If youâ€™re buying a house, prescription especially if youâ€™re putting less than 20% down and/or the house is on a private way, capsule you may want to read through our long and stressful ordeal that cost us many months and $20,000.
8 Theriault Court
In March 2010, we set about buying 8 Theriault Court, Cambridge, Massachusetts, owned by Catherine and Rafael Clemente, Jr. The house was listed at $449,000. We submitted an Offer to Purchase the house for $420,000, and after negotiations and an inspection, we agreed upon a purchase price of $434,000 and signed a Purchase & Sale (P&S) agreement.
We also made these concessions in the P&S at the sellerâ€™s request:
- We proposed to put down $10,000 as a good faith deposit, but the sellers required a 5% deposit. We acquiesced and our total down payment held in escrow with Coldwell Banker (sellerâ€™s realtor) was $21,700.
We were willing to accommodate the new home search of the sellers by agreeing to a very flexible closing date up to June 30, 2010 (up to 86 days from the date of the signed P&S).
Mortage loan attempt #1
After finalizing the P&S agreement, it was time to apply for a mortgage. During the mortgage approval process, the appraisal came back with a value of $417,000 on April 22, 2010. Based on this appraisal, we went back to the sellers to negotiate a selling price for which we could obtain a mortgage, based on the true value of the house. We were only able to renegotiate the selling price down to $425,000, with us bringing cash to closing to make up the difference between the appraised value we could seek a mortgage for and the amount the sellers wanted to get for the house.
As part of the price renegotiation, the sellers changed the realtorsâ€™ commission rate from 5% to 4% without first getting permission from our realtor. Our realtor was cornered into accepting this pay cut or risk our losing the opportunity to buy the house.
At this point, we also discovered that our first mortgage loan was turned down due to a private roadway way issue (more about that below).
Mortgage loan attempt #2
We knew that weâ€™d have to try another loan provider and would, thus, need to have another appraisal conducted. As part of our new price negotiations with the sellers, we also had to agree that if this second appraisal was,
â€œâ€¦higher than the purchase price [of $425,000], then the parties agree to negotiate in good faith relative to increasing the purchase price with a cap on the purchase price of $434,000.â€
This provision was definitely in the sellerâ€™s favor, as they explicitly ruled out lowering the price should the second appraisal affirm the low valuation of the first. Despite all of these provisions, we decided to press on.
The second appraisal came back at $415,000 on May 21, 2010, confirming the earlier appraisalâ€™s assertion that the sellers, at $425,000, were getting more for the house than it was worth.
During this period of time, we had about a week of daily negotiating around P&S amendments, pushing the mortgage contingency date back day by day as we waited for mortgage approval.
When approval arrived, it was conditional upon securing private mortgage insurance (PMI). Because we were paying 10% down to close on the house, we needed to secure PMI. Our mortgage broker and lawyer seemed certain that PMI is almost always approved. We thought we were good to go for closing, so we let the mortgage contingency date slide by.
Ater the mortgage contingency date, two different PMI company underwriters decided that, based on the comparable houses selling in that neighborhood, 8 Theriault Court was worth less than our mortgage amount. They wouldnâ€™t underwrite the insurance to finalize our mortgage loan approval. They wouldnâ€™t say how much they thought the house was worth, but our denial letter said the following:
â€œThe property does not meet [insurance companyâ€™s] minimum underwriting standard due to nonsupport of value from comparables,â€œ and, â€œThe property does not meet [insurance companyâ€™s] minimum underwriting standards due to overall poor functional utility.â€
And the other denial said, â€œComps do not adequately support value.â€
Despite these developments, the sellers were unwilling to come down in the selling price.
Mortgage loan attempt #3
Not being able to secure a conventional mortgage loan, we decided to instead pursue a government loan via FHA. FHA regulations require either the presence of an easement on the title documents of all properties on the private way, or a roadway maintenance agreement signed by all property owners abutting the way, stating that owners of the properties agree to share responsibility for the repair and maintenance of the road (excluding plowing by the City of Cambridge) and allowing them to access their own houses by driving over the roadway section in front of their neighborsâ€™ houses. Neither of these exists among the six property owners on Theriault Court and the sellers were unwilling to make any effort to ask their neighbors to sign an agreement so that we could obtain an FHA loan and close on the sale. As a result, we were unable to get an FHA loan.
Backing out of the purchase
At this point, we could not get a mortgage loan to close on the house, due to the houseâ€™s low value and the private way issue, both of which were beyond our control. The P&S document specified that the deposit belonged to the sellers once all of the contingency dates had passed, but we hoped, as reasonable people, that we could reach an agreement with the sellers to compensate them for expenses related to canceling the sale, such as breaking the lease on an apartment, and still have a large amount of our deposit returned to us.
That was not to be, as the sellers made a quick offer of $2,000, backed by a notice to our lawyer that they had retained counsel to litigate over the matter, if necessary. In the end, after consulting our own legal counsel and determining we would be unlikely to come out fiscally ahead (due to the cost of retaining counsel) if we choose to litigate the matter, we negotiated with the sellers to give us back a mere $4,000 of our $21,700 deposit. They pocketed the rest. In addition to losing $17,700 of our deposit, we were also out several thousands of dollars for the inspection, appraisal, and attorney costs, bringing our total loss on this real estate transaction to around $20,000. We also lost out on the opportunity to get the first-time homebuyerâ€™s credit of $8,000.
Overall, we learned a lot about how to better protect ourselves for situations beyond our control. We now seek to protect other potential buyers, of any home, from encountering the same problems. Unless you are able to put 20% down on a house and forgo needing PMI, make sure your P&S agreement includes contingency for you to get out of the deal if PMI is denied after the mortgage contingency date. Also, if the property is on a private way and there is no written agreement in place, be prepared to go door to door asking the neighbors to sign a private roadway agreementâ€”and know that there is no guarantee that they will sign a legal document proposed to them by a stranger.
The biggest lesson we learned is that if the sellers are unreasonable early on, as you negotiate on various things, or are unrealistic about the worth of the property in the face of mounting evidence to the contrary, walk away while you still can, because theyâ€™re not going to get any more reasonable as time passes. There are other houses out there and itâ€™s not worth the stress and potential fiscal losses.
The house at 8 Theriault Court is back on the market, this time at $439,000. Based on the two appraisals conducted just four and five months ago, and unless the market or the house has changed significantly since that time, the house is likely not worth even that amount.