Who is Responsible for Lender Required Repairs?

Deciding who pays for the repairs can determine if a deal gets done or not! Let’s figure out who’s supposed to do it.

When seeking a traditional mortgage, you’ll likely need to deal with repairs required by the lender. But, first-time homebuyers and new investors frequently ask me about responsibility….Who is responsible for lender-required repairs, the seller or the buyer?

Neither the seller nor buyer are responsible for lender-required repairs; they are negotiable. In some deals, the buyer will cover all repairs. In others, the seller will split repairs evenly. Repair responsibilities will be decided in each deal.

So let’s discuss what lender-required repairs would look like and a few scenarios for how you can get these repairs done to get the money you need to fund your fix & flip. 

AN OVERVIEW OF LENDER-REQUIRED REPAIRS

Before discussing responsibility, I need to provide an overview of lender-required repairs. With traditional mortgages, lenders have minimum habitability standards. In other words, they’ll only provide loans for properties that a borrower can move into immediately. This differs from hard money lenders, who offer loans for distressed properties needing significant repairs. 

Due to this habitability requirement, lenders often mandate that certain repairs happen before approving a loan. Banks, credit unions, and other traditional lenders don’t physically go out to properties to inspect them. But, they do require appraisals. And while an appraisal differs from a home inspection, appraisal reports highlight significant property issues. 

For instance, if a home’s basement has a ton of standing water from a leak, the appraiser will highlight that in the report. Or, if a house has significant mold or rot, the appraiser will note those issues. Significant paint peeling, roof issues, faulty wiring, and plumbing problems are other common issues that show up in an appraisal report. 

And, if homes have had major renovations in the past, this could cause some appraisal red flags. Lenders will want to see a paper trail to confirm that any renovations received the proper permitting. If not, retroactively applying for and obtaining permits can be a lengthy one. While not a repair, per se, it’s essential to understand how faulty – or no – permitting can trigger a lender requirement. 

When lenders review these appraisal reports and note major issues, they’ll add a condition to the loan closing. Before providing final loan approval, these repairs need to be completed. Finishing the repair removes the loan approval condition, and lenders will proceed with the closing process. Here’s the important takeaway: if someone doesn’t complete these required repairs, the lender will not approve the loan.  

WHO IS RESPONSIBLE FOR LENDER-REQUIRED REPAIRS?

Clearly, if you want to close on a loan, the lender required repairs matter. But who’s responsible for completing these repairs—the seller or the buyer? 

Trick question. No one’s responsible for these repairs. And at the same time, everyone is responsible for them. Someone needs to do them, but who that is will depend on the specific deal and the negotiations between the buyer and seller. Bottom line, lender-required repairs are 100% negotiable between the buyer and the seller. 

LENDER-REQUIRED REPAIR OPTIONS FOR BUYERS AND SELLERS

Depending on the particular deal (and often the broader market conditions), buyers and sellers generally settle on one of the below options for assigning repair responsibility. 

Option 1: Seller Pays for Everything

In a buyer’s market, the buyers have more negotiating power. This may put them in a position to demand that a seller pay to address all required repairs. For a buyer, this obviously represents the ideal solution. 

Option 2: Buyer Pays for Everything

Conversely, sellers have the upper hand in negotiations in a seller’s market. As a result, a seller may refuse a buyer’s demands to complete necessary repairs. If one buyer falls through in this sort of environment, another one will likely step up and be willing to complete the required repairs. 

Option 3: Seller and Buyer Each Pay a Portion 

In some situations, the buyer and seller may want the deal to move forward without having a clear negotiating advantage. As a result, the best solution may be to compromise. For instance, they could agree to have the buyer replace missing flooring tiles in a bathroom and have the seller replace the home’s missing stair rails. 

Option 4: Seller Pays for Repairs but Raises Contract Price

This is another compromise option. In some situations, the buyer may want to cover the required repairs to make the deal happen, but they don’t have the cash on hand to do so. Instead, the seller can pay for the repairs but raise the contract price for the cost of those repairs. This creates the same end state for the seller. That is, the buyer pays for all the repairs. However, rather than paying out-of-pocket for these repairs, the buyer finances them with a larger loan. 

Of note, this option comes with the possibility of a home not appraising at the new, higher contract price. Consequently, buyers and sellers should take caution when using this approach. 

Option 5: Any Variation on the Above Options 

At the end of the day, buyers and sellers can do whatever they want. Maybe the seller pays for 25% of the repairs, and the buyer pays for the other 75%. Or, the seller can raise the contract price to cover half the repairs, and the buyer can pay for the other half out-of-pocket. As long as they complete the repairs, the lender will approve the loan. 

Option 6: Buyer Walks Away

This is the “nuclear option” of repair negotiations. If the buyer and seller simply can’t agree on assigning responsibility for required repairs, the buyer can walk away from the deal. Obviously, this doesn’t represent a great option. Both parties have already committed a ton of time, energy, and money to the sale—all wasted if it falls apart. But, sometimes, this represents the only reasonable option for a buyer. 

FINAL THOUGHTS

Buyers, sellers, and real estate investors need to grasp this fully: if a lender requires repairs, they won’t approve a loan until those repairs get done. Some sellers believe this provides them an upper hand in negotiations. However, sellers should consider that if one lender doesn’t approve a loan closing, others may not as well. It may make sense to just come to some deal with the buyer to complete the repairs—even if it’s not the ideal option. 

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