Energy Law Wisconsin Blog

Summer Tip: A Word of Caution Regarding Vacation Homes on Private Roads

Required Formal Disclaimer:  Since this entry involves some discussion of legal principles, there is at least a theoretical possibility that one of you out there may read this blog entry and conclude that: (a) you and I have entered into an attorney client relationship; or (b) I am offering you specific legal advice for your specific legal situation.  In the unlikely event you reach either conclusion, I must inform you that sadly, it is not true.  Persons accessing this site are encouraged to seek independent counsel for advice regarding their individual legal issues.

This blog most often addresses energy issues, particularly in Wisconsin. However, the summer  weather and a client’s recent real estate deal have brought to my attention a concern that is increasingly likely to be encountered by people who own or wish to purchase a home in the Northwoods of Wisconsin and similar rural locations.

If you own a home on private road that is not maintained by the local municipality, you need to check in the real estate records to see whether there is an enforceable maintenance agreement binding current and future owners of homes served by the road. If the answer to this question is “No”, you could find yourself in a bind when it comes time to sell your property.

Fannie Mae, the federal residential mortgage underwriting agency, clarified its underwriting guidelines in 2008 with respect to homes located on a community-owned or privately-owned and maintained street.  See Fannie Mae Announcement 08-01 (January 31, 2008).  In this announcement, Fannie Mae stated:

“If the property is located on a community-owned or privately-owned and maintained street, Fannie Mae will now require one of the following:

1. An adequate, legally enforceable agreement or covenant for maintenance of the street. The agreement or covenant should include the following provisions and be recorded in the land records of the appropriate jurisdiction:

  • Responsibility for payment of repairs, including each party’s representative share;
  • Default remedies in the event a party to the agreement or covenant fails to comply with his or her obligations; and
  • The effective term of the agreement or covenant, which in most cases should be perpetual and binding on any future owners.

If the property is located within a state that has statutory provisions that define the responsibilities of property owners for the maintenance and repair of a private street, no separate agreement or covenant is required.

2. If the property is not located in a state that imposes statutory requirements for maintenance, and either there is no agreement or covenant for maintenance of the street, or an agreement or covenant exists but does not meet the requirements listed above, the lender must indemnify Fannie Mae for any losses or expenses it may incur due to the physical condition of the street or in order to establish and/or retain access thereto. Announcement 08-01, page 4.

Although this policy has been in place for several years, vacation home buyers and sellers are increasingly bumping into it as we emerge from the recent recession.  The impact is that prospective purchasers of homes served by private roads may not be able to obtain financing and owners of such homes may have a difficult time selling them to anyone who requires financing to complete the purchase.

Freddie Mac has not yet adopted such a requirement, but several mortgage professionals my client spoke to have indicated that that it is only a matter of time until Freddie Mac adopts the same policy.

The solution to this problem is for the homeowners who share the private roadway to enter into a legally enforceable maintenance agreement, which obligates them and their successors. This type of a document is not particularly difficult to prepare, but it can be a chore to get it signed by all the right people on the spur of the moment. Existing homeowners who don’t have any immediate plans to sell may be apprehensive about agreeing to an unknown amount of future maintenance expense.  It can take time to get everyone on board.

The bottom line is that buyers looking at vacation homes need to make road access issues part of their due diligence  and offers to purchase. Persons who own vacation homes served by private roads need to find out where they stand, so that, if possible, they can take the necessary steps to make their property saleable to someone who needs bank financing.

Written on July 12, 2013 at 2:39 pm, by Energy Law Wisconsin