Buying a Silicon Valley home? Understand that unless you are buying “all cash“, you will need to show your real estate purchase agreement to your lender, and your lender may want to see inspections, reports or disclosures based on what you’ve written in that paperwork. And then the bank, credit union or lending institution may ask for repairs prior to close of escrow, even in an “As Is” sale.
This happened to my buyers a few months back. They were buying their first home using an FHA backed loan. In the offer, we indicated that we would be having a few inspections (home, pest, roof, pool). Because financing with FHA backed loans is a tougher road, the lender did, indeed, require certain work to be done prior to close of escrow. It was supposed to be an As Is sale so the buyers ended up paying for work to be done in order to close (and the seller allowed us to reduce the price somewhat). Luckily they were all improvements that my clients intended to make anyway – but it was inconvenient and stressful to have to rush to have the work done, and of course this did cause delays. (We did discuss not having the inspections listed in the offer, but my clients very much wanted them in it.)
For this issue, does it matter which contract you use, PRDS or CAR?
If you are planning to purchase a Los Gatos, Saratoga or San Jose area home, most likely you and your real estate agent will use either the newest PRDS contract (Peninsula Regional Data Service, employed from Los Gatos to San Francisco) or the CAR contract (California Association of Realtors form which is used throughout the state of CA).
There are many differences between the CAR and PRDS contracts, but both of them have a place for listing at least some of the disclosures which are to be expected and whether or not the buyer intends to order a termite or pest inspection. The CAR form also has a place for listing any other inspections the buyer intends to have done. (Below find part of the section which lists inspections – too wide to fully reproduce here, unfortunately.)
One of the nice things about the CAR contract is that it is very clear as to who’s ordering and paying for what. Nowhere in the paperwork, though, does it state that unless an inspection or disclosure is named, it cannot be ordered later. So what is becoming common practice “in the field” is to simply not mention these disclosures or inspections in the offer.
Is that lender fraud? Might be – I will leave that to our attorneys to say for sure. Most of the mortgage people I talk with suggest that we simply leave things out to keep the situation uncomplicated. (I wonder if others in the bank feel the same way?)
The difficulty comes when buyers want to buy and sellers want to sell but the house, or pool, or some other element isn’t 100% perfect… If the bank sees the inspections reports and disclosures, it will of course show that the 50 year old house isn’t “like new”. The bank doesn’t like that. In more than a few cases, lenders essentially don’t permit an As Is sale. In these cases, the banks, credit unions or other lending institutions start rewriting the obligations on buyers and sellers. Maybe the buyer wants to do the repair differently after close of escrow – perhaps with alternate materials, but now is forced into paying for whatever is fast just so that escrow can close.
It’s not a simple problem, it’s complex. Just as every house or condo is unique, so too are the issues that come with them. If it were a simple matter that every house had to have a pest clearance, we could easily manage that. But in fact it’s not so straightforward. In response, agents and home buyers are leaving more and more blanks in the contract. Personally, I’m not comfortable with it. I present the situation to my clients, they talk with their banker or mortgage broker, and they decide what to do. I think we could have a better solution, though. Don’t you?