by Chuck Lieber on September 22, 2010
A Minneapolis homeowner who owned an older home decided to place his home on the market. He decided to have a presale inspection and requested a written report because of a recommendation from his Realtor. One of the significant issues outlined in the report was the fact that there was some sloping of the floors and some of the door frames were out of plumb. This is a sign of settlement which was common for that area.
The seller recalled that when he bought the home he had an engineer inspect the home and the seller (then buyer) was present at the inspection which is always recommended. Because of the age of the home, the engineer, observing the sloping floors and out of plumb door frames, was not alarmed and concluded that the settling which caused the defects occurred many years ago and concluded that it was not an ongoing problem. The buyer (now seller) went ahead with the transaction.
Now, as the seller was preparing to sell the home his agent suggested that it would be a good idea to have the report from the engineer available to potential buyers to help alleviate concerns about the defects. After searching for the report the seller recalled that he did not pay extra for a written report because he was at the inspection and everything was fine.
This is less common in Minnesota but unfortunately it does occasionally occur especially when specialty inspections are performed like engineering evaluations. The cost of these inspections can be extensive and buyers are tempted to save money by not getting a written report.
If the buyer wants to negotiate concessions from the seller due to defects the written report will be absolutely necessary as proof of the defects.
Certainly saving the money for a written report is tempting and although it is not common now, in an active market it occasionally made sense to have the property pre-inspected so the offer would not have an inspection contingency. It might make sense to temporarily forego the written report pending an accepted offer. If their offer is accepted then the written report can be requested.
As illustrated in the previous case a written report documents the condition of the home when the now seller bought the home which could be 5, 10 or more years prior. To buyers the important issue is whether the condition is recent or is an older condition that has not continued to progress.
In this case the pre list inspection report recommended that the seller get an additional inspection by an engineer to evaluate the foundation. Because the seller did not have a prior written report he hired an engineer again to inspect the foundation.
Sellers are wise to order the recommended inspections most importantly those that buyers will be particularly interested in. This provides the seller with support for his position if the buyers make an unreasonable request for compensation for defects.
In closing, Sometimes it makes sense to forego written reports however if you plan on providing inspection information to a buyer, hearsay from you will not cut it. A written report, in the buyer’s eyes, takes the seller bias out of the equation. The report is from the inspector, not from the seller.
by Chuck Lieber on September 10, 2010
A common term used in the real estate industry is “red flag” which refers to the condition or information on a property that appears conflicting and a wise buyer will get to the bottom of the conflict. For example stains on the ceiling may indicate that the roof needs replacing.
In most cases the red flag has something to do with the condition of the property but other factors could be a red flag so it is wise to pay attention to all aspects of the home search and purchase. I can’t really blame buyers for getting themselves into ridiculous loans that are now in foreclosure but a savvy buyer would have seen the red flags even though their less than ethical lender recommended and approved them for risky mortgages.
The process of buying a home is both stressful and exciting. Buyers can help reduce the stress by being actively involved and watching out for red flags and being vigilant about investigating those red flags.
Another important way to reduce stress is to work with an excellent agent you trust. Your agent will advise you regarding different aspects of the search and transaction but making the decisions will be up to you. Your agent has a fiduciary duty to you and to follow your legal instructions.
A few signs of a good agent are someone returns your calls promptly, answers all your questions and shows you homes that meet your search criteria. Some less than ethical agents try to push their clients into more expensive properties so be aware of that red flag.If aspects of the information you receive on a property appear conflicting that is a red flag. It could be due to carelessness but you should certainly get to the bottom of it in case it is due to someone concealing a material fact. Get answers to all your questions till you are sure you have the whole and accurate picture. When buying real estate there are no stupid questions.
If an inspector you hire or you suspect that the seller has had the property inspected before and you were not given a copy of that report, which is a red flag. It may indicate that there were conditions discovered during the previous inspection that the seller doesn’t want you to know.
Don’t assume anything. You know what they say about that. Follow through to make sure assumptions don’t make your transaction a nightmare. It might be easy to assume that if the lower level has a second kitchen and all the other amenities for a rental that it can be legally rented. Even if the seller has rented it in the past, the seller may have done it illegally. If you are counting on the income from renting the lower level to pay the mortgage you may find yourself in a home that you ultimately may not be able to afford.
Be conscious of potential changes in the neighborhood if there is a large open area in close proximity to the home you should find out what the plans are for that property. Don’t assume that it will be populated with single family homes. It could be perfect for a school in which case if you are sensitive to noise it could be a problem for you
In closing: Make sure you are on top of any unknowns and don’t be afraid to ask questions
by Chuck Lieber on September 7, 2010
In this buyers market it is rare to encounter a real estate offer that doesn’t have some kind of contingency. The buyer obtaining loan approval is an example of a contingency and is an event that must happen before the transaction can close.
Contingencies normally have an expiration date or time for them to be removed so this should be specified in the contract. These expirations times or dates are negotiable so whatever the buyer and seller agree to needs to be stated in the purchase agreement. Because sellers want to know that they have a solid deal, they want a short contingency whereas buyers want as much flexibility as possible to conduct inspections arrange financing or even more rare in this market to sell the buyer’s home.
Sellers should realize however that the contingency time should be realistic. If buyers become nervous because of an approaching deadline they could get cold feet and abandon the transaction.
With the tightening credit market a full approval for a mortgage takes longer than it used to especially because lenders are asking for more documentation and proof of the buyers ability to perform. Some want documentation directly from the IRS before they render final approval which can delay approval by 5 days. Occasionally underwriters require a second appraisal or review appraisal to insure the buyer is not paying too much for the property. This also obviously delays the final approval.
In some situations the contingency for financing doesn’t have an expiration date before the closing date. Depending on how the purchase agreement is written if the buyer can’t finalize financing before closing the buyer may back out and receive the earnest money back. This can certainly make the seller uncomfortable not knowing if their home is sold until closing. One alternative outlined in the Minnesota financing addendum is to have the financing contingency expire before closing. If it appears that the financing contingency will expire the expiration date can always be extended with the approval of all parties.
For sellers who have to wait till the closing date it is wise to have the possession date at least one day after the closing date so if the closing does not happen at least they will not have fully packed to move.
If the contingency is not actively removed what happens. Some contingencies automatically expire, commonly referred to as passive removal. An example of this in Minnesota is the inspection contingency. If the buyer has an inspection and does not notify the seller of defects they want corrected within a specified time the inspection contingency is automatically removed and the purchase is another step closer to closing.
The preferred method however is active removal of a contingency. In the case of the inspection contingency it is common if the buyer will not be asking the seller to correct any defects to notify the seller of that intent in writing.
The assumption by the seller that if the buyer doesn’t remove a contingency the earnest money becomes theirs is another common misconception. Many contingencies have clauses that specify that the buyer is refunded the earnest money if a buyer doesn’t remove a contingency so sellers should make sure they understand the details of the contingencies.
IN CLOSING: Sellers should not assume that just because the buyers don’t remove a contingency on time that they do not intend on closing. Even if the buyers indicate they do not intend to close, get it in writing.
by Chuck Lieber on September 3, 2010
Price is not the only important aspect of a purchase agreement. A purchase agreement and any counter offers should include all terms of the transaction.
In Minnesota most real estate agents fill out pre printed purchase agreements and accompanying forms that have been drafted by the Minnesota Association of Realtors forms committee who have consulted with legal counsel prior to release of the forms. Buyers need to fully understand all the terms of the purchase agreement prior to it being presented to the sellers
It’s surprising to observe that many buyers don’t really know the details of the agreement they are signing and depend on their real estate agent to insure that the purchase agreement reflects their wishes. Agents should make sure that this is not the case for their clients and buyers should not allow it. Buyers can get a copy of the blank agreement in advance so they can read it and be ready to ask questions when it comes time to fill out and sign the agreement.
More often than not a purchase agreement includes some standard contingencies. Contingencies are conditions that must be met before the purchase can be completed. The more common contingencies are for the buyer being able to obtain financing, for the property appraising for at least the stated purchase price, for the buyer accepting the results of negotiations regarding an inspection and less common in this market for the sale of the buyers home.
Contingencies often times have time constraints such as a deadline for conducting an inspection and negotiating how to handle defects. Minnesota’s inspection contingency gives the buyer the option of accepting the home as it was inspected, notifying the seller that repairs have to be made or compensation for such defects or simply deciding not to buy the home because of defects.
During the prior frantic sellers market offers were often submitted with no requested contingencies so that the offer will be more desirable to the seller. The occasional unfortunate outcome of this practice was that lawsuits were filed after closing when defects were discovered that the buyer was not aware of.
Occasionally, as it was during the frantic sellers market, it makes sense to forgo some contingencies but only if the buyer is fully aware of the consequences. Recently a buyer was involved in multiple offers on a Lake Minnetonka home. In order to make the offer more desirable the buyer did not include a contingency for the home to appraise for the stated purchase price.
Because of the fact that there were too few comparables in the area within the last 6 months the property did not appraise for the stated purchase price. The buyers were fully aware that this could happen so the buyers were prepared to increase their down payment in order to go ahead with the purchase.
The price and contingencies are only part of the picture. Some of the other items that are called for in a purchase agreement are earnest money amount, possession date or time relative to closing, the closing date, any personal property that may go with the property such as appliances, curtains etc., and occasionally sellers will exclude items such as a valued chandelier. Being very specific is important.
Leaving issues to be worked out later could become difficult especially if a seller becomes much less cooperative after the seller begrudgingly agrees to pay for defects found during the inspection.
THE CLOSING: Make sure you know what you are signing. Have your agent explain any items you are unsure of.
by Chuck Lieber on September 1, 2010
It used to be that when your home no longer fit your lifestyle you would by another home that better fit your needs. The market was a frantic sellers market so it made sense to buy your next home first, and then sell your old house. In today’s market however this process has many more risks and for some with the with credit requirements tightening it’s impossible.
by Chuck Lieber on August 30, 2010
A common misunderstanding in today’s real estate market is that the value of a home will increase by at least the cost if the owners do some remodeling. The magazine “Remodeling” publishes a study every year called their “Cost vs. Value Report” and this report makes the case for the fact that the increase in value is well under the amount invested unless the homeowner does the majority of the work.
