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I've run into this, though not with a short sale. The buyer is taking most of the immediate risk - work performed for which he/she will not get paid, if the deal fails. The owner's have a liability risk (what if the buyer cuts off a finger doing carpentry, etc). The owner has insurance - pretty much the same as if he had a contractor working on his house. But ... I'd recommend either the buyer do it under his contractor's firm -- so there is contractor's liability insurance in place. If not that, then the buyer could get his own contractor insurance.
The owner and the bank are getting done for free on the property - they shouldn't complain too much. For clarity's sake, it might not be a bad idea to draw up a work contract specifying what is to be done, with a cost breakdown, just so it's clear the repairs/improvements are added improvements to the banks' original BPO value (what if the investors order another interior BPO before closing and it comes in higher due to the repairs).
You could have the buyer sign a Hold Harmless Agreement that you get from your companies legal department. Make sure your broker is ok with this and that he/she approves of all the wording on the agreement.
Marcy
Thank you everyone for your great thoughts on this - sorry for the delay - this has indeed been unusual - yet driven by the fact that the sellers got stuck mid-way through a remodel when the market crashed. The hold harmless is being required and the general view is that the risk is primarily on the buyer side. The buyers are seemingly unable to get insurance as they do not own the property and the sellers were not able to keep up their policy either. As the 1sts and the 2nd have signed off, the risk of failure has just shifted the buyers financing, which is a conventional 80/20. This deal is now pushing 10 months old. The 1st previously "goosed" BPO numbers upwards about +90K in "quality control", which ultimately ruined an all cash deal that they should have taken. Thanks again - all ideas welcome!
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