Cash-poor home sellers ask for a bailout


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Dear Real Estate Adviser,
We are under contract to buy a house. The sellers were told that they had to make repairs to get a certificate of occupancy. Now that we are in the closing stages, the seller’s agent is asking us to sign a document relieving the sellers of these repair obligations in exchange for an equivalent monetary credit. If we don’t agree, the agent tells us, the sellers will have to put it back on the market. Can they do this?
— Anthony

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Dear Anthony,
Sure, there’s nothing illegal preventing them from doing this other than the largely unenforceable contract they signed with you that they now want to modify.

To be frank, this sounds like an act of desperation on the part of cash-poor sellers who’ve suddenly discovered they can’t come up with the scratch to get the place up to code. Your loan documents almost certainly state in some way that the seller must deliver you a home that’s mortgageable — read, “safely habitable” — in order for the lender to release funds. And that, Anthony, requires a certificate of occupancy. So, unless someone is paying cash, the sellers would face the same mortgage contingency issue with any buyer when they try to put it back on the market.

Another option is available

Then there’s this: Not having a certificate of occupancy, or C.O., as a new buyer means you wouldn’t be able to live in the house — at least legally — until the proper repairs are made and the certificate is issued by the city or county.

There is an alternative, however, called the Federal Housing Administration 203(k) loan, assuming you’re going the FHA route. This is a federally backed program aimed at getting more owners in homes and improving property values and neighborhoods for folks like you who want to invest in such a fixer-upper. Based on the lender’s appraisal, a 203(k) loan would advance you the funds to buy the place plus a “contingency reserve fund” to make needed renovations. Some loans also throw in six months’ worth of rent money so you can afford to live elsewhere in the meantime and not scrape to make those early mortgage payments.

Not always easy to get, though

However, the 203(k) can be a tough loan because not all properties qualify and funding is somewhat limited. You’d have to provide a painstakingly thorough proposal and detailed cost estimates, which sometimes necessitates the hiring of an independent consultant. Moreover, the repair work and C.O. would almost certainly trigger a reassessment by the taxing authority that would, you guessed it, hike property taxes on that house. This is probably becoming more expensive and complex than you ever imagined it could.

Should you continue your search?

So let me ask: On a scale of 1 to 10, how badly do you want this house? Anything below a 9 and I’d be inclined to punt and find an equivalent home that’s immediately occupiable and easier to finance. That is, unless these folks decide to offer one helluva credit greatly exceeding your own inspector’s repair estimates. (It would be unthinkable to proceed without such an inspection, by the way.)

Meanwhile, you have more than enough rationale to bolt from this transaction and should have no problem getting your earnest money back since the sellers are obviously changing terms. While I’m sure you’ve put a lot of time, effort and at least some of your hard-earned money in this deal, you may be bargaining for much more of that if you still want to buy this apparent money pit.

Good luck in your decision!

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