Friday, June 12, 2015 - Article by: Ross Bennett, CMB - Paramount Residential Mortage Group -
One of my favorite television shows is The Property Brothers on HGTV. This popular show is hosted by twin brothers; one a Realtor and one a Contractor, who locate old, out of date properties for sale. Then, with a six figure rehab budget, the brothers update the home to a more modern, functional design for new buyers. In the time slot allotted, they make the transformation look quite easy.
Due to the financial crisis, many foreclosed properties owned by banks are for sale with the caveat that the seller will not make any repairs or improvements. These properties are sold "as-is", without any warranty or fitness for habitation. If the buyer later finds a major structural defect, there is no recourse against the seller.
Repairs may something as simple as some missing appliances or a HVAC system. In other cases, serious structural, roofing, wood rot or termite damage may exist. Damage may be hidden from the scope of a home inspection.
There are many factors that go into the valuation of a home by an appraiser. One factor is the overall condition of the property. A property is good condition will sell for a higher price, and more quickly than one that needs repairs. A potential buyer must be assured they are getting a very good price to assume the risk of hidden damage or expensive repairs. Simply because you are purchasing a foreclosed property does not necessarily mean you are getting a great deal on it.
Furthermore, you must agree on a purchase price, plus the anticipated cost of repairs, that will be less or equal to the final appraised value of the home once the repairs are completed. If you don't buy the property at the right price, you may be underwater after the cost of repairs are factored in.
"As is" has two very different meanings, depending on context:
An appraisal report is completed by licensed professional who is trained in the market and cost replacement valuation process of a property. The property is the security for the loan, and the appraisal is completed solely for the benefit of the lender, who uses it as one tool in a decision whether to grant credit to a home purchaser.
It is important to remember that appraisers are not structural engineers, licensed roofing contractors or licensed pest inspections technicians. It is not within their job scope to protect you from hidden damage. If the appraiser notices there may be structural or other issues, he/she will call for an inspection by licensed specialist. The appraisal report itself should not be relied upon regarding the condition of the property.
The appraisal report may be completed in one of two manners:
Even if you are writing an "as-is" contract, a smart buyer will engage a licensed home inspector within 5 days of contract acceptance, to ensure the property is in good repair. The property also needs to pass a 4-Point inspection to satisfy your homeowner's insurance company before they will issue a Hazard Policy. This policy must be in force at the time of loan settlement.
Escrow closings for extensive repairs are not something most lenders will consider. Even on The Property Brothers, with a home inspector and a licensed contractor engaged in the purchase process, they often find hidden issues during demolition, such as mold, asbestos pipe wraps and tile, sagging foundations and dangerous electrical wiring. These issues must be remediated before move-in, sometimes with a 5-figure hit to the budget.
So, can you buy a property in "as-is" condition and get a home loan from a lender? It depends.
Do you have the time, expertise, financial resources and vision to buy such a property? What will the property be worth after improvements are completed?
At a minimum, you need to engage an experienced Realtor, a home inspection company, a licensed contractor and a pest inspection company to make sure you are not making a serious financial mistake. This is not a process for neophytes.
Lenders are not in the business of making loans on properties that are not "move-in ready". Mortgage lenders are not joint-venture partners in your rehab project. There is simply too much risk that a buyer, especially one with a limited budget, or a minimal down payment, will "walk" on the loan after settlement, once it is discovered the cost and scope of repairs exceeds their financial resources.
So while you can certainly purchase a home in "as-is" condition, expect that your lender will also weigh in on that decision.
Didn't find the answer you wanted? Ask one of your own.