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Insurance Inspections/FHA Requirements And Your Transaction

Home Inspector with Gold Coast Inspections

We all know that when buying a home, finding funding and binding a homeowner policy is a part of the transaction process. But what many RE agents don't know is that attempting to do so could blow your deal.

FHA conditions reports and insurance underwriting guidelines have changed dramatically since the storm seasons of 2004-2005. And conditions of property are of great concern to lenders and the insurance industry.  Why?  Defects and poor conditions = greater risk.

Mass devastation and record setting insurance claims due to subsequent damage from the previous storm seasons has forced HUD and insurance carriers writing policies in Florida to re-evaluate how they conduct their business.  Compiled with the slowed economy and down investment market (where insurance companies make a significant portion of their revenue) has forced them to adjust their policy guidelines to minimize risk.

On the insurance side of things, insurance companies don't want to insure a dwelling that could potentially cause a claim and payout.  The way this is managed is by evaluating risk.  The means in which is done witha few simple inspections. (1) Adjusting or setting a premium via a Wind Mitigation Verification (not used for binding policy rather in part to set premium). This allows the carrier to assess whether the home has been retrofitted with hurricane protection devices, a newer code compliant roof, truss straps, etc. (2) Four Point Inspection. This identifies whether a home has any defect within its roof, electrical, plumbing or HVACsystems.  And, can mandate the upgrade for these systems in order to bind the policy. (3) Roof Certifications. This inspection typically for wind only policies, but has become more apparent lately with the renewal of Citizens policies.

Now, how this can effect your deal....well.  If you client is dealing with a smaller insurance agent in which only writes business with a few carriers, they are told that "clear" inspections are a must to bind the policy.  Now if there are defects within these inspections (Four Point or Roof Cert) the agent cannot bind the policy therefore you cannot close the deal.  Unless, you point your client in the direction of a carrier that doesn't require these inspections.

For instance, prior to the storms of 2004-2005, a Four Point Inspection was only mandated for propertiesthat were 50 years or older.  Today, that is not the case for all carriers with the exception of Citizens.  Most carriers require this inspection for any property 40 years or older and a select few require it at 30.

So what to do?

First, when your client has made their decision to sign contract, they need to immediately contact an insurance agent.  They need to inform the agent of the location and age of the structure.  At that point, the agent will be able to tell the client what inspections they will need in order to bind.  Keeping in mind that underwriting guidelines change from carrier to carrier. Your client may also need to bind a policy for a condo, villa or townhouse.

How this can mess up the deal??? How about a short sale where the bank nor the owner is willing to remedy the defect prior to close.  That creates a problem.  It's a short sale for a reason, the owner no longer has the financial resources to repair or replace primary components of the structure.  And it is definitely not in the clients best interest to invest in repairs prior to ownership...right.  There goes your deal.  The worst part is that typically, all parties concerned don't find out about this until the 11th hour.

Because our company provides these services for our clients, we ask at every booking the age of the dwelling.  At that point, we can inform the agent and client as to additional inspections that they will need in order to bind policy.  We hear it daily from RE agents."I've been in the business for 30 years and never heard of a Four Point being required." This comment is fewer and fewer lately because most of the inventory being sold in South Florida is older.  Therefore is becoming more common knowledge. 

But what is taking its toll is the agent that had no idea of these requirements and is one week out from closing and the client can't close the deal because of insurance guidelines.  Where this hurts is not only the simple fact that you've wasted 2 or 3 months with this deal, but your client just lost their deposit money. Since most contracts are "As Is" with right to inspect, you are past the pull-out date and are left scrambling to salvage without penalty.  It's not the seller's fault your client couldn't get a policy and your client accepted the deal knowing the property was as is.

Then there's FHA guidelines.  Well, talk about inconsistency in the market.  These guidelines have changed a few times and for the most part there is no consistency within the FHA Appraiser market.  For instance, if the home has roofing defects, no carpet in the master bedroom and the pool in green with turtles living in it (actual deal from last week).  There is a good possibility that the appraiser is going to make mention of this in the FHA conditions report (I should hope so considering that what the report is for).  Now considering this is a short sale and the seller doesn't have the funds for switch plate covers, what do you think are the chances of this deal going through?  Better yet, if you know that this is an FHA loan, why are you placing such a home under contract in the first place?

The end result, for some transactions, is that I get a phone call 3 days later with an irate RE agent telling me how the Four Point messed up the deal.  This is the part that really makes my skin crawl. The conditions of the property are what they are.  Intentionally reporting anything less that what they are is fraud.  Not only that but not reporting primary defects leaves respectable inspectors such as myself in a position of potential litigation.

Most of the time, I write articles to inform our industry of relevant news and perspectives from the other side.  And sometimes I write articles to encite feedback.  This is an article in which I would like to hear from the RE agents perspective.  So, any comments, questions or feedback is greatly appreciated.