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We have our house sold, and have made and had an offer accepted on another house. It's a great house but unfortunately the septic system is near its EOL - "end of life" (2 years). This was determined during the septic inspection prior to the sellers listing, as I believe is required by local laws. It was provided to us in the sellers disclosures.
In order to determine a fair offer, we put the septic EOL issue aside and assumed the septic was in good order. Our offer was then contingent on the septic system being replaced prior to us closing. We reached an agreement on the price, but the seller wants to just give us the cash to get the repair done and provided us with a copy of a contract from a septic installation company. I don't mind doing this, and in some way prefer it so I can monitor the work... Then, at closing, as far as I understand it, the seller would pay us (using a certified check) to take over this contract with a value exactly equal to the contract signed between the seller and the contractor. The price for the install is being guaranteed by the contractor for 6 months.
The reason for them wanting to do it this way is because in order to get the engineer's plans, submit them to the city and gain the necessary approval and the pull the permits will take about 8 weeks. This doesn't factor in the contractors schedule - when can they do the work, and how long the job will take.
This will be seemingly circumventing the mortgage company for the septic cost. This septic agreement is not listed within the sales agreement for the house but as a side sales contract that is contingent on us completing purchase of the house. At which point we would receive the certified check for the full contract amount.
I feel that the sellers are trying their best to work with us, but this doesn't smell right. The sellers realtor came up with this solution. Unfortunately we cannot just ask for a reduction in the sale price by the contract amount as with closing costs, down payments, etc. we will not have enough cash left over after the purchase to have the work done in a timely manner.
Is this all above board? I am trying to be safe as I don't want to somehow find my way into owning this house but with the money that's promised not making it to us. What are the preferred ways of handling this in my situation? I have read about the potential to have the money held in ESCROW but could not find any solid info on it. How can this be achieved in the safest and reliable way?
No matter how the deal is "structured", the intent of the wording on any government-insured loan is to prevent money from changing hands amongst anyone involved in the process via "side contracts" - you don't want agents / bankers / appraisers / inspectors (or buyers & sellers) tossing money back and forth without everyone involved knowing about it. The lender in this case would have no way of protecting themselves from the seller giving you the total amount of your downpayment. (Not that this is whats happening here, just pointing out why an agent should know this is improper).
It sounds like the "professionals" here have allowed themselves to be painted into a corner by this problem, and they're opening themselves up to massive liability to get around your lender's requirements, which may be either unreasonable, or too unwieldy for them to deal with.
Lenders are (to be frank), often uncompromising & poorly-trained regarding repairs & deals like this shift responsibility from them to the agent/broker & seller (where it really doesn't belong).
There *is* a way to "escrow" funds for repairs. It's a hassle for the bank, and they don't *want* to do it, but that doesn't mean they *can't* do it, it's their job, and they get paid quite well for that job, whether they actually do it or not.
As a buyer, you're *probably* safe on this, you *probably* won't get ripped off, and if you do, you can *probably* sue the seller, the title office & both agents.. you could also *possibly* get charged with "lying to a federally-insured lending institution".. (super rare, but it does happen).
The "best" solution would be you - forcing your lender to do something they don't wanna do - which is escrow for the repairs, inspect after they're done & release those funds after the repairs are complete.
What usually happens in these kinds of deals is you lose the deal & walk away & the seller does the repairs before the new buyer steps in. (Or, they dump the house @ below market value to an investor who doesn't need a loan).
I suspect everyone involved has "good intentions" // the road to hell is paved with them // no one with a license (banker/broker/agent/lawyer) can tell you to go ahead with this deal without risking that license.
We have our house sold, and have made and had an offer accepted on another house. It's a great house but unfortunately the septic system is near its EOL - "end of life" (2 years). This was determined during the septic inspection prior to the sellers listing, as I believe is required by local laws. It was provided to us in the sellers disclosures.
In order to determine a fair offer, we put the septic EOL issue aside and assumed the septic was in good order. Our offer was then contingent on the septic system being replaced prior to us closing. We reached an agreement on the price, but the seller wants to just give us the cash to get the repair done and provided us with a copy of a contract from a septic installation company. I don't mind doing this, and in some way prefer it so I can monitor the work... Then, at closing, as far as I understand it, the seller would pay us (using a certified check) to take over this contract with a value exactly equal to the contract signed between the seller and the contractor. The price for the install is being guaranteed by the contractor for 6 months.
The reason for them wanting to do it this way is because in order to get the engineer's plans, submit them to the city and gain the necessary approval and the pull the permits will take about 8 weeks. This doesn't factor in the contractors schedule - when can they do the work, and how long the job will take.
This will be seemingly circumventing the mortgage company for the septic cost. This septic agreement is not listed within the sales agreement for the house but as a side sales contract that is contingent on us completing purchase of the house. At which point we would receive the certified check for the full contract amount.
I feel that the sellers are trying their best to work with us, but this doesn't smell right. The sellers realtor came up with this solution. Unfortunately we cannot just ask for a reduction in the sale price by the contract amount as with closing costs, down payments, etc. we will not have enough cash left over after the purchase to have the work done in a timely manner.
Is this all above board? I am trying to be safe as I don't want to somehow find my way into owning this house but with the money that's promised not making it to us. What are the preferred ways of handling this in my situation? I have read about the potential to have the money held in ESCROW but could not find any solid info on it. How can this be achieved in the safest and reliable way?
Thanks. Any advice is greatly appreciated.
BW
You will not close on a traditional mortgage without a septic inspection that shows proper functionality. .
You can achieve this via a FHA Full 203k purchase loan, wherein a minimum of $5,000 in repairs is performed, post closing, including septic and whatever else might be necessary, or desired. OR you can purchase using a Homestyle Conventional Renovation purchase loan.
I had literally this exact scenario a few months back. Needed a new septic, cost was only $3500 so we could not do the full streamline, no $$ for a full 5% dp on the conventional, seller wouldn't cooperate. So, we did involve escrow holdbacks, and the work was done within 5 days of closing. But that is a massive exception, and I got it done due to an error made by my underwriter. So, don't expect that.
You cannot do a streamline 203k because septic is not an allowable component, it is only available on the full 203k. So, rock and a hard place if you don't want other work done up to the $5k threshold. But, as the lender requires septic inspection, you cannot circumvent the lender in any way here.
I agree with the basics laid out by the others -- the "fool proof" way to handle a major issue (and septic system rebuild certainly is major) is through either a full blown 203k or appropriate escrow accounts.
Trying to do this without either MIGHT be faster, and I suspect that if the lender truly does OK this and separate lawyers are consulted for both the seller and the buyer this could be OK (as an escrow account is really just a formal way of having an escrow agent oversee what will be paid out), but with so many lenders being really freaked out by anything involving septic / plumbing it probably is NOT worth the risk of getting "shot down on final approach"...
If you are doing a "conventional loan" the seller's attorney, your attorney and the lender can all agree to appropriate escrow; FHA rules prohibit escrow repairs for septic / plumbing -- that would require the full 203k. Rules on FHA Repair Escrow | Home Guides | SF Gate
So it's really an unapproved side deal where everyone pretends they don't know about it due to the potential ramifications. It seems like its done to circumvent more difficult paperwork by agents/lenders/title companies as the risk doesn't fall to them, but to both Buyer and Seller.
I don't mind working around and more to get deals done, but I don't want to do anything illegal. I guess the question is 'is this kind of deal legal in my situation?".
From my reading it seems like it happens a lot. Is that your experience?
So it's really an unapproved side deal where everyone pretends they don't know about it due to the potential ramifications. It seems like its done to circumvent more difficult paperwork by agents/lenders/title companies as the risk doesn't fall to them, but to both Buyer and Seller.
I don't mind working around and more to get deals done, but I don't want to do anything illegal. I guess the question is 'is this kind of deal legal in my situation?".
From my reading it seems like it happens a lot. Is that your experience?
The reason it does not happen "a lot" is because the VAST MAJORITY of homes that sell really don't NEED major repairs. For places that are messed up, either the seller fixes the place up BEFORE LISTING IT or they price so low that an investor / flipper / cash buyer is happy to take the discount...
You are correct that there are issues with "side deals" ESPECIALLY with lenders and I know that MOST lenders will NOT allow any such deals -- think about, if anything goes wrong and the new buyer has a house with a septic system that does not work and the firm that promised to fix things for the amount the seller set aside odds are the buyers won't be able to afford making the place right. Worst case the buyer walks away and now the lender has to foreclose on a place with a busted septic system...
The goofy part of this is that if the buyer has FHA financing the inspection will FAIL and the seller MUST get the septic fixed BEFORE closing, of course the buyer could back out and the seller would be out of pocket the cost of the fix AND have no buyer...
THAT is why the 203k loan program exists. It is slower and more costly, but the system works because there MUST be bids from qualified contractors and the contractors are responsible to BOTH the buyer AND the lender. The lender oversees the payouts to the contractor... The costs of the repair are BUILT INTO THE LOAN that the buyer takes out.
Using an escrow agent is similar, the agent agrees to hold the funds supplied by the seller and, as the buyer oversees the work, disburse funds as project is completed...
I urge you to talk with your buyers agent and/or a qualified real estate attorney ASAP.
So it's really an unapproved side deal where everyone pretends they don't know about it due to the potential ramifications. It seems like its done to circumvent more difficult paperwork by agents/lenders/title companies as the risk doesn't fall to them, but to both Buyer and Seller.
I don't mind working around and more to get deals done, but I don't want to do anything illegal. I guess the question is 'is this kind of deal legal in my situation?".
From my reading it seems like it happens a lot. Is that your experience?
it's not illegal to get a rebate from the seller, but your mortgage document (and probably disclaimer docs from both your re agent/broker & the title office) will all require you to swear there aren't any side agreements going on outside of your purchase agreement, so in that respect, youl'd be committing fraud // lying to the lender, as would anyone else who was involved in crafting & concealing the side agreement.
I'm quite certain it goes on all the time, and this kind of thing also kills lots of deals.. from your perspective as a buyer, it's unlikely you would get prosecuted, but it was also unlikely Martha Stewart would get prosecuted as well - and you saw how that worked for her. I can't believe a licensed agent concocted such a scheme, (or that their broker went along with it), but hey, that's why we have disciplinary boards & those are the kind of folks who earn a trip before them.
If it were me, I'd fix my banker, not commit fraud because they didn't want to do something "hard". It's your banker's job to get you a loan - it isn't a bit unusual for a used house to need repairs, so they need to figure out how to deal with that, or find another occupation. But ymmv.
it's not illegal to get a rebate from the seller, but your mortgage document (and probably disclaimer docs from both your re agent/broker & the title office) will all require you to swear there aren't any side agreements going on outside of your purchase agreement, so in that respect, youl'd be committing fraud // lying to the lender, as would anyone else who was involved in crafting & concealing the side agreement.
I'm quite certain it goes on all the time, and this kind of thing also kills lots of deals.. from your perspective as a buyer, it's unlikely you would get prosecuted, but it was also unlikely Martha Stewart would get prosecuted as well - and you saw how that worked for her. I can't believe a licensed agent concocted such a scheme, (or that their broker went along with it), but hey, that's why we have disciplinary boards & those are the kind of folks who earn a trip before them.
If it were me, I'd fix my banker, not commit fraud because they didn't want to do something "hard". It's your banker's job to get you a loan - it isn't a bit unusual for a used house to need repairs, so they need to figure out how to deal with that, or find another occupation. But ymmv.
Side deals like this help to inflate home values. All those concessions are considered at appraisal and if you have a side deal it won't be on the books for the next appraisal. If the side deal is say $6k and the sale is $200k the real sale is $194k. You just inflated the comps for the next guy and if everyone does it we turn into 2007 all over again.
Get all sides of the deal on the books, they can set a portion of the sale aside at closing for use on the septic if they can't afford it otherwise. Repair credits tied up in escrow is pretty normal practice for big ticket items.
OP, I am in a similar situation, but I am the seller! When the septic failed inspection, both parties agreed I would get design and estimates, and we would escrow the funds from the net at closing. Then I was told the lender would not do that. So I'm trying to get it done and I have the funds to do it, BUT, the engineers and installers are backed up and it is unlikely it will be done before closing in in 10 days. My agent says not to worry. Really? Apparently the two agents have cooked up some scheme to do a side deal at closing. Sounds to me like it's not all that uncommon.
OP, I am in a similar situation, but I am the seller! When the septic failed inspection, both parties agreed I would get design and estimates, and we would escrow the funds from the net at closing. Then I was told the lender would not do that. So I'm trying to get it done and I have the funds to do it, BUT, the engineers and installers are backed up and it is unlikely it will be done before closing in in 10 days. My agent says not to worry. Really? Apparently the two agents have cooked up some scheme to do a side deal at closing. Sounds to me like it's not all that uncommon.
As a seller (or as an agent) I wouldn't have anything to do with a side-deal, nor would I allow one to occur if I knew about it. In the world of civil-suits, the buyer is presumed to be the poor, innocent, defenseless little duckling, and everyone else in the deal is "Snidely Whiplash" - scheming and conniving to defraud the poor little duckling. If there's any problem with the septic or the contractor in the future (if they take too long to finish, if they do a bad job, etc), you'll be getting sued, and in my neck of the woods even an unfounded nuisance lawsuit is going to cost you $10k to defend.. to start..
You aren't getting paid any extra for lying, and amongst the 100 pages of docs you'll be signing at closing, there will be several docs from your real-estate broker, the title office, and the lender asking you to declare that you aren't lying & letting them off the hook if you do.. No one needs that kind of excitement in their lives. Delay the deal if necessary, set the contractor's ass on fire to finish the job if you need to & do things right.
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Not really "a lot" but it does happen...
