5 nasty surprises that can stop your home purchase cold
Think the keys to your new dream home are as good as yours, do you? Not so fast. In this tough financial climate, some unexpected issues might scuttle the deal.
© Pascal Broze/Onoky/Corbis
When a seller wants to sell a home and finds a buyer who wants to buy it, you'd think they'd have a deal. What could go wrong?
These days, plenty. In this tough financial climate, there are both longstanding pitfalls and a crop of new ones. At best, these can cost you time or money. Or both. At worst, the home you want could slip from your grasp.
1. The appraisal kills the deal
Even after you and the seller have agreed on a price, the appraiser — the expert assigned by the bank to authenticate the home's value — can ruin everything.
A little background: Your lender needs to know that the home you're buying is worth what you're paying. Banks are touchy on this subject at the moment. They own nearly 1 million foreclosed homes and stand to inherit millions more from defaulting borrowers. Your lender wants to be sure your new home won't be added to this pile.
Appraisers arrive at a home's value in part by comparing recent sales of nearby homes. But falling prices, and foreclosures and short sales in the neighborhood, make these comparisons tough.
Your sale can suffer if the appraiser doesn't know the neighborhood. Walter Molony, spokesman for the National Association of Realtors, says federal rules meant to prevent lenders and appraisers from getting too cozy have unintentionally increased pressure on appraisers, which he says has led to sloppy, hasty and inaccurate appraisals.
Case in point: Bryan Robertson, a Silicon Valley, Calif., agent with Sereno Group, recently had a client with a home for sale in a higher-end San Jose neighborhood. A buyer liked it and offered $1.06 million, not astronomical in this pricey region.
But the out-of-town appraiser said the home was worth $980,000, so the buyer's bank refused to lend more money. The dismayed buyer faced coughing up the difference — $80,000 — in cash or losing the deal.
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With home values falling and distressed sales making comparisons difficult, appraisal problems are common:
- Three-quarters of Century 21 agents surveyed recently blame low appraisals for buyers' problems getting financing.
- In any given month, 10% of the National Association of Realtors' members see a sale die because of a low appraisal.
- Another 10% of NAR members report sales were delayed by appraisal issues.
Occasionally, though, the buyer enjoys a silver lining: 15% of sellers agree to drop the price after a low appraisal, the NAR says.
Pre-emptive action: Choose an agent with deep experience in the neighborhood. Robertson, for example, could show the appraiser that several nearby homes of the same size and floor plan had sold for more. The appraiser revised the home's value to the price the buyer and seller had agreed upon.
- On our blog, 'Listed': Charities raffle off houses to raise money
2. Your lender demands home repairs
In this fussier climate, lenders may hold up a sale if the appraiser points out even minor repairs that need to be done. Bryan Wiley, a senior loan officer with Guild Mortgage Co. in Bellevue, Wash., says that when he worked for another company, he once had to delay a home purchase until window screens could be installed.
The screens, included in the purchase contract, were nowhere in evidence. The appraiser pointed out the omission, so the bank's rules compelled him to withhold the loan.
"We couldn't get the loan documents out until the builder put up the screens and the appraiser signed off," Wiley says.
There's nothing new in lenders insisting that homes they finance be shipshape. But a few years ago, a lender might let the buyer and seller agree to complete the sale and fix any minor problems later, paying for them out of the seller's proceeds held in escrow. Today's buyers and sellers rarely are given that kind of slack.
Pre-emptive action: To anticipate issues an appraiser might raise, scrutinize the home inspector's report for any potential problems with the property. Also, be certain all conditions listed in your purchase and sale agreement are met.
3. The home has baggage
Remember any boyfriends or girlfriends from your past whom you fell for before realizing that he or she had deep "issues"? Homes can be like that, too. Some come with baggage.
Any surprises usually crop up when a title search is done to clear the way for your purchase.
For example, there's a chance, given all the financial turmoil these days, that someone besides your seller has a claim on the house. For this reason, many deals today "are not clean and easy," says David Townsend, an attorney and CEO of Agents National Title Insurance Co. For example:
- A bankruptcy — not uncommon these days — may have produced creditors who have filed claims against the home to get what's owed them.
- Your seller may have argued with a contractor who did work on the house years ago. Contractors or suppliers with beefs against the owner can file mechanic's liens against the property, preventing it from being sold until the claim is settled.
- Maybe the seller lost a lawsuit and failed to pay — or perhaps didn't know about — a court judgment worth thousands of dollars. You can't buy the home until the debt is satisfied. Ditto for unpaid child support or alimony.
Missing permits are another deal-stopper, Townsend says. Sellers occasionally complete do-it-yourself remodeling and think, "What the heck, I don't need those expensive permits." But they do. Typically, the real-estate agent listing the home makes sure all permits are in order. But sometimes this escapes notice.
Occasionally, buyers are shocked to learn that the boundaries of the property they're buying aren't correct. Maybe the seller built a carport, addition, shed or fence that crossed onto a neighboring property. No one's the wiser until your title search uncovers the error. But you can't buy the place until the error is corrected. The seller may have to tear down the structure or negotiate with the neighbors to buy or sell a few feet of land. These problems can set back your purchase or end it altogether.
Pre-emptive action: Buy title insurance. "We've run into situations where errors have come out of the woodwork years later," Townsend says. With insurance, your claim to your home is protected. Warning: If an insurer declines to insure the title of a home you want to buy, walk away from the deal.
ALWAYS check the flood maps!!!! found out the house we were selling was in a flood zone ( after living there for 10 years) and had to have flood insurance (
never had it while living there) !!!
found out that the maps were wrong and fought for 10 months and some many $$$$ later to get it changed. lost the deal that was on the table because of this. and then lost more $$$$ because of the time delay.
while your at it be sure and ask glenn and all the other industry troll shills out there to show you borrowers the rate sheet and the back end yield spread premium/service release premium you made jacking up your clients rate from what they actually qualified for
all the industry shills and professional message board trolls/AM radio content parrots seem to vanish when confronted with the TRUTH
and the rest of you idiots who have faith in these clowns DESERVE to get ripped off
If anyone would like the actual facts and guidelines that support 100% of what my previous post said, please feel free to contact me through my company and I would be happy to teach you the way things really are. I can document absolutely everything!
...for all your preaching, you are totally clueless... the whole melt down was caused by government mandated risky loans...
Did the government actually "mandate" risky loans?? And the government was responsible for the "whole" meltdown? Where is the evidence?
- CRA regulations only affected national banks, many of the worst loans were from mortgage firms not under CRA regulation.
- When most state attorneys got together in 2003 to crack down on predatory lending (risky loans) the national banks went to the Bush administration and an obscure federal agency (OCC) invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. So in this case it seems as though the banks used the government to continue the pushing of risky loans rather than the government mandating the banks make these loans.
- These loans were sold as Mortgage Backed Securities (MBS) and even though many were entirely made up of subprime loans they were given AAA ratings by Moody's and S&P thus investors thought they were secure investments. This AAA rating also was a reason that demand for these products (and subprime) was so high.
- All groups had financial incentives to push these risky loans they generated more fees than regular loans.
- Also, if you remember, construction and housing were the main drivers of the economy this past decade. Builders, mortgage companies, banks and many others had great interest in keeping this boom going. Prices were appreciating 10% and more per year and the only way that consumers could afford a house was with these new risky loans. Greenspan gave his OK for these loans in a 2004 speech.
- Self regulation was the mantra of the Bush administration, Greenspan and the Republican controlled congress so again, was government actually forcing banks to make these loans or was government turning a blind eye to these loans since finance companies were making money hand over fist with the creation, packaging and selling of these products.
yes, be sure and contact glenn, especially if your a loser deadbeat with no financial responsiblity....like glenn, he is the poster child for the scumbags in the mortgage industry
hey...my name is glenn...even if you had a foreclosure 2 months ago from the house you couldn't afford, i can get you another loan for another house!!!!
dude, do us all a favor and go get lost out in that wildfire..........and all you people flocking to him for the truth, ask glenn to show you the rate sheet the day your loan is locked...so you can see how much he screwed you over giving you a rate higher than you qualify for because he has to make his money not just from the excessive up front fees but on the yield spred premium/service release premium he gets paid on for giving you a rate higher than you qualify for...
what say you mortgae shills/internet trolls?????
Yep, after Barney Frank, Chris Dodd & the rest of the miserable lying democrats
destroyed the housing industry this what we got. A hapless F%$#! up housing market
with the banks getting the 'bail out'. How many broker crooks got rich off this scam
and now they're STILL benefiting from the current low interest rates. Non dock loans,
forcing banks to lend to losers, easy money, all the work of the demoRATS and NOW
they have the AUDACITY to claim it was lack of regulation!
The Republicans? they were too gutless to stand up to this scam, afraid of the filthy
lies that would come from the media no doubt!
For those of you not in the industry, you should be aware that a few years ago congress passed a law, with good intentions, that attempted to create a partition between appraisers and lenders in order to preserve appraiser independence. The unintended consequence is that this law resulted in a significant rise in demand for a middleman partition and appraisal management companies (AMC's) filled that void. It is estimated that today AMC's service 80% of all mortgage transactions. Not all AMC's are created equal. However, like most businesses, they are in it to make a profit. A common AMC practice is to email broadcast an assignment to a pool of appraisers in an area and then assign the appraisal request to the appraiser who is the cheapest and fastest instead of the appraiser who has the most training and experience. This is not the way to hire a professional. As you can imagine, this has had a significant downward pressure on the fee received by the appraiser while the AMC is actually charging the consumer more than the former standard rate for their "management" of the process. Many of the more experienced appraisers will not work for the AMC's at these discounted rates and instead are marketing their services to the few lenders who do not utilize AMC's and other users of appraisal services. So, the realtors and buyers are is left to deal with lower tier appraisers. Congress is aware of this issue and recently passed a law that stated the AMC's must pay appraisers a customary and reasonable fee excluding from the discussion the fees that appraisers have been getting from AMC's. However, the AMC's have become very powerful during the past few years and were able to delay implementation until their lawyers were able to expose a loop hole in the law. The government department that is to enforce this law is still in the development stages. So, the AMC's are doing what they please. Ultimately, the consumer and the american tax payer will pick up the tab for the greedy AMC's and their poor appraisals. Just last month the FDIC filed a complaint against LSI, Corelogic, eAppraiselIT, and other outfits for negligence resulting in the bank failures.
This is a really strange article. Nearly all the caveats are things that are good for the buyers, yet they're presented as though they are bad.
1. A low appraisal? Sounds to me like you've just been saved from paying too much.
2. Lender demands repairs? Well, they were in the contract. Sounds like a good idea to me.
3. Home doesn't have a clean title? You really don't want one of those. Where I've lived, it's always customary for the seller to provide title insurance for the buyer. Duh!
4. Really people, if your credit rating isn't at least 760, you probably shouldn't be buying a home, and I can't imagine why anyone would want to lend you money for anything that wasn't fully secured.
Re self-employment income. If you gross 100k and have 50k expenses, then your income is 50k. Why is that an issue?
5. Pre-approved? Yeah, for a loan on a good place. If the bank is afraid, perhaps you should be, too.
Most bad things that happen to this country is attributed to laws passed by Congress. Such is the case on all the foreclosures. Congress forced the banks to loan money to the poor people who couldn't meet the payments and then turned around and filed bankruptcy, thus forcing the foreclosure situations. States have passed laws that protect the buyers of these homes, who file bankruptcy and then get to keep the home. Many of these buyers in my opinion constitute fraud and thievery in this situation.
As a Real Estate Broker I am confronted with these issues daily. The congress did their knee jerk reaction to the financial crisis by making a stupid law. I have known some outstanding appraisers over the years and they have always shown an even hand when performing the difficult task of appraising a property. Now, when you have a willing buyer and seller they (the parties to the contract) no longer dictate value, some outside appraiser does.
My real issue is the use of derelict properties (foreclosed & short sale) as viable comparables. Most are in serious need of repair which costs thousands. These outside appraisers pull up a comp out of the system telling them square footage, how many bedrooms and bathrooms and use the sales price as comparables. If we don't stop this practice home values have no chance of rebounding till ALL foreclosures and short sales are gone.
Banks don't want to lend unless the price at foreclosure exceeds their loan exposure. They will do everything they can to turn down any buyer that is suspect.
I agree with the article above...find a qualified agent and stick with them.
I will leave you with one other thought. As a buyer of property, you get the services of your agent for free since commissions are paid by the seller. You can chose to have the very best in representation without spending more. I know it sometimes feels like you should use your friend, neighbor, family member or someone else who just got their license or dabbles in the business. There is a difference, check credentials and education. This may be the biggest transaction in your life, do you really want to trust it to someone who doesn't do this for a living?