The New Reality In Today’s Market
With today’s focus on the value of residential real estate, one of the most critical aspects of purchasing a property is it’s physical condition. The professional appraisal required to obtain financing is a very comprehensive analysis of the property’s value, including condition. In particular, when a Buyer is looking at foreclosed or bank-owned properties (known as Real Estate Owned or REOs) the property’s physical condition will come under very close scrutiny by both the appraiser and the lender.
Certain property conditions will be considered normal wear and tear, while others indicate a need for freshening up. Still other physical aspects fall into the category of health and safety issues. It is this latter category that concerns lenders and may affect the ability to obtain financing.
Financeable – Minor Deferred Maintenance and Functional Obsolescence
Those are mouthfuls, aren’t they? Common examples of deferred maintenance can include worn carpeting, neglected landscaping or the need for fresh paint. Functional obsolescence refers to issues such as obsolete floor plans (I.e. three bedrooms and only one bathroom), outdated fixtures or old-style floor or wall heaters. While these conditions may affect the over-all value of the property they are generally acceptable to lenders and will not (in most cases) affect the ability to get a loan.
Non-Financeable – Health and Safety and Structural Issues
This is the area where some Buyers are finding it difficult or impossible to obtain financing. These conditions can be found in any property but are more likely to occur with foreclosed, bank-owned properties:
- Open walls – holes knocked into walls or other damage
- missing fixtures or cabinets
- damaged or non-existent flooring – exposed concrete or subfloor
- roof with less than 5-years of remaining life
- a non-working pool or spa
- cracked foundation or slab
- extensive water damage or mold
- inoperable, damaged or missing heating systems
- damaged electrical or plumbing system
These conditions are generally not acceptable to lenders and unless they are remedied will disqualify the property for conventional financing.
Solutions – Yes, There Are Some!
Some Sellers may be willing to fix or repair the problem or credit the Buyer an amount of money to account for it. Of course, the Buyer also has the option of curing the problem at his or her own expense. However, the condition must be taken care of and verified by a follow-up appraisal report before the lender will agree to finance the purchase and the sale can conclude. If the Seller is a bank or lender, some may be willing to cooperate with the Buyer while others are selling the property strictly “As-Is”. Another option is to seek non-conventional financing such as “hard-money” or perhaps a construction or rehab loan. While an option, these types of financing are often difficult and/or expensive to obtain and ultimately may not be a viable alternative to the average home buyer or investor.
This is an area where a little knowledge will go a long way for the typical real estate Buyer. Being aware of how the property’s condition can affect your financing at the beginning, rather than several weeks into your escrow, can save you more than a few gray hairs!
contact Paul at (800) 775-7334 or [email protected]