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So you've found the home of your dreams, and you're measuring for drapes. You're ready to move forward with the purchase when you get that dreaded phone call: Something has gone wrong with the house.
When a problem arises in the midst of the homebuying process, it can be difficult to decide whether or not to walk away. In some cases, it's worth finding ways to solve the problem. In other situations, it may be better to move on to a different property that won't cause you a lot of headaches.
Here are six times when you should let the sellers know they can put the house back on the market.
1. The house appraises for less than what you've offered
When you've made an offer on a home, your mortgage lender will require an appraisal to confirm the home's market value. Sometimes, the appraisal will show the house is worth less than you offered. Not only does this mean you'll be overpaying, but it also means you'll have to come up with a bigger down payment.
The bank will typically only lend you 80% of the value of the home, unless you want to pay for private mortgage insurance. So if you're buying a $200,000 home, you'll need to come up with a $40,000 down payment, and the bank will lend you the remaining $160,000. But if that home then appraises for $175,000, then your loan-to-value ratio will be 91% ($160,000/$175,000). In order to satisfy your lender, you'll need to raise your down payment to $60,000.
Don't buy a house that's worth less than you're paying for it, because you'll be underwater right away, and in order to finance the purchase, you'll have to pay for private mortgage insurance or pay a bigger down payment. Walk away unless the seller is willing to drop the price to the lower appraised value.
2. The home inspection reveals major problems
Homes can be harboring all sorts of problems, from mold to spider infestations. (Having nightmares yet?) Buying a home with serious problems could send you down a never-ending spiral of repairs. This is why a home inspection is so important.
Most inspections turn up minor issues, especially on older homes. You may decide you can live with the defects, or you may ask the seller to either repair the problem before closing or give you a credit to fix the problem after you move in. However, if there's a major issue, like an unstable foundation or severe mold, walk away and save yourself the hassle.
If you do decide to buy a home with a serious problem, get several quotes to find out what the issue will cost to fix. Don't ballpark the cost; the last thing you want is to take a $200 credit for a curled roof shingle, only to find out that the underlying problem requires a $10,000 roof repair. If the seller is going to solve the problem, confirm that a qualified and licensed contractor is doing the work so the seller doesn't do a low-cost patch-up job that gives you problems the minute the paperwork is signed.
3. The title search reveals unexpected claims
A title search must be performed on any type of real estate deal to ensure there are no unexpected claims on the property. You want a clear title, which means the seller transferring the property is the owner, and there are no other claims on the property.
Sellers can only sell the rights to property they actually own, so if there are competing claims, those come with the house. You'll inherit the easements, the creditor claims, and any other encumbrances. If there are problems like a boundary dispute, a weird easement granting access to a creepy neighbor, or a third party with a claim on the property, walk away. Otherwise, you could end up having to pay off someone else's debt or watching your neighbor trudge through your yard as you sip your morning coffee.
4. The house will cost a fortune to insure
Start getting insurance quotes after you've made an offer so you'll know your total monthly housing costs. While shopping around, you may get surprised with high quotes for insurance. This could happen if the home is in a high-risk area such as a flood zone, or if the home has certain features that insurers consider to be liabilities.
You'll be paying insurance bills for the entire time you live in the home, so unless you want to spend a fortune making some insurance executive richer, consider walking away if the premiums look too high. You may decide you're willing to pay a higher insurance bill in exchange for breathtaking views of open water and three fireplaces. But if not, try to find a comparable house with more reasonable insurance costs.
Finally, don't forget that high insurance costs usually indicate that you're at risk of a disaster. Do you want to evacuate your riverside home every time you get four inches of rain, or could you live with buying a home on higher ground?
5. The deed restrictions are way too onerous
Deed restrictions often protect property values and keep your neighborhood looking nice -- but they can severely restrict your rights as a homeowner. When you make an offer on a home, get a copy of the deed restrictions. Read them carefully to see if you can live with them. If you aren't allowed to park your new boat in the driveway, or if you can't build that workshop you've always wanted, then consider looking for a house with rules you can abide, as it can be very difficult to change deed restrictions.
All that said, be sure to read the fine print when going over deed restrictions. You may find that the restrictions have expired or that the enforcing body no longer exists.
6. Work has been done without a permit
You know that beautiful new sunroom addition that made the house seem so light and airy, or the finished basement with the awesome bar? If those upgrades were done without a permit, this is a major problem. If construction has been done without the necessary permits, the local government could find out and cite you for property code violations.
When the issue is discovered, the homeowner will have to pay fines for the unpermitted work. If you're the homeowner, you're the one who has to pay, even if the prior owner was the one who did the work without clearing it with local officials. Your tax assessment could also go up once the upgrades are properly disclosed.
The unpermitted improvements must also be inspected when discovered, which can mean opening up walls to make sure electrical wiring was done right. If the improvements aren't up to code, you may have to fix them or tear them out. Imagine having to fill in that unpermitted pool or remove a fireplace that was added illegally, and you'll see why it isn't worth it to buy a home with unpermitted work.
As with the other items on this list, the seller may be able to correct the problem. In this case, they could pay the fine, have the work inspected, and bring it up to code. But make sure this is done before you close on the home. And remember: If they cut corners on the permit, they may have cut corners on other maintenance projects, too.
Buying a home is a long, complicated, stressful process, so the last thing you want to hear is that you need to take a bunch of extra steps to protect yourself from being ripped off. However, you owe it to yourself and your family to search for any hidden risks before investing huge sums of money, and years of your life, in your new home.