Maryland real estate

October 19, 1999

TO: All Real Estate Brokers Approved to Participate in HUD’s REO Sales Program in Maryland

All FHA-Approved Mortgagees Doing Business in Maryland

FROM: Sidney B. Severe, Maryland REO Project Director

SUBJECT: Property Condition and Inspection Issues

Since assuming responsibility for the REO sales program from InTown Management Group (IMG) approximately four weeks ago, we have received numerous complaints, questions and concerns from brokers, purchasers and lenders about the condition of properties, about repairs, and especially about policies and decisions made by IMG with respect to those items.

The nature of the questions and complaints we have received leads us to believe that there is some fundamental misunderstanding of the basic provisions of HUD’s REO sales program among many of our customers and other industry participants, especially with regard to property condition.. In this Circular Letter we want to clarify some of these basic issues, and establish policies under which we intend to operate.

Property Condition

All HUD REO properties are sold as-is, with no expressed or implied warranties. As stated in Paragraph B of the Conditions of Sale on the Sales Contract:

"Seller makes no representations or warranties concerning the condition of the property, including but not limited to mechanical systems, dry basement, foundation, structural, or compliance with code, zoning or building requirements and will make no repairs to the property after execution of this contract. Purchaser understands that regardless of whether the property is being financed with an FHA-insured mortgage, Seller does not guarantee or warrant that the property is free of visible or hidden structural defects, termite damage, lead-based paint or any other condition that may render the property uninhabitable or otherwise unusable."

It is the responsibility of selling brokers to ensure that all purchasers understand this provision before they execute a sales contract and submit an offer. It is especially important that prospective purchasers understand that our listing a property as eligible for FHA-insured financing does not represent a guarantee of the property’s condition. It does not mean that a home inspection has been conducted, or that the utilities and mechanical systems have been activated and tested. Rather, it means that a licensed appraiser has conducted a visual inspection of the property, and made a determination on the basis of that visual inspection, that the property meets the intent of FHA’s Minimum Property Standards (MPS).

If the purchaser, based on his/her personal inspection and/or on inspections made by his/her contractors, determines that one or more aspects of the property are not acceptable, he/she should not let the eligibility of the property for FHA-insured financing lead them to disregard those concerns, or to assume that the items in question will be repaired by HUD. Likewise, if the purchaser is satisfied with the condition of the property, they should not view the fact that the property was not listed eligible for FHA-insured financing necessarily dissuade them from making an offer to purchase.

With an inventory in Maryland approaching 3,900 properties and limited staff resources, HUD does not have the ability to discuss with prospective purchasers or brokers the condition of any particular property, or to provide them with copies of appraisals or inspection reports, or to respond to questions about them. Ultimately, the condition of the property is the condition that the purchaser satisfies to him/herself that it is.

Home Inspections

HUD encourages prospective purchasers involved in private real estate transactions to have a home inspection performed. Purchasers are required to execute a Form HUD-92564-CN, For Your Protection: Get A Home Inspection where the transaction involves FHA-insured financing of existing property.

HUD also encourages prospective purchasers to have a home inspection performed on HUD REO properties. There are some key differences between private transactions and REO sales however, of which selling brokers must ensure that prospective purchasers are aware.

1. It is typical for sales contracts between private parties to include in the sales contract a provision making the sale contingent upon a satisfactory home inspection. HUD REO properties however, are sold as-is with no such contingency. Prospective purchasers must understand that once HUD has executed the sales contract, they are expected to complete settlement or suffer the loss of their earnest money deposit. The subsequent identification of problems or defects in a property does not release the purchaser from their obligations under the contract (except in the case of damage to the property after the execution of the sales contract; see below).
   
2. In a private sale where repairs are required, the seller and purchaser will often negotiate the completion of those repairs. HUD will not make any repairs to REO properties, nor will we permit the purchaser to make them prior to settlement. We will not negotiate with the purchaser a revised sales price where the purchaser identifies required repairs. We will neither establish a repair escrow where none previously existed, nor revise an existing escrow.
   
3. In a private sale the property is usually occupied by the seller or his/her tenants, or it has only recently been vacated. The utilities are usually active. Where they are not active, the seller is typically dealing with only that property or a small number of properties, and can make arrangements, if specified in the contract of sale, to have them activated.
   
   HUD REO properties have generally been vacant for at least twelve months, often longer, and the utilities have been turned off. Our Preservation and Protection guidelines for foreclosing lenders require that plumbing systems be winterized. Depending upon the nature of the systems, actions may have been taken to deactivate the systems which will require repairs before they can be activated. HUD currently has almost 3,900 properties in its inventory, and we cannot meet the administrative burden that activating the utilities on our properties would entail. Our sales contract does not make the sale contingent upon the activation of the utilities.

The bottom line is that purchasers will not be able to conduct the same kind of home inspection on an REO property as they would on a private sale.

Selling brokers should make two points clear to prospective purchasers: 1) home inspections should be performed before an offer is submitted since the sale will not be contingent upon the results of the home inspection; and 2) when selecting a home inspector, purchasers should ensure that the inspector is aware that the utilities will not be active, and that he/she is being asked to provide his/her best judgment of their condition through a visual inspection or through such other means available that do not require the activation of the utilities.

Purchaser Activation of Utilities Prior to Settlement

HUD’s sales contract does not give purchasers the right to activate the utilities in their name prior to settlement. There is no outstanding written policy from HUD providing purchasers with this option, and it has not generally been HUD practice in other states. HUD’s contract with IMG did not require that they authorize purchasers to activate the utilities. Nevertheless, we understand that it was the practice in Maryland.

Selling brokers should advise purchasers that HUD will not authorize them to have the utilities activated in their name prior to settlement. HUD lacks the staff to deal with the various administrative problems this practice creates, and it also represents a severe risk to the condition of our properties, especially during the winter.

Where a purchaser received written authorization from IMG to activate the utilities we will honor it, but we will not issue any new authorizations.

Termite Damage and Treatment

Our policy with regard to termite inspections, treatment and damages is as follows:

1. Inspections. The cost of the inspection required to determine if the property is free of termite and other pests is the responsibility of the purchaser.
   
2. Treatment. The cost of treatment necessary to destroy any active infestation is the responsibility of HUD. We will reimburse the purchaser at settlement for the cost of treatment. The purchaser must provide documentation on the infestation, and the proposed cost of treatment must be reasonable.
   
3. Damages. The cost of repairing any damage caused by termites or other pests is the responsibility of the purchaser. As stated in Paragraph B of the Condition of Sale in the Sales Contract, HUD does not warrant the condition of the property, and will not be responsible for any repairs after the contract is signed.

Damage After the Execution of the Sales Contract

Paragraph E of the Conditions of Sale in the Sales Contract gives HUD (and HUD alone) the discretion to repair damage to a property which occurs after the contract was signed. As a practical matter, we do not intend to exercise our option to undertake repairs. In most circumstances therefore, the purchaser will have the option of either closing on the property as-is with a HUD-determined price reduction, or canceling the sale and receiving a refund of the full earnest money deposit. Selling brokers should ensure that purchasers understand that the amount of the sales price reduction is not negotiable. It is the purchaser’s option to accept or reject HUD’s determination, but we will not engage in open-ended discussions or negotiations over the amount.