Today, a number of factors are forcing banks and financial services firms to take a closer look at the property appraisal process before approving a mortgage. These factors include a rising number of foreclosures, many applicants applying to extend mortgages to include unforeseen repairs, and a rise in bankruptcies due to being over extended as a direct consequence of unforeseen repair costs.
Unfortunately, the standard lender’s appraisal often fails to reveal the true condition of a home or the applicant’s ability to pay for required repairs on the property. This is where a home inspection conducted by a qualified independent home inspector – perhaps commissioned or required by the mortgage lender or the mortgage insurer could serve as a valuable adjunct to the appraisal.
While only a small number of buyers today commission a home inspection for their own protection, they are not obligated to share the results with the lender – even though the report may reveal serious defects with the property. Despite these facts, home inspectors are not routinely hired by lenders, and are typically called in only when a bank appraiser or a valuer raises a specific concern. In fact, Independent Property Inspections (IPI) has found that less than one out of a hundred inspections conducted by its independent inspectors are done on behalf of a lender or as a requirement of the mortgage application. The inspector is only called in when the appraiser notes an obvious structural problem, such as springy uneven floors or a leaking roof. There are many other serious problems that are not as obvious and that would normally go unnoticed during an appraisal by an untrained eye. Some examples are failed framing systems, unsafe defective electrical wiring, blocked underground drainage systems, old roofing not yet leaking but in very poor condition, and subtle cracks in walls that may be symptomatic of more serious foundation failure.
Another concern is that the inspector who is called in at an appraiser’s request is usually asked to perform only a partial inspection, in order to investigate one or two items, raising the possibility that other serious problems may still be overlooked. Even though such limited inspections may seem simpler and even adequate at the time, it represents short-sighted thinking. Ultimately, it is in everyone’s best interest to inspect the property thoroughly and make sure the buyer doesn’t take on more home repair bills than he or she bargained for.
Horror Story – Julie, a single mum with two kids, a 9 year old Oliver and his 6 year old brother Ben, Julie has a full time executive job and works 50 hours a week, some from home. Julie downsized last year when she lost he husband to illness. Julie needed to be closer to work and the school and she could not manage the mortgage on her single wage. Julie found the perfect home, it was ten minutes walk to school and a further fifteen to her office, it had the three bedrooms, the en suite she so desperately wanted, secure backyard, it even had a lockup garage.
On auction day Julie was beside herself with nerves, so she got her brother to do the bidding for her, she was pre approved for $380K. Julie’s brother won the final bid with $384,500. The extra $4,500 just maxed out the credit card. The day Julie and the kids moved in was the day their world fell apart. The house sure looked different without the furniture, floor coverings and all those wonderful paintings on the walls. She immediately found termite damage in the floor boards where the king size bed was, she found the bathroom floor was rotten around the shower from years of leaking, the ceiling inside the bedroom 2 robe had collapsed under the weight of the water soaked insulation, and the timber stumps under bedroom 3 and the hallway were also rotted out from the water ponding under the house.
The total repair bill was in excess of $17,000 and the lender refused to advance Julie any more. She had reached her limit. The banks valuer didn’t raise any concerns by saying he is not qualified to comment on property defects, the lender said Julie had demonstrated her ability to pay the mortgage and ticked all the other boxes, so all the numbers stacked up.
The word got out about the house and Julie couldn’t resell it. Julie ended up declaring bankruptcy and she lost the house, She is now living back with her retired parents and catching an hour and a half hour train ride to and from work six days a week, Oliver and Ben were forced to change schools and friends.
The bank was forced to sell the house for $290,000 12 months after Julie left. Taking a loss of $90,000.
It seems incredible that a simple $350 building inspection could have avoided all this.
Wake Up Australia; Now that’s a case for “Mandatory Home Inspections” To continue without them is simply “Un Australian”.