Full Disclosure & Due Diligence: Digging For Dirt in the Housing Market

A major challenge for all home buyers is the short and long term risk of having to invest additional funds to maintain and repair a property once purchased. The task is greatly exacerbated by the fact that the vast majority of home buyers have little if any knowledge base from which to assess the risks involved with what is arguably their largest potential investment/liability. This dilemma is even further compounded by a lagging sales market where sellers are especially anxious to sell and prone to sugar coat the real condition of their property and where new homes have frequently been at least partially constructed by builders that are no longer in business.

And as preamble to the following the report, if you think that homeowner's insurance and/or home warranties hedge the inherent risks -- think again. Insurance very rarely covers system failures and maintenance issues and warranties typically just cover the immediate problem at hand. By example: should a roof leak, the warranty -- plus a deductable -- might pay to repair the leak but not cover the broader problem of a failing roof system. Similarly, should the sanitary (sewer) system fail due to aging iron drain pipes, the warranty just covers the ruptured section of pipe and not the entire, about to rupture, rusted out network of pipes.

The WSJ this morning contains a great piece on What Home Sellers Don't Tell Buyers being "Eager to unload their abodes, some sellers exaggerate the size of their lots or their houses. Others minimize their property-tax or utility bills, conveniently forget about pests, or downplay flooding problems or noise." And "because [home buyers] can't expect rising home prices to bail them out of costly mistakes ... deals are taking longer, and more of them are falling apart as buyers find properties sometimes aren't all they're supposed to be." Incredibly only "30 states have disclosure laws requiring sellers to tell prospective buyers and agents about leaky roofs and other problems" according to the article. And while a good home inspector can visually uncover some issues, they can't cut holes in walls or run cameras through pipes for fear of being blamed for creating new problems. The article also points out that "Listing agents usually accept a seller's word on property dimensions ... [and that] buyers must usually order inspections for mold and radon gas separately, ... Home buyers often gripe about tax and utilities bills that are higher than sellers said they were ... [and] Sellers may play down distractions that could drive you crazy, such as barking dogs or idling buses."

So what's a buyer to do? One of the best pieces of advice regarding neighborhood ambience -- also contained in the WSJ article -- is to visit the neighborhood under consideration at night, which is when you'll be there most often, and also knock on neighbors doors and ask questions. I would also suggest that in addition to having a home inspection (required by all mortgage companies) that you research and hire the best local construction maintenance and rehab company you can find to inspect the property under consideration. Home Inspectors have practically zero liability and no skin in the game. A reputable local construction company, on the other hand, has a great deal to gain by earning your confidence and is likely to be more well versed in local building issues, potential problems and be able to accurately estimate the cost of remediation which you can then use to lower the purchase price. Due diligence takes many forms and home buying is not the time to be timid or shy -- anymore than you'd be with a prospective supplier.

William Busch

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