Inman

Avoiding a real estate ‘lemon’

Q: I’ve been wanting to buy a home for years, and now seems to be the perfect time, but I’m still procrastinating. I have a deep-seated fear that I’ll buy a home that has hidden problems. I’m afraid of making such a major, long-term financial commitment and then — surprise! — the foundation has a problem, or the roof is bad. How do people get past these fears?

A: A number of things about home buying should be uncomfortable if you are treating the matter with the appropriate gravity. To make the momentous move from procrastinator to property owner, you must gain a certain level of comfort and control around those items.

Mindset Management

Many smart homebuyers are concerned about the prospect of buying a "lemon" of a house. Horror stories abound of unsuspecting buyers closing escrow only moments before the house starts to fall apart, piece-by-piece. In fact, years ago, Richard Pryor documented a bizarrely extreme and hilarious version of this phenomenon in the film "Moving."

To get a comfort level around the issue of potential future repairs and surprises, so that you can activate yourself on the path to homeownership, rethink the process of house hunting and getting into contract. Shopping for a home and even getting into contract does not lock you in, irretrievably, to purchasing a specific home, warts and all.

Rather, the house hunt and contract are like a first phase vetting that sets the stage for your due diligence into the condition of the property. In a wisely conducted transaction (see Need-to-Knows, below, for how to conduct your transaction wisely), the contract simply secures the property for you, at the price terms you can live with, so that you can acquire the information you need to avoid big surprises after close of escrow. If you structure your deal correctly — including contingencies, disclosures, inspections and a home warranty — you will slash the risk of having later condition problems pop up.

Even when you buy a home as-is, in most cases you are still entitled to obtain inspections, review all the sellers’ disclosures, and back out of the deal if your investigations reveal condition issues that you are not willing and able to take on. As-is really means that you agree to take (and the seller agrees to sell) the property in its current condition at a certain price, if you elect to close the transaction after you have completed your investigations into the property.

Your house hunt and contract do not lock you into buying a problem property, and it doesn’t make sense to thoroughly investigate the property until you get into contract. As such, if you want to and are ready to buy, don’t let the fear of a lemon stop you from getting a loan approval and starting to look. When you’ve found a place and its time to formulate your offer, you can structure your purchase contract to protect yourself from buying a lemon.

Need-to-Knows and Action Items

There are a number of protective elements that you can, and should, build into your transaction and your ongoing smart ownership strategy to dramatically minimize (a) the likelihood that you will end up with major, surprise problems with your home, and (b) your exposure to big-dollar-amount repairs in the event surprise problems do arise. …CONTINUED

Contingencies

Virtually every buyer should ensure that their contract has an inspection contingency, among others, unless they are planning to buy a home they know is falling apart and are OK with that (some people are!). A contingency, in general, is simply your right to bail — your right to back out of the contract. The right to inspection and inspection contingency, in particular, assures you the right to access the property for inspection by home inspection or trade professionals for a certain number of days, and allows you a certain number of days to back out of the transaction and recover your deposit money if you are not satisfied with the results of the inspection(s) and cannot resolve your condition concerns with the seller.

Disclosures

The terms of every state’s form contract and every state’s real estate laws require that sellers disclose to prospective buyers of their home anything that would have a material impact on the decision-making of a reasonable buyer. This means that things like past plumbing, roofing, electrical, foundation and drainage problems are required to be disclosed by any seller in any state. Disclosures of these sorts of past issues can guide your inspectors to dig deeply into the quality and adequacy of any repairs the sellers may have made, or to drill deeper into the current state of the problem, whether it might be something you need to fix, and what the fix will likely cost you — all before you finalize the transaction. In some areas, sellers prepare disclosures before they are even in contract — properties with pre-listing disclosures can create an even greater level of comfort and certainty for you, as a buyer, in moving forward on a particular home.

Inspections

Long story short — get them. You should at least have a home inspection, pest inspection (aka wood-destroying-organism or termite inspection), and roof inspection (unless the roof is very new and still under a written warranty). And attend the pest and property inspections — you will learn an immense amount about the inner workings of your home and it will give you a few hours to spend with the home to get that comfort level you need to decide to make it yours. Lastly, make sure you follow up on any recommendations for further inspections that are made by the pest, property or roof inspectors.

Home Warranty

Make sure that your contract specifies that you will walk away from the transaction, if you choose to consummate it, with a home warranty. In many states, it is normal for the seller to cover the costs of your first year’s home warranty. Similar to a car warranty, a home warranty limits the amount you have to pay for a long list of specified repairs that arise after you close escrow, usually to the amount of a $50 service call fee. Ideally, review the warranty contract before you close escrow, so you can understand what is and is not covered, and renew your home warranty every year when it is about to expire. That few hundred dollars will pay for itself the first time your furnace or water heater goes.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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