Protecting the Interest of Buyers and Lenders
When a buyer signs a purchase and sale agreement, the agreement is based upon certain information that is provided by a real estate professional or by the seller of the home. Because of extensive laws that have been designed to protect new buyers, there are certain disclosures that must be made prior to signing an agreement. In most cases, known defects in the property such as cracked foundations, leaking basements or a bad heating system must be disclosed by the buyer. These property deficiencies are generally included in the purchase and sale agreement as well, and in most cases, the price reflects these defects.
However, buyers and lenders alike need their interest in the property protected. Buyers do not want to pay more than the property is worth (e.g., a negative equity purchase) and a lender will not loan the borrower more than a certain percentage of the property value or the purchase price, whichever is lower. Appraisals and inspections are necessary to verify all information that is provided to the buyer. Appraisals verify the value of the property and a number of inspections are done to ensure that the property is structurally sounds and ready to occupy.
What happens when the numbers do not add up?
When a seller fails to disclose defects in the property, or worse yet the property was advertised with false information, the buyer has some options for recourse. Most purchase and sale agreements contain clauses that specify terms of the finalization of sale. Some of these include:
Contingent upon financing - When a buyer is uncertain about getting a mortgage, they may request the seller put a clause in that specifies they can extract themselves from the contract.
Contingent upon appraisal - If the real estate professional or the seller did not provide a recent appraisal prior to the signing of a purchase and sale agreement, this clause may be included. This clause may include a specific appraised value that must be met when the final appraisal is done.
Contingent upon inspection - Inspections are generally ordered once the buyer has secured financing (which is generally contingent upon appraisal and inspection). Inspections should be done on heating/air conditioning systems, electrical systems, roofs, a pest inspection is typically ordered and depending on the state, a sewer or septic inspection must be done. In most cases, one inspector will handle all of the inspections except pest and sewer inspections.
Contract modification may work
If for any reason a property value is lower than expected or there are deficiencies found during inspection, this does not mean that the buyer cannot secure financing or will back out of the sale. Buyers who are determined to own the house will typically elect to work with the seller and modify the contract accordingly. This may involve lowering the purchase price, agreeing to make certain repairs or modifications or other conditions which may be agreed upon between the involved parties. In cases where the seller has agreed to correct any deficiencies, a second inspection (generally paid for by the seller) will be required to ensure that the work is completed satisfactorily.
Those who are buying a home should also be aware of some of the common items that get overlooked during home inspections. In some cases, inspectors may not completely test a heating or air conditioning system (generally due to weather concerns), floors that may be damaged (but covered with carpeting), defective appliances and other defects. It is crucial that all inspection reports be reviewed carefully as most of them do not guarantee that anything in the home is 100% free of defects.