The worse the news, the more people you should tell and the quicker you should tell them.
We’ve all heard the phrase, ‘When disaster strikes, will you be prepared?’ but many don’t often associate it with a real estate loan or purchase transaction. One of the secrets of a seasoned professional, however, is to be prepared and know the steps to take to make sure the transaction and closing are impacted as little as possible.
Location, Location, Location
There are two clichés of real estate that I’ve learned are far more than cliché, and are in fact almost Universal Truths of our industry. The first is, everything is about relationship. The second is, location is the top three important factors to consider when selecting a property.
Interestingly, these Truths also hold true when it comes to navigating a transaction after a natural disaster occurs. It is critical to have solid relationships with your Team, which includes the Realtor, Loan Originator (both the individual and the company he works for), appraiser (or Appraisal Management Company - AMC), Title and Closing Agent. And, the specific location of the property will have a huge impact on what’s required in the wake of the disaster. Only a group that works together can quickly adapt to what is required to validate that the property was not damaged by the disaster, or come up with a plan of action to address the damage inflicted by the disaster and how to work with the seller.
The Calm before the Storm
Having a plan and knowing the steps to take following a natural disaster will allow you to be a valued facilitator and a rock of solace in an otherwise extremely stressful time. The good news is almost every lender has a defined process for what is required to issue the loan. If you find they don’t, it’s an indication that it may be a good idea to start thinking of trying a new partner. While the loan is not the only part of the transaction, it is probably the one most likely to hold up closing. Therefore, it’s certainly wise to contact the Loan Originators if they haven’t already reached out to you to assess the situation.
There are a couple of things you can also do on your own to be proactive and gather as much information as possible. The first is check if the Federal Government has declared the disaster and if the property is in the declared disaster area. The Federal Disaster Management Agency (FEMA) provides an online resource for all declared disasters. The list for 2012 can be accessed here: http://www.fema.gov/news/disasters.fema. Fortunately there have been no declared disasters yet this year. FEMA also provides a list sorted by year: http://www.fema.gov/news/disaster_totals_annual.fema.
The second step is to determine whether the appraisal has already been completed. If a disaster is declared by FEMA, and the appraisal has already been completed, additional action must be taken to document the condition of the property.
Recovery in Action
Disaster’s struck. You’ve done your research, your Team has sprung to action, and it turns out the property is in the disaster area. Now what? First, designate who will contact the client. Providing information and a plan of action will reassure them you’re the right person to be handling the transaction, and give you the most realistic insight into the future of the transaction.
The Real Estate Settlement and Procedures Act (RESPA) officially includes Natural Disaster in their definition of a “Changed Circumstance” (found in § 3500.2). What that means is any increases in costs are legally allowed to be passed along to the borrower/buyer, as long as the costs are associated with the disaster. Our clients need to know an unexpected event has occurred and they’re going to need to budget for some additional expense. Even if the property is not damaged, expect at minimum that the property will need to be re-inspected by a licensed appraiser to validate the property was not damaged (presuming of course the appraisal has been completed – if the appraisal hasn’t been completed then the appraiser must state in the original appraisal that the property wasn’t damaged). The sooner the re-inspection is ordered, the less likely delays will occur.
Re-inspections are not a small issue. Especially given the changes to our industry and the number of qualified appraisers remaining, sometimes the turnaround time for a re-inspection can exceed 14 days. Think about it, if you live in a small town, there are probably fewer people serving the appraisal market than there were three or five years ago. If your town happens to be struck by disaster, every transaction in process at the time is going to need attention. Since the Home Valuation Code of Conduct (HVCC) and now the Appraisal Independence Requirements (AIR) have forever changed the appraisal process, the days of calling your friend the appraiser and asking for a favor are pretty much out the window. If you happen to be in a big town, the number of properties affected is likely step-in-step with the higher number of appraisers in the area. The first people to schedule the re-inspections are likely to benefit from the shortest turn-times. One other factor to this scenario is if the lender you’re working with is large enough and does enough volume to have leverage over the AMC (not in a way to influence values or the opinion of the appraiser, but enough to get orders fulfilled before other smaller lenders).
If repairs are required, it’s even more important to take quick action. However, depending on the type of disaster, waiting may be inevitable. If a flood or hurricane has caused water damage, the water must recede and the mess must be cleared before any estimates of repairs can be made. Similarly, if there’s a fire, obviously, repairs can’t begin until the fire is out and Fire and Law Enforcement have declared the property and area safe and accessible for inspection. Once the property is ready to have the damage assessed it needs to be determined if, when and how the seller will participate. Next, a licensed contractor or similarly qualified professional should be consulted to determine the cost for repairs and how long the repairs will take to be completed. Once those steps are finished, the purchase contract should be extended and provided to the Lender so they can communicate any additional requirements specific to the particular loan scenario. Once the repairs are completed a Certificate of Completion (commonly referred to as a 442) must be issued and reviewed by the lender’s Underwriter to make sure the work satisfies their guidelines.
At the end of the day, any natural disaster will be chaotic, stressful, and likely add an unexpected wrinkle into real estate transactions. More than any individual step I’ve outlined above, I can’t stress enough how important it is to have clear and frequent communication. You’ll notice there are a couple of themes I mention in almost every piece I write. Prime among them is communication. The worse the news, the more people you should tell and the quicker you should tell them. With good communication, you deservedly earn the trust and admiration of your clients and your business partners. The hundreds of transactions that close smoothly tend to blend into the history of our career, but the transaction we were able to save that almost slipped away like a foundation demolished by a mud slide, will be remember by you and everyone else in the transaction for years to come.
Joshua Weinberg is a nationally recognized speaker, author, consultant, and leader in the real estate industry, specializing in integrating compliance and technology. He is currently Director of Compliance for First Choice Bank, a State Chartered and FDIC Insured Depository institution, and Senior Vice President of Compliance for First Choice Loan Services Inc., its subsidiary.
Previously he was one of the owners and COO of a real estate services firm in San Francisco, CA providing real estate sales, mortgage brokering and property management services. He can be reached for consultation or questions at email@example.com.