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Negotiating the Change in Terms Addendum to Agreement of Sale

By: James Goldsmith, Esq. on in  | 

In a balanced market, and frequently in this seller’s market, properties are sold twice. There is the original offer and acceptance and then there is the renegotiation that follows the inspection reports.

When a problem is discovered by an inspection, how should it be handled? Assuming that the agreement is contingent on the outcome of inspections, the buyer has the right to terminate. If, however, the buyer wants to move forward with purchase there are multiple options, as are suggested on the Change in Terms Addendum. The parties can agree to a reduction in the purchase price, seller credit, repairs pre-settlement or just about anything imaginable. So, what is best?

There are some guiding principles to consider. Can you get the work done before the settlement? The seller is going to get the full purchase price, so why shouldn’t the buyer get the full property? Get the repairs done before settlement, so that they can be evaluated and determined to be complete. This makes a lot of sense, but there are some obstacles and other considerations if this approach. In today’s world, settlements occur much sooner after an agreement is executed than previously. Parties can negotiate a continued settlement date to accommodate repairs, but there is no guarantee that an agreement can be reached.

Another consideration is who will do the repairs? It makes a sense that the buyer selects the repair person and negotiates the terms of repair. The buyer, after all, is going to live with these repairs whereas the seller is off and running. Will the seller perceive that the buyer is seeking the “Cadillac” of repairs, as opposed to a repair that is perfectly fine, but less expensive? Will the buyer perceive that the seller is merely looking for the expedient?

Crediting the buyer with the reasonable cost of repair, assuming it is approved by the buyer’s lender, seems to be a good approach. The buyer can take what time is necessary to perform not only the reasonable repairs, but perhaps add to those repairs by including elective upgrades. As sensible as this seems, consider what was stated above about having the property put in shape before settlement, as highlighted by the following example.

Sellers and buyers reached an agreement and the buyers performed their inspections. An inspection of the synthetic stucco revealed a problem and a contractor was engaged to evaluate and provide an estimate. The estimate came in at $15,000 and the buyers and sellers agreed to a reduction in the purchase price by that amount. Timing and the contractors scheduled did not permit pre-settlement repairs.

After taking title and possession, the buyers took several months before they contacted the contractor. After multiple calls were not returned, they sought another contractor with expertise in the repair of synthetic stucco. This contractor, however, opined that the necessary repairs would cost a minimum of $40,000.

Assuming that the sellers revealed what they knew, how could be they be responsible for the overrun? As the “proposal” from the original contractor had an “out” in the event more problems were found as well as other similar language, how could that contractor be liable? And where is that contractor?

Who is left in the buyers’ gunsights? Yes, perhaps the buyer’s agent. But why? What did the buyer’s agent miss?

Buyer’s agents are frequently in the position of having to guide their clients when defects are found. When giving this advice, a buyer agent should review with their clients the “what ifs,” an analysis of the likely scenarios that may play out for each of the available choices. In our stucco example, what if the contractor is out of business or not available? What if additional problems are found once the work commences? What if the contractor is found to not be qualified? What if the contract with the contractor waives all warranties and expressly provides that the price is not guaranteed?

I don’t want to leave you thinking that the buyer’s agent is liable in the above example.  Certainly, any reasonable buyer has the ability to assess the limitations of having repair work undertaken post-settlement and based on a contract not seen. It should be within everyone’s experience and/or knowledge that additional problems can be discovered once the work commences. Is the buyer any less aware of these potential problems then the buyer’s agent? Trial is where we would learn if the buyer’s contributory negligence bars her recovery.

A buyer’s agent is not required to get it right. It is enough to review the pros and cons of each of the choices available to a buyer who has discovered a problem. Getting the work done after settlement always involves the potential of discovering defects not previously revealed, as well as the additional cost of repair. While this may be obvious, advise your buyers accordingly and timely. Consider the “what ifs” to all choices.

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Comments (13)

Comments

  • Etta Norton   July 17, 2020 at 8:07 am

    this is so convoluted, seller gets an estimate… buyer can get one too if they are wary of sellers,

    Reply to Etta Norton
  • Joe Larkin   July 17, 2020 at 8:26 am

    Thank You for an informative piece to consider.

    Reply to Joe Larkin
  • Bill Kribbs   July 17, 2020 at 8:44 am

    This is very good information. I’m thinking this would be a good topic for discussion and field examples from people with experiences like these. I’ll bet I could ask any new agents less than 3 yrs in business, to explain the values and pitfalls of this addendum and they would scratch their head. Could this be created into a CE cource? Lots of problems could be avoided and the agents reputation enhanced!

    Reply to Bill Kribbs
  • Ruth Killian   July 17, 2020 at 9:00 am

    Well explained. Two contractors are going to have two different opinions about a repair and the cost of the repair. Possibly getting two or even three opinions when the problem was discovered may have brought the varying costs to repair to light at that time.

    Reply to Ruth Killian
  • Jodi Diego   July 17, 2020 at 9:32 am

    Excellent article! Thank you.

    Reply to Jodi Diego
  • Ryan Thomas   July 17, 2020 at 10:30 am

    Great article. You really hit every angle I could think of as well. My personal preference is a credit if the repair is major or requires a good cosmetic finish. If it’s electrical, plumbing, or other mechanical I tend to just get that stuff knocked out.

    Reply to Ryan Thomas
  • Pat Moyer   July 17, 2020 at 10:34 am

    Great look at the “realities” of what can happen post settlement. As always, thank you.

    Reply to Pat Moyer
  • Harry McCarty   July 17, 2020 at 12:52 pm

    Jim great article! Negotiate, Negotiale, Negotiate. Try to keep buyers and sellers happy and get to the table.

    Reply to Harry McCarty
  • William D. Smulick   July 17, 2020 at 2:53 pm

    On your MLS Statement and Agents comments the seller can state that inspections are recommended, but the amount of any requested improvements will be reflected as an increase of the sales price in the change in terms.

    Reply to William D. Smulick
  • Daniel Seigel   July 17, 2020 at 3:06 pm

    We should always explain to Buyers the difference between an estimate and a quote.

    Reply to Daniel Seigel
  • Paul Stull   July 17, 2020 at 4:27 pm

    Today I find some buyers who research and use the home inspector and contractor for repairs of their choice. I recommend a proposal when you get into negotiating repairs. The proposal should include a detailed report on repairs and solution to the problem/s to be carried out, time frame for completion, cost and signed by the appropriate person in charge.

    Reply to Paul Stull
  • Melani Lamond   July 18, 2020 at 5:16 pm

    Are you aware that there is a proposed PA law which will forbid home inspectors to give any repair cost ranges in inspection reports? As Mr. Goldsmith wrote, settlements often occur very quickly, without time for repairs – or even in-depth estimates. A range at least gives us an idea if this is a very large cost problem, or a relatively minor cost problem. It gives us an idea if the buyer should terminate, or move cautiously forward, or delay settlement to get contractor estimates & repairs due to the severity of the problem. What will we do if we don’t even have price ranges to help us figure things out? Perhaps it’s time for me to retire.

    Reply to Melani Lamond
  • Alex King   July 29, 2020 at 11:12 am

    Nice discussion. One other point to add is that getting estimates that the buyer can trust in the tight timeframe of negotiating inspections can be difficult.

    Reply to Alex King

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