Replies to This Discussion

Permalink Reply by Joseph Kuhl on October 6, 2010 at 6:38am

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).

Permalink Reply by Marcy Moyer on October 6, 2010 at 9:09am

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

Permalink Reply by Jasmine Hodge on October 6, 2010 at 11:41am

Thanks for your response - I had considered the same logic, but it is great to receive confirmation.

Joseph Kuhl said:

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).

Permalink Reply by Jasmine Hodge on October 6, 2010 at 11:41am

Also a good idea - thanks, Marcy.

Marcy Moyer said:

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

Permalink Reply by Joseph Kuhl on October 6, 2010 at 12:06pm

One last thought - what happens if the buyer isn't competent as a contractor - suppose he starts the work and sawzall's though a plumbing line and causes a lot of water damage? Then doesn't want to buy the house any more? I'd have another agreement about that - maybe in the contract itself, that the property will be in equal or better condition than when the work was started, otherwise the repairs come out of the deposit (assuming there is a sizable down-payment held in escrow, that is).

Permalink Reply by Sherrilee Denton on October 6, 2010 at 6:03pm

What does your BROKER say about this? Your E&O Insurance may not even cover you and your brokerage in this type of contract arrangement. I would be sitting down with my broker to discuss all the ramifications to best protect you, your brokerage and the parties to the contract. Good luck!

Permalink Reply by Jasmine Hodge on October 14, 2010 at 7:25am

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!

Permalink Reply by Jake Bowers on October 14, 2010 at 1:16pm

I would be surprised if the buyer's employing contractor would put their business in any risk position by being involved in this for free. And I would not be putting myself as an agent/broker by being involved in drawing up a contract. If some damage or injury arose, I would not expect your insurance to cover you; it is well outside what your insurer signed up for in writing your policy.

Get the buyers to have an agreement drawn up by their attorney that is acceptable to the owners that covers injury to person and property, and in which the buyers accept all risk of loss of time and materials, will not sue for injuries to themselves, and will pay for any damage; and, get the attorney's input on this!

As for risk to the property, do you have any sense of how good this person is at his/her work? Older and mature? A lead carpenter or whatever, or the guy/gal who carries water? Find out what this person does exactly to assess risk to a failed repair/improvement; just working for a contractor means little.

I would not tie this into the purchase contract; it could possibly give the banks an excuse to back out if they change their minds and find out that somehintg was done 'behind their backs'. I would keep this a separate transaction between the buyers and onwers, completly separate from the real estate deal.

Permalink Reply by Jim Schneider on November 2, 2010 at 5:58am

This happened on one of my short sales recently, the appraiser had issues with peeling paint on an FHA loan. The paint was on a coopala (it sits on the roof). Our concern was the buyer, who is a contractor, could fall off the roof. I directed the attorney's to work it out as it is a contract change, they asked for the contractor to show proof he was bonded and insured. It ended working out. I'm surprised it doesn't happen all the time now that FHA is so popular with first time homebuyers and we've got a bunch of properties that the seller can't fix (due to lack of funds).

Make sure the lawyer covers your clients rear, and that your client knows the risks, but generally it's good for everyone involved.

Permalink Reply by Jim Schneider on November 9, 2010 at 5:38am

So Jasmine, we're all wondering how it worked out with the repair on your short sale. Let us know.

Jim Schneider - Chicago Suburbs



Jasmine Hodge said:

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!