REPORT RULES . . .
VARY WITH THE LOAN TYPE!
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
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.
for Different Loan Options!
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
Repairs - Avoiding this major deal killer!
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
‘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.
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.
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.
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.
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.
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
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.
Web Page/Pest Contro/Inspectiossl