BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
A regular occurrence in real estate transactions involves buyers requesting repairs by the seller but wanting to close escrow prior to the completion of those repairs. One option agents explore is holding money in escrow pending the completion of those repairs. However, even with a holdback, there are many risks of sellers not performing or not performing to the buyer’s satisfaction. The following addresses some of those concerns.
SCENARIO NO. 1: I represent a buyer. The seller agreed to perform a Section 1 pest clearance. However, the buyer has to move as the buyer’s home has been sold. The buyer wants to close the escrow before the seller completes the work. I have advised the buyer to require a holdback of the estimated amounts of the pest work. What are the risks?
RESPONSE: There are a number of risks to the buyer closing early even with a holdback. Consider that when the pest control company starts performing the work it is possible, if not likely, that the pest control company may find additional work that was not previously known, which needs to be addressed. If this occurs, the cost to remediate will likely be in excess of the holdback. In that instance, a dispute will likely arise between the buyer and the seller as to who is responsible for paying the additional work. Such dispute could rise to a legal dispute. Please note that BRM dealt with a case where a holdback was $30,000, which was one and a half times the estimated cost, but the actual cost turned out to be $150,000. The seller refused to pay the bill leaving the buyer to pay it. The buyer subsequently sued the seller. The seller filed a cross-complaint against the agents for failing to properly advise the seller on the risks of agreeing to the Section 1 work and failing to properly draft holdback language addressing who would be responsible for paying for any work in excess of the holdback.
SCENARIO NO. 2: I represent a buyer who closed a property without the seller performing all the work agreed upon in the contract. After the close of escrow, the seller’s contractor performed the work, but the buyer is extremely unhappy with the quality of the repairs. The buyer has now demanded that the seller participate in mediation and wants me to participate as well. What is your advice?
RESPONSE: That is a risk of closing the escrow prior to a seller completing the work. While you as the buyer’s agent cannot guarantee the work, it is recommended that you raise this as a risk for the buyer prior to agreeing to this term. Never attend a mediation without representation. Your manager will consult with litigation counsel whether you should participate in the mediation.
SCENARIO NO. 3: I am a listing agent. The buyer requested repairs to be completed by the seller prior to the close of escrow. The buyer and seller closed escrow before the repairs were complete. The seller has now disappeared and failed to perform the repairs. The buyer is now looking to me to perform the repairs. What should I do?
RESPONSE: This is yet another example of a risk of closing early without seller’s repairs being completed. You should immediately consult with your manager who will likely recommend that you refer the buyer to a qualified California real estate attorney to enforce the contract against the seller, as this is a contract dispute between the buyer and the seller.
DISCUSSION: The risk to buyers of closing an escrow before the seller completes repairs include, but are not limited to, the following:
- A seller or seller’s representative failing to complete repairs.
- A buyer being dissatisfied with the seller’s repairs.
- Repairs costing more than the parties expected, leading to a dispute as to who is responsible for the additional costs.
- Concerns about the qualifications of the seller’s contractor (e., is the contractor licensed, has appropriate insurance, has workers’ compensation insurance).
Broker Risk Management has prepared an advisory and disclosure for buyers regarding the risks of closing early without completing repairs. BRM discourages the early close of escrow, but understands that sometimes it is required. Attached to this Tip is that advisory.
PRACTICE TIPS:
- If a seller has not completed repairs prior to the close of escrow, it is recommended that agents discuss this situation with their manager.
- Buyer’s agents should recommend to their clients that they refrain from closing early, if at all possible, until the seller’s repairs are completed to their satisfaction.
- If a buyer insists on closing early, the buyer’s agent should refer that buyer to a qualified California real estate attorney and use BRM’s Advisory and disclosure regarding the risks of closing escrow without seller’s repairs being completed. The buyer’s signature on this Advisory is documented evidence that buyer has been advised by you of the risks of doing so.
Attachment: Advisory and Disclosure Regarding Closing Escrow Before Seller Completes Repairs
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management PC. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry but rather are intended to suggest good risk management practice.