Termite Repairs in Real Estate: What You Need to Know About Section 1 & Section 2
When buying or selling a home, a termite inspection is often required to identify any issues related to wood-destroying pests and dry rot. The inspection report categorizes findings into Section 1 and Section 2 items, each with specific repair expectations and guidelines. Understanding the difference between these sections is essential, especially when it comes to who covers these costs.
What Are Section 1 and Section 2 Items?
Section 1 Items: These are issues that indicate current damage or infestation by termites, wood-destroying fungi, or dry rot. Section 1 items are typically more urgent as they directly impact the structural integrity of the home. As such, many lenders, particularly FHA and VA, require that Section 1 items be resolved before closing.
Section 2 Items: These issues do not show active damage but identify conditions that could lead to future problems, such as excess moisture or wood contact with soil. Section 2 items are generally preventative, so lenders rarely require them to be fixed before the sale. Whether or not to address Section 2 items is typically left up to buyer and seller negotiations.
Who Covers the Cost of Section 1 Repairs?
The responsibility for Section 1 repairs often falls on the seller, especially when FHA or VA loans are involved. These types of loans have strict property condition requirements to ensure the home is safe and habitable. As a result, many purchase agreements specify that the seller will take care of Section 1 items to facilitate a smooth closing. However, with conventional loans, there is typically more flexibility, and repairs may be negotiable depending on the buyer’s and seller’s agreement.
Buyer and Seller Negotiations
In general:
Sellers: Should plan for covering Section 1 items, especially if the transaction involves FHA or VA financing.
Buyers: May request that the seller address these repairs, or in competitive situations, may offer to handle them themselves to strengthen their offer.
In some cases, buyers and sellers may negotiate to split costs, especially for more extensive repairs, or agree that the home will be sold “as-is” with the understanding that the buyer will take on any repair responsibilities.
Can Section 1 Repairs Be Paid Through Escrow?
Yes, Section 1 repairs can often be handled through escrow, especially if the seller needs to cover costs from the sale proceeds rather than upfront. Here’s how it usually works:
Deduction from Sale Proceeds: The seller and buyer agree to cover repair costs through escrow, where funds for the necessary repairs are deducted from the seller’s proceeds at closing. This is particularly helpful when large repair costs are involved.
Escrow Holdback: Sometimes, an escrow holdback arrangement is set up. This involves holding a portion of the seller’s proceeds to cover the estimated repair costs (with a bit extra for unexpected expenses). Once the repairs are complete and inspected, any remaining funds are released to the seller.
Licensed Professional Requirement: Termite repairs must be performed by a licensed pest control professional to meet lender requirements, especially for FHA and VA loans. This ensures repairs are up to code and fully resolve the identified issues.
Final Thoughts
Navigating termite repair responsibilities can impact your buying or selling experience. Here’s a quick recap:
Section 1 items typically need to be fixed, and sellers often cover these repairs to meet lender and buyer requirements.
Section 2 items are usually not mandatory but may be negotiated based on the preferences of the buyer and seller.
If Section 1 repairs are required, they can often be paid through escrow, making the process easier for sellers.
If you’re in the process of buying or selling a home and have questions about termite repairs, Section 1 vs. Section 2 items, or how these issues can impact your transaction, feel free to reach out. As your trusted real estate agent, I’m here to guide you through the process, ensure all necessary repairs are taken care of, and help make your transaction as smooth as possible!
