REO property transactions with septic systems are turning out to be messy propositions for Realtors, buyers, lenders and the towns trying to track them.
Banks and servicers are selling REO properties “as is,” and means without the Title 5 inspection that ensures a functional septic system. Massachusetts law requires an inspection whenever a property title changes hands; buyers must inspect the property on their dime within six months of the sale.
This creates a bind for buyers looking for a mortgage, however, as lenders require a Title 5 inspection to write the loan.
“If they’re borrowing to buy the property, then they also have to satisfy the lender’s requirements for replacing the septic, which would inherently be more stringent than the state’s,” said Charles Nilsen, chairman of the Massachusetts Mortgage Bankers Association. “The lender wants to know that without question it can get replaced, so that if they take the property again they’re not stuck with a property with a bad septic.”
Buyers must put anywhere from $20,000 to $50,000 into escrow before a lender will approve a new loan, in case the inspection turns up a faulty tank.
This gives cash buyers, usually speculators or investors, another leg up on the traditional home buyers looking for a bargain on a foreclosed property. Without having to satisfy a lender, cash buyers and banks can get the deal done with oversight only from a local board of heath.
Tough To Track
“If it’s a cash sale, I think there is a probability that either the buyer is unaware of it, or it just doesn’t get done,” said Charles Le Ray, an attorney at Brennan, Dain, Le Ray, Wiest, Torpy & Garner, P.C. in Boston. “If the [local] board of health happened to realize that a property had been sold, and they haven’t received an inspection, they might initiate something.”
Some of the commonwealth’s cities swept up in the wave of foreclosures, like Brockton and Worcester, don’t have to deal with the problem; they are nearly 100 percent served by a public sewer system.
Others aren’t so lucky.
Steven Curry is the director of public health in Fitchburg, where approximately 20 percent of the city has septic systems. Curry said banks are getting better at informing the city when foreclosed properties are sold, titles are transferred and inspections are forthcoming.
But when a buyer pays in cash, Curry said it’s almost impossible to track.
“We can only catch that by paying attention to the transactions,” Curry said. “Those are the tough ones, and I honestly haven’t seen any of those.”
When asked if health departments were adequately staffed to monitor each property transaction for Title 5 inspections, Curry said, “Well, I have a population of about 40,000, and I have two code inspectors, so absolutely not.”
