Historically, one of the most onerous aspects of dealing with Federal Housing Administration loans was the inspection process. Fortunately, conventional lenders have never required much more than termite repairs. Sadly, this is all changing — to the detriment of both consumers and agents.
A disturbing new trend is emerging where conventional lenders are now demanding access to both the seller and the agent property disclosure statements. If the agents do not provide these documents, the lenders refuse to fund the loan. If the agents do submit the disclosures, some lenders are requiring the sellers to make the repairs that the lender demands prior to funding the loan.
To understand how this process works and why it’s harmful to both consumers and brokers, here’s a hypothetical example that illustrates what’s currently happening:
You are the listing agent on property that sits on a hill with a substantial downslope. At the bottom of the property there is a 200-year-old oak tree that is dying and is currently leaning at a precipitous angle over the cul-de-sac below. The tree poses no immediate risk, but will have to be removed sometime in the near future.
Your sellers are relocating outside the area and need the funds from this sale to close on their next home. The buyers have seven business days to conduct their physical inspection period, 21 business days to obtain conventional loan approval, with closing in 45 days.
The sellers and the listing agent note the dying oak tree on the disclosure statement. The buyers have a tree removal service estimate the cost to remove the tree. Since the buyers will be adding the deck where the tree is currently located, they agree to accept a seller credit to remove the tree after closing.
The buyers obtain conditional loan approval subject to the lender’s review of the disclosure statements. The physical inspection and loan approval contingency periods have expired. After the lender reviews the documents, the lender makes funding the loan contingent upon the tree removal prior to closing.
When the sellers contact the tree removal service they learn that this oak tree is part of the Los Angeles Historic Preservation Overlay Zone. This means that they will need two permits: one from the building department and a second approval from the Board of Public Works. This process generally takes 21-30 days.
The fallout from the situation above could have the following consequences:
Since the buyers are well past their loan contingency period, they could lose the transaction, especially if the sellers have received an all-cash backup offer. If the contract contains a liquidated damages provision, they could lose their deposit as well. If the buyers have sold their current property or have given notice to their landlord if they are renting, they could be without a place to live, requiring the additional costs of doing a double move.
If the sellers cannot close on their current property, they will be unable to close on their next purchase. Even if they could swing a short-term (bridge) loan to carry both properties, they would still incur the costs of carrying two mortgages. They also run the risk of selling their property for less money to a different buyer.
This emerging practice raises some serious issues that the real estate community needs to address:
1. Does the lender have a right to see the agent/seller property condition disclosure?
The laws in virtually all states specifically require the agents/sellers to deliver their disclosure statements to the buyer, not the lender. Would the lenders relent on this practice if local/state associations and/or companies were to fight this practice?
2. Lenders are not principals in the transaction
Only the buyers and the sellers are principals in the transaction and, hence, they are the only ones who can dictate the terms. Consequently, how can the lender demand that the parties modify their agreement to meet their demands? Is this practice even legal, especially when the principals have already agreed upon a solution?
3. Don’t do this!
Unfortunately, some agents are so concerned about what the lenders are doing that they are not noting anything on the disclosure that could be an issue with the lender. This clearly violates real estate law and puts the agent’s license and their brokerage at risk for failure to disclose.
4. If you must provide the lender with your disclosure statement, avoid diagnosing
For example, if you see a brown stain on the ceiling, avoid saying, “The roof is leaking in the living room.” (The brown stain could be from bees in the attic and from honey dripping from a hive.) Instead, your disclosure should read: “Brown stain noted on northeast corner of living room ceiling.”
If there are cracks in the stucco, avoid saying, “The foundation is settling.” Instead, say, “Cracking noted on the exterior stucco adjacent to the front door steps.”
If the tree roots have raised the sidewalk in front of the house, avoid saying, “Due to the ficus roots in front of the house, the sidewalk has buckled causing a trip hazard.” Instead, say, “Buckled sidewalk noted adjacent to ficus tree.”
The bottom line is this: If the lenders’ demands regarding items on the disclosure statement are interfering with or causing harm to your principal, immediately consult with your legal counsel about steps you can take to protect your principals from being harmed by the this practice.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Discover why leading Realtor associations and companies have chosen Bernice’s new and experienced real estate sales training for their agents at www.RealEstateCoach.com/AgentTraining and www.RealEstateCoach.com/newagent.