Jan. 22, 2013. Randy Brown.
Note: I am just a broker. I am not an attorney. I suggest you contact your broker or attorney for additional information on this subject.
The Forms Committee has modified the contract, and here is the new inspection resolution form, and some comments on how it will work.
It is not good.
You have purchased a house, and there are some inspection items that need to be fixed. No big deal… right. Wrong. Here is what you need to know:
Here is the inspection paragraph from the contract:
10.3. Inspection Resolution. If an Inspection Objection is received by Seller, on or before Inspection Objection Deadline (§ 3),and if Buyer and Seller have not agreed in writing to a settlement thereof on or before Inspection Resolution Deadline (§ 3), this Contract shall terminate on Inspection Resolution Deadline (§ 3), unless Seller receives Buyer’s written withdrawal of the Inspection Objection before such termination, i.e., on or before expiration of Inspection Resolution Deadline (§ 3).
Here are the potential options for this scenario:
1) You submit the inspection list to the seller prior to the Inspection Objection Deadline and they do not respond. The contract is cancelled on the Inspection Resolution Deadline at midnight. You get your earnest money back and we start looking again for other houses.
2) The seller responds and we work out some level of compromise on the list. This needs to be worked out by midnight of the Inspection Resolution Deadline, and SIGNED, or the contract is cancelled. If it is agreed to, we need to give the inspection resolution form to the lender, who is now legally bound to present it to the main lender and underwriter. Since escrows for repair are very rare, all of these items will have to be corrected prior to closing. It would be a good idea now to see if your lender will allow an escrow for any repairs. It is very uncommon.
If there are unfinished items, and they cannot be completed by closing, the lender will not be able to do the loan and the contract will have to be cancelled by you using the loan contingency.
If we are past the Loan Objection deadline then we have no contingencies, and there is a chance you will lose your earnest money, as we will not be able to close and we will have no contingency to protect you.
If your lender can allow an escrow for repairs then we are fine with this option. Or, if the repairs can all be completed prior to closing we are fine to close.
Note that anything on the inspection resolution has to be given to your lender, It is Colorado law. The lender will decide if they can allow an escrow or allow a repair item to remain unfinished. It will be up to their underwriter.
3) The seller agrees to the entire inspection list, and then we have to give the entire list to your lender, who is now legally bound to present it to the main lender and underwriter. Since escrows for repair are very rare, all of these items will have to be corrected prior to closing. It would be a good idea now to see if your lender will allow an escrow for any repairs. It is very uncommon. Any items not repaired will stop the loan from closing.
Therefore, the lender will not be able to do the loan and the contract will have to be cancelled by you using the loan contingency. If you are past the Loan Objection Deadline then there is a good chance you will lose your earnest money, since that is normally the last contingency that protects the buyer.
If your lender can allow an escrow then we are fine with this option.
If all of the repairs can be completed prior to closing (48 hours before, preferably) then we can close without any problems.
Note that anything on the Inspection Resolution Form now has to be given to your lender, It is Colorado law. The lender will decide if they can allow an escrow or allow a repair item to remain unfinished. It will be up to their underwriter.
4) If the seller gives you an allowance for closing, say in the form of $500 in closing costs in lieu of the repairs, and the repairs are very minor, it is possible that your lender can accept those terms and close without the repairs being completed. This is up to the buyers lender. This possibility should be discussed with the lender prior to an agreement.
5) You switch your loan to a 203k loan which allows for repairs to be made after closing. This would need to be completed before your loan deadline, and will cost you more money, as the FHA 203k loan is more expensive than other loans. Note that, currently, FHA Mortgage Insurance is permanent on an FHA loan, and cannot be removed.
6) We withdraw the inspection list prior to the Inspection Resolution Deadline at midnight. The property closes and you own it after the loan is approved, but no repairs are completed. You have to paint and complete all of the needed repairs after closing on your own.
Side agreements or money transfers which would allow the seller to pay for an item after closing or at closing are loan fraud, and cannot happen.
This is the new Colorado law, and there is no way around it.
Complicated, isn’t it. Now that the new law is in effect, this is the situation we will face with all inspection items listed on the Inspection Resolution Form.
Now, unlike the last class I took, I will give you a way to handle this mess.
In Short Sales, and in bank owned properties, there are rarely inspection requirements. The banks refuse to do anything, and their houses are a complete mess in most cases. In a short sale, the seller has no money to do repairs. So, all of these sales are purchased as-is. They are in awful shape, have frozen pipes and are purchased in as-is condition. The lenders are completely unaware of the condition, because no inspection is ever turned in. An inspection list is not even turned in to the lender, because the agents know that no repairs will be completed.
Given that scenario, why in the world would a seller, who is maintaining his property agree to more than a short sale or bank owned property? It is an absurd double standard.
But it might be the answer. Sellers and listing brokers need to tell buyers the property is well maintained and no repairs will be made. Every property will be sold as-is.
Anything else is absurd.
Or, you can create an inspection resolution and give it to the underwriter, and see the havoc that is caused by these well intentioned but unknowing underwriters as they get involved in situations that have serious repair problems they do not understand and let them create serious ramifications for your buyers and sellers.
This mess will evolve into purchases being as-is. And I ask you, why would an owner occupied home in excellent condition be subject to repairs and ridiculous requirements for a sale when a short sale or bank owned property is not.
It is just a simple change in your perspective.
Note that this is not a common way to handle this mess. Normally the broker sends the info to the underwriter and they create whatever mess they want to.
Call with any questions.