Monday, May 13, 2013

Home Inspections and the Market

There is nothing like a little, local, anecdotal evidence to shake up a real estate story.  Things are definitely perking up in real estate sales because inspectors are tight on schedule again.  For the last several years hiring a home inspector went something like this; buyer: "I need an inspection at 123 Maple, when can you be there"?  Inspector: "I have tomorrow at 1 or 4 available will that work"?  But lately it seems inspectors are booked out several days.  I have an inspection this afternoon that my client booked five days ago and this was the earliest available.

So the buyers are starting to pull the trigger.  We knew this already since multiple offers over asking have been happening all year.  But now we are getting just a little more inventory dribbling in and so a few more sales can happen.  It seems that it is just enough to keep those inspectors booked up.

Now that I started a line of thought on inspectors, this could be an opportunity to touch on the importance of these inspections and how a buyer should interpret the information.  Every state has its own method of regulating (or not) inspectors.  Here in Washington State, inspectors are required to take continuing education and to use a state mandated, uniform method of inspection.

Inspectors will look at just about everything in the house.  An inspector will provide a thick report detailing everything they found.  They will call out little things like a loose light switch cover right up to more severe items like the condition of the furnace, electrical issues, etc.  In most cases an inspector is well trained on a variety of disciplines but typically is not an expert in any of them.  They will refer you to a licensed professional in the line of work related to the item they are questioning.  An inspector will tend to err on the side of caution when reporting things.

It is most important for buyers to be very cautious about how they interpret and use the information they receive in an inspection report.  The inspector should be using a tiered severity system.  An item may be functioning, marginal, or defective, for example.  A marginal item is OK for now but will likely need servicing soon.

When interpreting the report, understand that the inspector is citing in great detail and with general caution the smallest of details.  Often an inspector will indicate a problem with an item that in fact may not turn out to be a problem. Remember, they err on the side of caution.  It is classic case of them covering their tail.  If the home is older you should be prepared for many items to be sub-standard relative to a new home.  But they were fine for the era of the house.  Not all inspectors do a good job of explaining that the home is older and the items that they are indicated are not to code, were in fact to code when the house was built.  Generally this is grandfathered in.  Too many buyers get unnecessarily scared off from a solid house at a good price because they misinterpret data in the inspection report.

The inspection should provide two basic functions.  First and foremost it is designed to inform the buyer of the condition of the house and its systems. This is a protection that helps to insure there are no catastrophic issues that would be dangerous, and/or very expensive to repair.  This can be a savior especially with older homes and homes that are exempt from seller's disclosure.

The second function is a "honey do" list for the home after purchase.  The inspectors will usually provide a summary list of all the marginal and defective items they find.  Some inspectors will even list them by importance.  The items that are not fixed prior to close by the seller can be handled at the buyer's discretion after closing.

Since we are moving into a seller's market, the buyer's should avoid demanding too much.  I like to categorize the inspection findings on defective and marginal items into three categories.

First, items that are genuinely dangerous and may keep the house from closing.  Some items that are found on an inspection are items that an appraiser may cite as needing repair.  This will likely cause the lender not to close until the items are remedied (especially with FHA or VA transactions).  These are items that a buyer should ask the seller to tend to prior to close.

The second category are negotiable items.  The buyer may decide to ask the seller for a little help with say a defective or marginal air conditioning unit. This is an expensive item.  These negotiables however should take into consideration the price of the house.  Was this home listed at a very low price, is it a value in the market?  Was it priced at the top of the market and then bid up to a higher price?  If the former is the case then it may be best to leave most of the second category items alone and just fix them after closing.  If the latter rings true then sure, the buyer can hit the seller with some repair/replace requests.  It is usually a good idea in a negotiation to show that you are willing to share in the "pain"  Buyers should cite numerous items that are defective or marginal but only ask a for a few that are really important to them.  Buyers should give the seller a reason to stay in the transaction with them rather than moving on to the next buyer.  In this market there is probably a next buyer just around the corner.

The third category is for items that should simply be added to the aforementioned "honey do" list and the buyer should deal with those themselves. Don't irritate a seller by asking for trivial repairs.  This behavior may set a tone that the buyer is going to be troublesome and may scare the seller off and into a defensive stance or even to another buyer.  This is particularly important when dealing with a bank owned property or a short sale. In the former the bank is often unwilling to make repairs and in the latter the seller is often unable to make repairs due to financial concerns.  If a buyer is asking for nothing serious but only a few "trivial" items, tell the seller why they are asking for it.  Maybe the buyer is elderly and unable to make these seemingly simple repairs or some other reasonable issue is present.  Don't leave the seller to his own devices in determining the attitude or motives of the buyer because they will likely assume the worst and that may not be the case at all.

In conclusion buyers should take the inspection report with a healthy pinch of the proverbial salt.  They should protect themselves from serious issues by following up on them with an additional inspection or a request for a seller remedy and then use the rest of the report to identify things the buyer can remedy over time after closing.  Buyers should always have a professional inspection of a property before they commit to buy.  These are excellent tools especially when they are used properly.

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