Repair rules complicate financing for ‘as is’ deals

REThink Real Estate

Q: I am trying to buy a home with a 5 percent downpayment, and I’ve been told that the only loan I can use is an FHA loan. I made an offer on a house I really like, but it’s a very old house. My offer was to take it "as is"; I thought I would just get a pest inspection and a home inspection to make sure I knew what I was taking on, but the seller was clear up front that he wouldn’t be doing any work to the place, so I got the place at a very good discount.

Anyhow, somehow the appraiser saw the pest inspection report and now the bank is saying it won’t do my loan unless all the repairs the inspector recommended are done before closing! There’s no way the seller or I can afford it, and the seller had other offers from two other buyers who say they’ll take it "as is." Do you know of any solutions to this problem?

A: It’s one of the strangest but very common things, this real estate version of the "Don’t ask, don’t tell" policy. If the loan underwriter doesn’t know and isn’t specifically told that the buyer has obtained a pest inspection, it doesn’t require seeing it — it’s simply not a requirement for a loan, even an FHA loan.

(The one exception is in the event the appraiser sees some condition on the property he or she feels might pose a health or safety risk — the appraiser has the right to recommend that the underwriter require that an inspector or contractor verify the safety of that item in writing, or repair it.)

However, if the underwriter is informed in any way that there is a pest report on the property, he can and almost always will ask to see it. And once he asks to see it, he can and almost always will require the recommended repairs be completed — before funding the loan.

This is a major glitch on "as is" transactions, where the buyer negotiated a lower price for the property specifically because of the repairs that needed to be done, and planned to do the repairs herself, over time, or in the course of an overall overhaul and remodel of the property.

In these cases, the seller often can’t or won’t pay to do the repairs — or even allow the repairs to be done — before closing. And the buyer often doesn’t have the cash to get the repairs done, or was planning to use the cash to do larger, more urgent projects after closing to make the home livable.

There are a number of ways underwriters learn of pest reports. Sometimes it is specifically mentioned in the contract. (This, by the way, is not necessary — buyer’s brokers can preserve their clients’ rights to obtain any and all inspections they want to without specifically stating which inspections the buyer plans to obtain.)

Other times, the listing agent has left a disclosure packet, including reports and repair bids, on the kitchen counter or uploaded them into the multiple listing service (MLS) listing, and the appraiser sees them, then alerts the underwriter.

I’ve even seen underwriters notice a line item on the proposed closing statement that mentions that the buyer was planning to pay an inspector out of escrow funds at closing, and demand to see the inspection report generated before green-lighting the release of mortgage funds.

In any of these events, the underwriter will almost always require to see the report. If the report has active infestations or even dry rot, or wood damage — no matter how minor or unlikely the problem is to get worse — the underwriter will require that it be cleared before closing.

Many agents whose clients are buying properties "as is," but obtaining inspections for their information, now simply don’t mention any specific inspections in the documents to allow their clients the right to do the work after closing, on their own timetable, or in the course of other changes they have planned to the property.

In terms of workarounds, some underwriters will waive the repairs as long as they see that the buyer has signed an agreement to take the property "as is," and the appraiser gives the opinion that there are no health and safety dangers on the property, and that the repairs recommended do not cause the value of the property to fall below the purchase price.

However, underwriters have a vast amount of discretion, and many will simply not budge on requiring repairs once they see the reports.

In these cases, buyer and seller might want to discuss splitting the repair costs, or otherwise renegotiating the terms of the sale to allow the repairs to be completed (e.g., increasing the price to cover the repair costs sellers incur to meet the lender’s requirements).

Some buyers will find a less expensive contractor to actually complete the repairs, then just have the pest company reinspect and certify that the repairs have been done satisfactorily.

I’ve also seen mortgage professionals switch the entire transaction to a new lender, presenting them with a totally new contract that doesn’t mention the pest report.

This strategy requires major cooperation from the seller and an extension of time to close the deal. Often, sellers prefer to move on to their backup offers in these situations, but it never hurts to ask.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

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