Many people remain confused over the rules and regulations governing inspections, including pest control reports and repair items related to various types of loans. This is an attempt to provide a quick reference regarding this subject.
Conventional, FHA and USDA loans now depend upon the appraiser to determine if inspections are required. Both buyers and sellers have become more aware of the value of acquiring inspections, however, many are now encouraged to acquire said inspections at their expense and outside the contract – meaning that the purchase contract makes no mention of inspections. In other words, buyers will have to depend upon their own observation of the prospective property to be purchased and determine the number and/or extent of inspections they wish to have done. The real estate representative can provide some guidance and additional information regarding this subject but the final decision as to which, if any, inspections are to be done rests with the buyer.
If the purchase contract and escrow instructions do not address a pest control report, the lender is unlikely to require a report or any subsequent repair work to be done unless recommended by the appraiser (see below for more detail). On the other hand, if inspections are referenced in the purchase contract, the lender will most likely require there being reviewed by the underwriter. If a pest control report is not going to be provided, it is advised that the purchase contract exclude the pest report provision and/or specifically identify that no pest control report will be obtained.
If a pest report is acquired, typically, only section one work is required to be completed. Section two items (generally those things that could lead to infestation or problems) do not have to be done, at least prior to close of escrow (COE). The exceptions to this rule can be any reference to roof inspections and/or plumbing/water problems. These can be an issue regardless of the loan type.
We know that if the report calls for a roof inspection, underwriters are likely to require at least a two or three year roof certification (certifying the roof water tight for that period of time). We further recognize that if an inspection is done, the buyer and seller could easily be negotiating a new roof, again prior to COE. Plumbing problems, while a nuisance, can often more easily be rectified than roof concerns.
Even though the pest control report is clear, the appraiser may identify repairs to be made as a part of the appraisal process. Additionally, the appraiser may identify un-permitted improvements or zoning violations, all of which must be addressed and completed prior to COE.
VA financing requires a pest control report and all work identified on the report (both sections one and two) must be addressed. Recent reports suggest that in some instances section 2 work may not be required but this is dependent upon the underwriter’s review of the report. Buyers and sellers are encouraged to address the obvious conditions prior to any pest report inspection. Questions about who can pay for repairs and under what circumstances change regularly and should be discussed with the mortgage lender.
Different Rules for Different Loan Options!
Appraisals are very consistent for all loan options. The idea that an appraiser will overlook or ignore some issues when performing an appraisal for a conventional loan vs an appraisal for a government loan option is simply not true! It is recommended that real estate licensees become familiar with the items that are most often addressed by appraisers and advise their sellers accordingly.
Request for Repairs – Avoiding this major deal killer!
In today’s competitive market where multiple offers might occur, it I tempting to delay the discussion of home defects and repair until after the contract is accepted and inspections acquired. The anticipation is that the buyer can make a “request for repairs” at a later time in the contractual time period.
The ‘request for repairs”, occurring after inspections have occurred but prior to all contingencies being removed, can become a major hurdle to completing the transaction. This re-negotiation of a contract after several weeks has elapsed can result in, at best, both sides a bit resentful and at worst, a cancellation of the contract.
To further complicate the transaction, the lender is often instructed to wait for the inspections to be completed prior to ordering the appraisal. During robust markets and lengthy appraisal time frames, this delay can be fatal to lock in periods and can interfere with meeting closing deadlines.
One remedy to this situation is for the seller to acquire a home inspection and pest control report when preparing to sell. Having these two reports available when an acceptable offer is made allows a prospective borrower quickly determine if the condition of the property is an issue in proceeding to purchase. The seller’s investment of $500 – $700 upfront may allow both parties to either eliminate any need for future repairs or to quickly address any required re-negotiation surrounding the property’s condition.
Obviously there are times when circumstances suggest at least postponing the acquisition of these reports in advance – short sales or other cases where there is a lack of sufficient equity or cases of distressed property in which the condition is of little concern to a cash buyer.
But many sellers may not recognize the value of providing reports wherein the transaction may move more smoothly and timely and even allow for the negotiation of a win-win price for everyone, especially when a buyer feels that there has been “full disclosure”. In other words, a home inspection report, even if there are repairs to be made, allows an estimated cost to be factored into the buyer’s offer. A pest report may be acceptable to the buyer because s/he recognizes that the repairs are manageable. if the roof is older or shows signs of wear, a roof inspection may reassure a buyer or identify what a new roof will cost allowing the buyer to proceed with an offer.
Instead of viewing these reports as deal-breakers, they are more likely to create a buyer confidence that will lead to an acceptable offer to purchase. Providing such reports could be the best investment the seller will make in preparing a home for sale.
What About Allowances?
The other issue that warrants a brief comment is the area of allowances (i.e.; roof, carpet, etc.). The item related to such allowance typically must be installed prior to COE and can not be merely a credit to the buyer. The question of “escrow holdbacks” (wherein the escrow retains the funds required to complete the pest control work to be accomplished after the close of escrow) is often raised. Practically all lenders today refuse to accommodate an escrow holdback. The one rare exception might be when weather prevents the completion of an item (i.e.; rainy weather prevents a roof from being installed).
Finally, regardless of the final requirements regarding inspections, it is still advisable that reports be obtained as early as possible after listing the property. In this way you avoid surprises that could jeopardize the transaction at the last minute.