The paper said “diamond in the rough.” Which means either it needs lots of work or perhaps just a little TLC. But exactly how “rough” can a house be before a lender decides the collateral is not healthy enough to issue a mortgage? And what happens if you want the seller to fix something before you’ll close the deal?
Upon contract, one of the first things you’ll want to do is have the home inspected for structural integrity, defects and potential problems. Note, this is not the function of a licensed appraiser who determines the market value for the home. A home inspection helps to ascertain the overall “health” of the house you’re about to buy. A bad roof, leaky plumbing or wood rot can usually only be found when a house doctor crawls through the attic, under the house and on the roof. If there are major problems found, potentially it can stop the deal dead in its tracks. That’s why most lenders won’t order appraisals on properties until an inspection has been performed.
But what if there are no major problems but minor ones? What if the carpet, while not in dire straits, is definitely worn and could use an upgrade? Or perhaps the deck needs a good work-over. Maybe the home you’re about to buy has been inhabited by a trio of kindergartners with a penchant for drawing cartoon characters on the walls? New paint job?
Such minor, perhaps cosmetic concerns may not be strong enough to kill the entire transaction or scare away even the heartiest of lenders but may lead the way for some good old-fashioned negotiations between buyers and sellers. And unless you’ve done this before, you need to have a good agent to help negotiate around these hazards. If not done properly, even agreed upon negotiations won’t fly when it comes to the lender’s table.
If you want the deck painted and the mailbox fixed, and it’s in the contract, the seller must perform. If the fence needs repair and you want it fixed, spell it out in the contract. The appraisal may then state that the value is based upon the fence being fixed. This may lead your lender to require the fence being fixed before you close, after all, you and the seller agreed on the fence repair. But what if the seller doesnt’ agree to do anything until after closing?
Let’s say you want new carpet throughout the house and while the seller agrees, also doesn’t want to pay for wall to wall carpeting before the deal closes. The seller has a good point. Why spend $5,000 before the deal is done? There’s the possibility that brand new carpeting would be installed, at the seller’s expense, then to have the buyers not qualify for the mortgage.
All too often at this stage a “seller concession” is made, but made incorrectly. Using the example above, instead of installing new carpet the seller agrees to a $5,000 carpeting allowance to be settled at closing. No new carpet, just $5,000 to the buyer to go and buy new carpet from the seller’s funds. Makes sense, right? Wrong.
A lender won’t let a seller pay the buyers $5,000 at closing. Paying $5,000 in buyer closing costs, fine. But not hand over cash. Install $5,000 in carpet before closing, fine. But not hand over cash. Even though the buyer and seller have agreed, in writing and in the sales contract, to give $5,000 cash at closing for a carpet allowance, the lender won’t allow the seller to hand over cash at closing.
Cash allowances written in the contract can’t happen and you should be aware of this before you get deeper in buying process. Your real estate agent will help steer you in the right direction and help construct a sales contract that will please both the buyer and the seller. But expecting to come home with a $5,000 check in your hand won’t happen. No matter how rough the diamond is.