Happy New Year! An update on the Quinnell Zombie.
We are about six weeks out from the closing date. During the last few weeks we've hit several road blocks, also known as learning opportunities, unique to securing a conventional mortgage. Below I cover two deal killers that don’t often get much attention: appraisals and insurance.
First, let’s set the stage to illustrate why the appraisal deserves some thought. As part of our purchase agreement, the seller requested that we provide a Written Statement several weeks ahead of closing. (For those in states that don’t commonly use Written Statements, it is essentially “seller’s contingency” in the form of a formal commitment by the lender to follow through on the mortgage. After a buyer submits a Written Statement, they stand to lose the earnest money if the deal fails for lack of financing. Additionally, if the buyer cannot get a Written Statement by the agreed upon date, the seller may cancel the purchase agreement.)
So, well ahead of the Written Statement date, we had locked in our interest rate just south of 4% and submitted all pertinent documents to the lender. The lender then scheduled an appraisal. But the Appraiser raised a red flag: She refused to appraise the Quinnell Zombie because it is not recognized as a duplex by the city, i.e., it is not permitted for use as a multifamily.
To remedy this permitting, the Appraiser requested either (1) a kitchen in one of the units of the up-down duplex and all doors separating the units be removed or (2) the seller get a conditional use permit from the city allowing use as a duplex.
As the buyer, we want the benefit of our bargain, i.e., a duplex to house hack. After all, this is an attractive feature of the Quinnell Zombie. While the seller advocated for the easy fix of removing the kitchen and doors, we insisted that they obtain the conditional use permit. Also, keep in mind that the current tenants are still living there, so removing the kitchen would have necessarily displaced one of the tenants.
With this decision, however, we turned over control of the deal to the seller. Remember that the seller can cancel the purchase agreement if we don’t get the Written Statement in on time . . . which turns on the appraisal . . . which cannot be completed until the seller gets the conditional use permit. See what happened there? In summary, the seller could simply delay getting the permit and cancel the purchase agreement after the Written Statement date passed.
In this way, the appraisal can be a critical aspect of a deal. So, even those of you finding great deals where the appraisal will come in well above the agreed purchase price, you may benefit from asking yourself what could go awry with your appraisal.
We asked (in writing) to extend the Written Statement date. And the day before the Written Statement was due, the seller extended the Written Statement date. We were lucky that the seller is still committed to keeping the deal alive.
Second, with respect to insurance, a deal may turn on your ability to secure a policy. That's because most lenders will require homeowner's insurance to protect their interest in the property. In our case, the Quinnell Zombie is old. It is old enough to have knob and tube wiring and Zinsco electrical panels (think Federal Pacific Electric or Pushmatic panels). But I guess not old enough for a full electrical retrofit . . . until now.
While knob and tube or an obsolete electrical panel may not be inherently dangerous if properly maintained, there are several concerns that insurance companies don’t like. In fact, some insurance companies will not insure homes with knob and tube or certain electrical panels.
I our case, after the inspection, we first asked for the seller to replace the electrical panels, knowing this may be an issue. But they refused. So step two was to see if we could actually still get an insurance policy. It turned out we could, but only if we get an electrician in to perform and inspection and provide a statement regarding the condition of the electrical system. According to our insurance agent, all we need is a statement from a licensed electrician that the current electrical system is safe and functional.
We were lucky to have a seasoned insurance agent on our side that found such as flexible policy. But this illustrates that insurance, namely the inability to obtain a policy, can be a deal killer.
While we haven’t gotten an electrician in yet (we are waiting to make sure the seller gets the conditional use permit before spending any more money) this seems like a low bar. And yes, we are planning to replace the electrical panels as well as any knob and tube wiring.
Here is to keeping the ball rolling.
