Great News for Real Estate Investors! – click below for details
PRIVITY OF CONTRACT:
Who Is Making Repairs For Your Buyer?
The #1 post closing question we get asked is this: “the sellers agreed to repair the (roof, electrical, plumbing, etc.) and now we’ve moved in and the (roof, electrical, plumbing, etc.) isn’t fixed. Can we go back to the seller and make them do the work properly?”
Under MOST situations, the answer is NO!!!
Huh? You mean it’s ok the seller didn’t have the work properly done as they agreed they would do? Yep, that’s exactly what we’re saying. And here’s why.
In Kentucky there’s a legal concept called “privity of contract.” Privity of contract says if I didn’t enter into a contract with a contractor directly, and if the contractor does a crummy job, the contractor is not liable to me.
Therefore, when a buyer requests a seller to make certain repairs after the home inspection, the way most agents handle the situation, there would NOT be privity of contract because the seller picks the contractor, not the buyer.
In addition, when a buyer allows the seller to pick the contractor, we know the seller will likely pick World’s Cheapest Contractor, LLC to do the work. This only increases the odds the buyer will have an issue after closing.
So, how do we fix this?
We’d love to say “insist on your buyer picking the contractor,” but we don’t think that’s realistic. Instead, as a selling agent, we’d suggest when you’re dealing with Big Ticket Items (roof, HVAC, basement, structural issues, electric, plumbing), you reach out to the listing agent BEFORE making a repair request and ask them who they are likely to use for this work. If you are comfortable the person doing the work is qualified, in the repair request specifically state the seller shall use [insert name of qualified contractor listing agent suggested] and state specifically “buyer’s name shall appear along side the seller’s name on the invoice.” If you are NOT comfortable with the contractor they suggest, you need to write in the repair request the contractor your buyer would like to use for the work. In this case, you will still need to add “buyer’s name shall appear along side the seller’s name on the invoice.”
When the buyer’s name appears on the invoice, we now have privity of contract.
If an issue pops up after closing, the buyer can now go back to the contractor to insist the contractor take care of the problem. And at the same time, we’re now using a contractor we feel good about.
Another alternative would be to have the seller give the money for all repairs directly to buyer, but this should NEVER happen without the buyer’s lender’s consent. Of course, in a cash closing, it’s fine to give money directly to the buyer, but not if there’s a lender involved.
We hope your summer has been fun and productive and we hope to see you soon at a closing table!
Since the early 1970s, our firm has practiced primarily in the field of real estate law. We represent banks and mortgage companies, real estate investors, builders and individual buyers and sellers in a variety of transactions related to residential and commercial real estate in Kentucky and Indiana. Our primary area of practice is real estate closings. However, our attorneys also practice in other areas of law as well.