1) Active Water Intrusion (stains, bubbling paint, musty odor, warped floors)

Why it matters: Hidden damage, mold, insurance disputes, and rehab creep.

Order next: Moisture mapping, targeted plumbing/roof review, mold test only if indicators exist.  Taking these steps ensures proactive management of potential issues, giving lenders peace of mind.

Lender responses (choose one or stack them):

• Condition to fund: Identify source + stop leak + provide remediation plan and bid.
• Holdback/repair reserve: 1.25×–1.50× verified mitigation + repair bid (buffer for “opened wall” surprises).
• Re-trade: Reduce proceeds or raise rate/points if water source is unknown or widespread.
• Insurance requirement: Verify water-related exclusions/limits and require water backup endorsement when relevant.

Fast rule: If the source or extent of damage is uncertain, recognize that your budget is an estimate; consider ordering additional testing or expert review before proceeding.

2) Roof End-of-Life / Unknown Age (patching, ponding, soft spots, curling shingles)

Why it matters: Roof drives insurability and disputes over “interior water damage.”
Order next: Roof certification or contractor letter + replacement bid (or core sample on flat roof if warranted).

Lender responses:

• Condition to close: Roof certification with remaining life meeting your loan term + exit horizon.
• Repair reserve: Full roof replacement reserve or funded repair escrow with draw controls.
• Re-trade: Reduce LTV or proceeds if replacement is imminent.
• Exit protection: If takeout refi is the exit, require roof to meet typical lender/insurer standards before stabilization.

3) Foundation / Structural Red Flags (horizontal cracks, settlement, sloped floors)

Why it matters: Big-ticket capex + permit risk + time risk + valuation uncertainty.
Order next: Structural engineer (focused scope), drainage/grading evaluation.

Lender responses:

• Hard stop trigger: No funding until the engineer provides stamped findings + scope + cost range.
• Re-underwrite value: Reduce as-is value / increase rehab budget / lower max proceeds.
• Reserve: 1.50× engineer’s repair estimate (structural surprises are common once work starts).
• Covenant: Require permits + inspections + lien releases for structural work.

“If an engineer is required to understand the collateral, an engineer is required before you fund.”

4) High-Risk Plumbing (galvanized/polybutylene, frequent leaks, low pressure)

Why it matters: Repeat losses + tenant disruption + mold + claim denials (seepage).
Order next: Plumber inspection, pressure test where appropriate, repipe bid if indicated.

Lender responses:

• Condition to fund: Confirm material type + leak History; require repipe plan if high-risk lines exist.
• Repair reserve: Repipe holdback, released only with permits and final sign-off.
• Insurance condition: Confirm the carrier will bind coverage with the known plumbing type; require a higher water-damage deductible disclosure.
• Structure the loan: Shorter term or higher pricing if plumbing risk threatens the timeline/exit.

5) Sewer Lateral Unknown (older areas, trees, slow drains, prior backup)

Why it matters: A sewer failure can result in a $10k–$40k surprise cost and a delay.
Order next: Sewer camera scope + locate depth/material + repair bid if compromised.

Lender responses:

• Condition to close (preferred): Clean sewer scope with recorded video + written findings.
• Reserve: If the scope is “marginal,” escrow a repair reserve with release on completed work.
• Re-trade: Adjust proceeds if scope reveals offset joints, root intrusion, or collapse risk.
• Borrower covenant: No tenant occupancy until lateral is verified if risk indicators exist.

6) Electrical System Risks (FPE/Zinsco, knob-and-tube, aluminum branch wiring, double taps)

Why it matters: Insurability, life safety, and forced upgrades.
Order next: Licensed electrician evaluation; panel/wiring documentation; upgrade bid.

Lender responses:

• Hard condition: No funding until insurability is confirmed and hazards are scoped.
• Repair-before-fund: Panel replacement / critical corrections required pre-close on high-severity systems.
• Reserve with draw controls: Electrical upgrades held back, released only after permit final.
• Insurance requirement: Proof of a bound policy without exclusions that cripple collateral protection.

“If the insurer won’t cover it, the takeout lender probably won’t either.”

7) HVAC End-of-Life / Nonfunctional

Why it matters: Habitability, rentability, and refinance readiness—especially for multifamily.
Order next: HVAC diagnostic, remaining life estimate, and replacement bid.

Lender responses:

• Reserve: HVAC replacement holdback (especially if occupancy/seasonal heat is required).
• Condition to fund: If non-functional, require a repair or replacement plan before close.
• Draw schedule control: Tie releases to install milestones and permit closure.
• Exit covenant: Require HVAC to be operational before appraisal/takeout refinance.

8) Unpermitted Work / Additions (garage conversions, added baths, ADUs, layout changes)

Why it matters: Value disputes, code enforcement, insurance gaps, and refinance failure.
Order next: Permit search, zoning/use verification, legalization pathway estimate.

Lender responses:

• Re-underwrite value: Underwrite to legal square footage and legal unit count only.
• Condition to close: Borrower must disclose unpermitted areas and provide a cure plan or remove/return to prior use.
• Loan structure: Lower proceeds or require a larger down payment to keep true LTV conservative.
• Covenant: No marketing/lease-up claims using unpermitted space; no rent underwriting from illegal unit(s).

“If it’s not legal space, it’s not collateral value.”

9) Hazard Indicators (asbestos/lead, old insulation, suspected tanks)

Why it matters: Remediation can be expensive and time-consuming; disclosure liabilities can spook exits.
Order next: Targeted testing (not fishing expeditions), tank scan if indicated, remediation bid if positive.

Lender responses:

• Condition to close: Test results + remediation plan if indicators exist.
• Reserve: Remediation escrow + disposal documentation requirement.
• Re-trade / walk-away: If remediation cost/time threatens the loan term, exit.
• Legal/documentation covenant: Require proper abatement contractor, permits, and clearance documentation.

10) Safety / Compliance Concerns (egress, stairs, handrails, fire/life-safety gaps; soft-story risk where applicable)

Why it matters: Liability exposure + municipal enforcement + insurance challenges.
Order next: GC compliance scope, life-safety review when warranted, local code-trigger assessment.

Lender responses:

• Condition to fund: Correct immediate life-safety issues before close (handrails/egress basics).
• Reserve: Life-safety compliance holdback, released at final inspection sign-off.
• Borrower covenant: No occupancy/tenant move-in until required life-safety corrections are complete.
• Exit protection: Require compliance items to be completed before appraisal/takeout underwriting.

Default “Response Ladder”

When a trigger appears, pick the lowest-cost response that protects collateral and the exit:

·       Re-trade (adjust proceeds/price/rate/term)

·       Reserve/holdback (escrow funds; release via permits + inspections)

·       Condition precedent to funding (must cure before close)

·       Covenants (must cure post-close by date; reporting requirements)

·       Decline (when scope is unknowable, timeline breaks, or exit is compromised)

“Reserves fix budgets.  Conditions fix uncertainty.  Declines fix deals that can’t be priced.”