Home Inspections and Property Condition
What’s the happiest day for both buyers and sellers in a real estate transaction? It’s the day it goes under contract. The buyers have a new address and are excited about settling in. And the sellers no longer have leave for showings or put the toothpaste back in the vanity drawer.
What’s the flip side? The day of the inspections. The buyers have discovered after about $700 in inspection fees that the house is less than perfect. And the sellers are incredulous and offended by the inspector’s report citing all the “nit-picky” things he discovered. Issues regarding property condition are the number one reason for contract cancellations. It’s usually not as bad as both parties think. Initial reactions are often extreme. In the past two decades I’ve successfully guided hundreds of buyers and sellers through this mine field. In a nutshell, here’s how it works.
Let’s start with the issue of property condition disclosure. Sellers are required to disclose what they know about the condition of the property. Seller’s Disclosure Statements address a broad range of topics like physical condition, environmental considerations, health and safety hazards, improvements made by the seller, property taxes, restrictions on property use as well as other issues that a buyer would want to know before making a purchasing decision. These disclosure forms are very specific and comprehensive. It’s also a history of what has happened while the seller’s have owned the property. For example, if the roof leaked in April of 2011 and was replaced, then that should be disclosed by the sellers. As a buyer you should look carefully at this disclosure before you make your offer and ask for clarifications for what you don’t understand. In your offer you will acknowledge that you have received the disclosure and read it. I urge you to do so.
Every sales contract should have an inspection provision giving the buyer a window of opportunity to conduct property inspections. If it doesn’t, or, if what’s there is not explained to your satisfaction, then stop right there. Either the contract is lacking a necessary provision, or the agent is lacking knowledge, or both. Make sure you understand what, as the buyer, you have the right to inspect and the process for resolving items that are deficient. You will also have a window to make requests for items to be repaired or replaced.
A seller may choose to sell a property “As is” but that should be understood up front and disclosed before anyone makes an offer. Under this circumstance, the buyer would have an opportunity to inspect and either accept the property in its current state or cancel the contract without damage.
Buyers make purchasing decisions based on the assumption that everything about the property is in good working order unless the sellers have disclosed otherwise. For example, if the disclosure states the water heater doesn’t work, then ask that a new one, paid for by the seller, be installed by a licensed plumber prior to the closing date in the contract and exclude the dead water heater from inspection. In other words, ask for it up front. If it’s an issue, deal with it now. Any property condition of which a buyer or agent has actual knowledge is defective should be addressed when the offer is made and not through the inspection provision in the contract. If, on the other hand, the disclosure states the water heater is “working” and it isn’t, then the buyer has a legitimate beef.
What if the seller discloses that the roof is 21 years old but doesn’t leak? Is it defective? Maybe not. But it could be obsolete and un-insurable, therefore it should be a consideration. Things go from black and white to shades of gray quickly. A seller doesn’t want to shoulder all the cost for a new roof on a property that they no longer want to own, and a buyer doesn’t want to buy an obsolete or potentially un-insurable roof. Again, this could be dealt with up front in the offer.
Assuming all the property condition knowns are out of the way, the offer has been accepted and the inspection window is open, how do you select your inspector(s)? I suggest you start by deciding what you want to inspect. Your agent should provide you with a list of inspectors in your market and what type of inspections each offers. That list is a good guide for what you may want to inspect. But not who you may want to do the inspections. If you know someone who has bought or sold recently, so you could ask them about their experience and gain some knowledge. But your agent should be helpful to you. After all, it’s only reasonable to expect that they have knowledge and experience with inspectors. I will make two or three recommendations based on my experience and let the buyer decide. Sometimes it boils down to which one is available given the inspection completion deadline.
After the inspections are completed and the reports are in, it’s time to decide on what to request to be corrected. Here’s where you must prioritize what’s most important to you. I don’t recommend that you ask for everything that the inspector cited in the report unless you’re buying a new house. That’s altogether different. So, focus on the big stuff. Roof. Siding. Windows. Heating and cooling equipment. Foundations. Make sure all the big-ticket systems are addressed. Again, this is where you need the guidance that a seasoned agent can provide.
Your requests must be in writing. And be as clear as possible. Don’t just ask that the water heated be replaced, specify the capacity and require that it be replaced by a licensed plumber. It’s the same with anything that’s associated with basic utilities. Require that the work is performed by those qualified to do the work. Ask for invoices prior to closing and make sure they have either been paid or are being paid by the seller at closing.
Once the work is completed and prior to closing, the buyer has the right to reinspect the repairs to determine that the work was done correctly, and If not, that further corrections be completed under the agreed to terms prior to closing.
What if the work can’t be done before closing due to weather or replacement components aren’t available? There are two ways to resolve this. This is my preference. Get a firm bid for the work and at the closing have the total amount of the bid set aside under the agree to terms and in the form of a check from the title company doing the closing to the bidder and handed over to the buyer. When the work is completed the buyer gives the check to the contractor. Simple, if the buyer’s lender agrees. If for whatever reason this won’t work, then money will need to be escrowed to pay for the repairs. Escrow is when a third party holds value (money) for the benefit of the principal parties for future use. In this case the title company would hold 150% of the bid price until the work is completed. Any excess money left in the escrow account would be returned to the parties under the terms of the escrow agreement after the bill is paid. I’m not a big fan of escrow for two reasons. Contractors don’t like it because there’s a third party making decisions about when the work is completed. And there are administrative costs associated with the accounts. But sometimes it’s what needs to happen. I suggest you have this discussion with your lender ahead of time, so you know what they will, or won’t allow.
Did I say minefield? I can’t over stress the importance of having a skilled real estate agent to lead you through this phase of the transaction whether you’re buying or selling.
If you’ve read this far, I hope I’ve given you some insights into the inspection process and its importance in the real estate transaction. If you have questions about inspections (or anything else for that matter), please contact me and I’ll be happy to answer them.