Handling renovations as part of purchase agreement - Posted by Scott (ATL)

Posted by Dallas Allbritton on June 19, 2001 at 20:11:08:

If you are going to hold the note increase the selling price as anticipated and require her to put the 10K down as a condition to buy. You can state in the contract what you will do and give yourself the time needed to complete the work after the closing. If she wants in now, she will have to agree to let you do the work after she moves in.

If the home is your primary residence I’d HIGHLY recommed that you refi BEFORE you sell to her so you will get the best rate on your loan.

Handling renovations as part of purchase agreement - Posted by Scott (ATL)

Posted by Scott (ATL) on June 19, 2001 at 19:56:01:

I believe I have a buyer for one of our renovated homes but she wants more renovations! I don’t mind doing it but we’re out of cash.

I’ve drawn up a draft scope of work and will come up with the estimate but I know it will be about 20K worth of stuff. We’ve already put in 25K.

Anyway, I’m planning on doing “owner financing”…Actually I’ll probably use the PACTrust but I don’t want to float the money for the additional rehab. The additional rehab will of course raise our sale price and her monthly payments. She has about 10K to put down (so she says) and has given us $500 in earnest.

Any suggestions on covering our butts? I would like to get the down payment first then do the rehab (We’ll have to refinance the current mortgage which we can do but it will take about a month and she wants to move in Aug 1st so the rehab stuff needs to get started).

Anyway, how have you guys handled purchases with rehab contingencies?


Re: Handling renovations - Posted by Jim Williamson

Posted by Jim Williamson on June 20, 2001 at 10:37:42:

I agree with JPiper in saying NO. There is always someone looking for a piece of property with some rehab work to be done.

Re: Handling renovations as part of purchase … - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on June 20, 2001 at 10:17:35:

I am with Jim on that in general. I’d want it to be an equal trade: your cash spent on renovations vs. her cash from the loan proceeds coming to me immediately after completion of repairs. That makes for a good cash on cash return. Otherwise you sunk some serious dough in the house without means to get it back, unless you do a cash out refi and assuming you can get most of your hard cash back.

When I have buyers whom I owner finance and they want remodeling that’s beyond what I consider “reasonable” I would put a provisional repair clause in our agreement. I.e., I’d provide these additional remodeling/repairs upon the buyer obtaining a new loan with the written statement of full unconditional approval from the lender and the title company/closing agent on stand-by ready to close.

I assume your owner financing calls for a balloon payment a few years down the road. That’s the time to spend the money on extra repairs/efatures and get them right back from closing.

Just Say NO - Posted by JPiper

Posted by JPiper on June 20, 2001 at 08:08:09:


Just say no!

If this woman wants to come into this deal with a new loan…AND some IMPORTANT non-refundable cash upfront to insure her performance, AND a solid agreement that you feel is collectible if she should fail to perform (drawn by your attorney), then it might be worth considering.

But in this case? Forget it. Spending $20-25K MORE for a $10K down payment? Bad business. And what do you do if she decides not to proceed, wants even more, etc?

There’s got to be someone out there willing to owner finance the house the way it is. $20K extra “repairs” is considerable.


Re: Handling renovations - Posted by DavidV

Posted by DavidV on June 20, 2001 at 24:17:07:

Be careful how you handle it if you do. Will the upgrades overbuild for the rest of the neighborhood? If she has a small earnest money down she may decide she likes another house better and just walk after you do all that fix up.

Re: Bad move, in my opinion. - Posted by Ed Copp (OH)

Posted by Ed Copp (OH) on June 19, 2001 at 20:54:28:

Here is why.

When you exchange something of value, in this case the labor of the suspected purchaser, you and the prospect have entered into a Barter arrangement You will gain and your gain will be taxable as ordinary income right now. Not when the property sells but when the gain is received.

Next you may be creating a situation where the person doing the work “could” claim to be your employee. Consider what to do, if the worker is standing on the kitchen countertop and has some sort of attack and falls off, thus hitting thier head and while no visible injury can be seen; they are afraid to go into kitchens ever again. Got workers comp?

What if they have a wreck on the way back from the hardware store where they bought nails for your house. Are they in your employ? What if they are at fault and a person in the other car is killed? How much will they, and you be sued for? Wrongful death suits seem to start in the millions of dollars, so what if the driver does have say $30,000 in liability insurance and thier company pays off and says"have a nice day"; so who has the deep pockets now?

So after all this is done who then owes the employers portion of the social security tax that is due for the prospective purchaser, who did have income in kind by virtue of the benefit received in the work exchange? Possibly you will owe this, along with your ordinary gain on the value of the work done.

Now it seems to me that there must be a simpler, better way to do this.