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Purchasing a Home with A Failed Title V


Generally, banks require that homes have working septic systems. In Massachusetts, it means that they have to have a "Passed Title V" or Passed Title 5.  This document (more on Title V Here) is the banks assurance that at least at the present time, the system is working correctly.  If the home has failed Title V, generally, most banks won't lend on it.  So that leaves you two options:


Pay Cash for a Property with a Failed Title V

If there's no bank involved, well, then they can't object!  Purchasing a home direct allows you to circumvent the banks requirements - this is why many investors purchase in cash.  Most municipalities will allow a cash buyer up to a year to fix the septic system and update the Title V.  But if the septic system isn't working, you won't be living there.  Obviously, if you are buying the property to fix it up, fixing the septic must be a priority (to open the potential pool of buyers as wide as possible), and in my studies, is usually immensely profitable (usually netting 200-300% return).  But not all of us can buy properties with cash.  So you might be able to:


Put Money in Escrow to Get the Septic System Fixed and Get a New Title V

Some banks (emphasis on SOME!) will allow a buyer to have the some of the money from the purchase put in escrow to fix the property for septic repair.  But to do this, there needs to be an estimate of what that might cost.  In general, that means someone, buyer or seller, must pay for a septic design, and get a various number of bids (1-3 is customary) based on the septic design.

A septic design involves several steps, but can generally be done for $1500-$4000.  Most excavators are able to give solid estimates based on a design, but generally assuming that they don't hit ledge, or other rocks that would require blasting.  Once the estimates are obtained, the bank will usually ask for 150% of the design estimate to be put in escrow, where an attorney holds it, and the attorney will pay the bill for the septic, when it's fixed, and then return any extra money to whomever put it in escrow.


An Example Escrow Arrangement for Title V Repairs

A home is on the market for $200K with a failed Title V.  A buyer agrees to purchase the property, and the seller agrees to put the septic repair money in escrow.  The estimates are $15,000 for the repair of the system.  They buyer, at close, pays the seller 200K, and the seller pays his lenders (100K, for example) and then takes 150% of the 15K ($22,500) and puts that in escrow with the closing attorney.  The seller leaves the closing table with $77,500. The buyer then has the new system put in place, and it only costs $14,000.  The buyer sends the bill to the closing attorney, who pays the installer, and refunds the difference ($8,500) to the seller.  There are variations on how this works, but this would be a typical scenario.



Do Good Things Today! Matt Heisler