Questions from a recent transaction

Question 1: should non-profit, city government-funded housing entities sell houses that are unsafe?
Question 2: should non-profit, city government-funded housing entities sell houses to investor groups?

These questions have to do with a recent client transaction. Some names have been changed to protect the innocent (and me!).

My clients, Mr. and Mrs. Buyer, are approved for an FHA loan. We have been looking for a home for them since February. They found a home in Glendale that seemed to perfectly fit their needs.

The house was owned by Verdugo Housing Corporation, a non-profit organization that, I’m told, is chartered by the City of Glendale. I understand that Verdugo Housing was formed as a non-profit city partnership to increase affordable home ownership in Glendale.

Verdugo Housing had recently purchased the property for somewhere in the $200,000’s and had done a cosmetic rehab (carpet and paint). The home was for sale in the very high $400,000s and Mr. and Mrs. Buyer made a full-price offer just before it went on the market. Escrow was opened in April.

We repeatedly asked for legally-required physical inspection disclosures, but VHC never furnished them to us. And the house inspection did not go well. At all. (Recall that FHA will not fund loans on substandard houses.) The roof was crumbling. A couple of rooms that were added on were not attached to the foundation. The a/c and the stove didn’t work. The electrical work was substandard in places. Those were the major issues; there were many minor issues as well.
The buyers asked the sellers to fix the major issues; after all, a non-profit housing corporation would not want to sell substandard homes, right? To our surprise, the VHC declined to do so. My broken-hearted clients cancelled the escrow. We heard through the grapevine that the day after escrow was cancelled, Verdugo Housing Corporation sold the house on an all-cash deal to a group of local investors, who intend to rent it out.