HI everyone, I'm going to tour a property tomorrow in Rhode Island. It's a 4 unit in a location that I like. The issue is the property currently has a cess pool and needs a septic in order for the seller to actually sell it but apparently the seller doesn't have the money to install a septic, he wants to use the money from the sale to do the septic. Is this even possible? how's he going to get the money from a sale to install the septic if he can't make a sale until it has the new septic? I originally wanted to use a 203k loan on a property i could house hack but I'm not sure if that will work here. Is there anyway I can get this property under contract/purchased with a contigency that the seller has to use the money to install a new septic? What are some financing options I could use in this situation? thanks for your help there any way I can structure some financing to

Hi Sean,

Who is requiring the septic to be installed before the sale? Is it occupied? In most cases, you can have an addendum waiving such things (check with your attorney as I am not giving any legal advice). Another way to settle that is, If you're paying cash/hard money, having the seller put the property into a trust and you transfer ownership interest in the trust. Also, you could possibly do an escrow hold-back, where at closing the cost of the septic is held for the install. If there is no mortgage on the property, you could give the seller the money to install the septic as a mortgage in the 1st position to protest your money.

When dealing with banks, they can complicate things so, the 203k could take some time or not even close the deal.

Hope this helps

Sean, it seems that you will need to replace the cesspool with a septic system within 1 year of the sale date, so if the seller can't do it before closing (always preferred!), you could get a credit from the seller for the work.

But, get  a few estimates as "The cost of replacement varies and depends on the size of the system, the soil, the water table and proximity to bodies of water. Conventional systems will typically cost less than $20,000, but if an Advantec or other specially designed system is needed costs can reach or exceed $30,000".

See Cesspools and the Rhode Island Cesspool Act Frequently Asked Questions and The RI Cesspool Act Goes into Effect 1/1/16: What Buyers & Sellers Need to Know (from which the quote above was taken).

You will want to check with your mortgage broker, however, with whether the bank will have a problem with a repair credit that large. But maybe with a 203(k) (if you use one) it wouldn't be an issue. Definitely something to ask about before you get too far into this though, and also bring up the issue with your attorney as soon as possible too, just to make sure that the one year timeline is still correct.

@Sean Doherty , As @Anthony Thompson stated, a generic septic is generally speaking in the $10,000 to $12,000 range for a 3 bed.  The price does go up exponentially after you go beyond three beds.  If there is a high water table, or if you are near a coastal area, you may need a sand filtration or some other type of specialized system that generally runs around $30,000 depending on the specifics.  

I do not understand why the seller would be fixing the septic from proceeds of the sale.  I would fact check that.  If you are purchasing the property for cash, you can sign an addendum like @Al Murray mentioned.  As Anthony stated, you would have 1 year to get the new system installed and upgraded from the existing cesspool.  

Depending on the LTV, a bank may do a 203k for your septic, but this is not a guarantee. Some banks do get funny when it comes to a septic system.

Best of luck with this. 

I know another option is that some towns (town specific) within the state offer some low interest loans for new septic systems. Check with your town.

@Al Murray @Anthony Thompson @Brandon Ingegneri @Kyle Brodwater

The state of Rhode Island requires the new septic to be installed within one year of the closing date. The property is currently occupied. 

I contacted the bank today and got some info.  The closing attorney would have to hold 1.5 times cost of the install in escrow and once the system was installed and signed off by the town any unused funds in escrow would be released to the seller.  Once the septic is installed I could then refinance to a new 203k rehab loan to make the necessary upgrades I want to make.

After reading through the links that Anthony provided I found out that if the town has plans to be sewered before Jan 1, 2020 and the cesspool is not failed then I may be able to certify in writing that the property will be connected to the new sewer system within 6 months of receipt of notification to connect to the sewer systems. I'll have to contact the town about there future wastewater plans on Monday. This would be a much cheaper option.

Thank you all for responding and providing insights and information!

@Sean Doherty glad to help, and thank you for posting a follow up with what you found out - that will probably help people in the future who have a similar question and find this thread in the forums :)