The Importance of Inspections

I recently had an experience with a client that served as a huge reminder of the importance of inspections. Often, buyers do their inspections and identify minor repairs that are needed around the house. It’s normal; they are not buying a brand new home. Sometimes the seller will pay for the repairs and sometimes they won’t, but they can usually come to a satisfactory agreement, and the buyers can press forward and buy the property. In this instance, everything went well with the home inspection. Minor issues were uncovered. The seller was willing to fix most of the items to my clients’ satisfaction. Then we had the mold inspection. The mold inspector detected moisture in a wall on the ground level. He tracked the source of the water to a leak at the exterior wall where the weather proofing had been ripped apart. (The weather proofing contractor would later explain that the weather proofing installed when the house was built was yellow jacket, an inexpensive, not very durable material.) The mold inspector drew the conclusion that the plant roots along the side of the house caused the tear in the weather proofing and ultimately, the sprinklers leaked into the house. This discovery led the seller to reveal that there was moisture in the same wall 10 years ago. The wall was patched but the source of the leak was never identified. The sellers merely cut down the time on the sprinklers, never noticing that the weather proofing was no longer in tact. So it was quite possible that the sprinklers were leaking into the house for at least 10 years.  No matter the fault, we had caught a relatively serious issue, and the seller agreed to replace the weatherproofing and stop the leak.  But there was still the issue of the moisture in the wall. The inspector suggested we open up the wall in order to dry it out and to assess the damage. The seller said no, because they had looked in the wall only 6 weeks earlier while doing some aesthetic patching and said it was dry. My clients were frustrated with this conflicting information. They really wanted the house and were willing to pay for some of the damage, but they wanted to make sure that the cost wouldn’t be astronomical. They even offered to pay for the cost of opening and patching the wall in order to look inside it. After days of negotiating, the seller finally agreed to open the wall. When the wall was opened, we ultimately found that the studs were riddled with mold. And it was possible that the mold extended into the second floor. Repairs would have cost much more than what my clients were willing to spend, and the house would no longer be a good buy. The mold inspection identified problems that never came up on the home inspection report or on the seller’s disclosures. It was only the buyer’s due diligence and thoroughness that uncovered problems that could have been easily overlooked. Had my clients closed escrow and had not spent the time and money to do their inspections, they could have been saddled with some extensive mold and water intrusion problems down the road.

Carbon monoxide monitors

As of July 2011, all homes in California with fossil fuel burning appliances (i.e. gas stoves, gas fireplaces) or attached garages will be required to have a carbon monoxide monitor. Most likely a portable monitor will suffice, and they should be relatively inexpensive. I won’t be surprised if this ends up becoming a compliance issue when buying or selling a home just like it is for smoke detectors and the bracing of water heaters.

Giving a Notice to Perform

When the buyer or seller is not following the stipulations of the contract, you can issue them a Notice to Perform. Once this Notice is given, they will have a certain amount of time to make the required action or you can cancel the contract. The new Residential Purchase Agreement defaults this period to 2 days. So for instance, if the buyer has not removed their contingencies, the seller can issue the Notice to Perform. If two days after the notice has been delievered, the buyer still hasn’t removed their contingencies in writing, then the Seller can cancel the contract and return the buyer’s deposit. Keep in mind, that within this contract, Time is of the Essence. If the seller waited 5 days after the two day waiting period (or one week after they issued the Notice to Perform), they would have to issue a new Notice to Perform to the buyer if they wanted to cancel. In effect, the Notice to Perform has an expiration due to the “Time is of the Essence” clause in the contract.

Backup Offers on Short Sales

Someone asked me today if it made sense to make a back up offer on a short sale. I think it’s a good idea. Short sales can take an average of 4 to 6 months to get lender approval. Several lenders are currently rolling out new systems in hopes of delivering short sale approvals on a more expedited schedule, but until this happens, you should expect a long waiting period. Because it can take a great deal of time, it’s not uncommon for the buyer to walk before the lender makes their decision. Many buyers will find alternate properties while waiting for the bank. So in this scenario, a back up offer would be able to step up and enter into a contract with the seller. Now, don’t get any silly ideas that the process would move more smoothly because the lender has already approved the short sale. If you have ever seen any lender approval letters, you would notice that the lender stipulates that the approval is granted only for this particular buyer. If a new buyer comes into play, the lender will take a few steps back and start much of the process all over again. It could still be several months before you receive your approval letter and are able to open escrow. I did encounter this situation recently. I had clients who made an offer in June 2009. They were not the accepted offer, but we let the listing agent know that we would like to be a back up. In the mean time, my clients continued to look for another property. In October 2009, the short sale approval came through, but the seller had lost their buyer. My clients were next in line. They entered into contract with the seller, and then they waited and waited… until finally we received written short sale approval in the beginning of March 2010. We were able to close escrow in the first week of April, nine months after they submitted their original offer! It always seemed like a long shot and something just sitting there on the backburner, but it turned about to be the best move. My clients have a new home that they love.

Negotiating on Overpriced Listings

When negotiating with an unrealistic seller, it helps to gather as much information as possible. You want to know at what price the seller purchased the property. How much money, if any, did he put into the property? Are there any specific circumstances that have led to the seller putting his home on the market? This will help determine where the seller is coming from. He may be trying to recoup the money that he paid for the property. Or it may have been a labor of love, and he feels that his house is worth more. Either way, it’s going to take a lot of work to convince the seller to sell for less. If the seller doesn’t have to sell, then most likely he won’t. So it’s good to know the seller’s level of urgency. If the seller can wait it out for a couple of years, he will be unlikely to negotiate because he doesn’t have to; he’s merely testing the waters. “If somebody bites, great. If not, I’ll try it again when the market turns.”If the seller does need to sell, then you have something to work with. If possible, try to find out if there have been any other offers and at what price point. The listing agent may or may not be willing to give out this information. Legally, they can. As long as the seller is okay with it, the listing agent can disclose how much the other offers were for. But if the offers are low, many agents will not be willing to divulge this information. If you know that the seller has received a couple of offers that have been lower than hoped for, he may be getting a clue to where the home’s market value really lies. Market value is what people are willing to pay. If buyers keep coming in with offers at X, then clearly Y is not the right price. If you make a similar offer, he may no longer be surprised, and possibly ready to negotiate. The listing agent will also have more ammunition to talk the seller down. How the seller responded to past offers can also be insightful. Did the seller ignore low offers? In that case, it may be a better idea to make an offer at market value and say it’s your highest and best offer. If the seller’s pattern was to counter any low offers, then you may be able to start lower than what you’re willing to pay, and come up. This makes the seller feel like he’s getting something more out of you.In the case where there have been no offers, then Days on Market can be very telling. A listing that has been on the market for months, in an active market, is clearly overpriced. Having a strong understanding of the comps and a good rationale for your offer price can help the seller see the light. But it’s also important to make sure the listing agent agrees with your assessment, because it’s the listing agent who will advise the seller on how to respond.