buyer to perform some due diligence prior to writing the contract. The advantage is that the Buyer knows that the property is going to be in basic working order at the time of closing without further expenditure on the Buyer’s part. The Buyer isn’t going to have to close on the house and then put in a new A/C, roof, or water heater.
From the Seller’s perspective, The disadvantage is that the Seller may have to pay up to the amount of the repair limit to correct any defects, but since this amount is set during the initial negotiations, in can be incorporated into the accepted purchase price. The big advantage for the Seller is that, unless serious defects are discovered that cost more than the repair limit to correct, the Seller knows that the transaction is going to close (subject to any financing or other contingencies, but those are subjects for another time).
Given the many pitfalls that can accompany a canceled contract, like lost market time, moving schedule mayhem, and complications closing the next transaction, the higher probability of closing the repair limit contract is often worth it.
The biggest advantage, however, may be the lack of a stressful secondary negotiation at the end of the inspection period, which is what happens almost every single time with the As-Is contract.
There is so much more to this that what we have space for here. We’ve been writing contracts here on the Island for decades, and we’d love to help you with your next transaction.