In the context of a home sale or purchase, a red flag is a warning sign that there might be something serious going on with the property that requires further investigation.
For instance, if there are cracks in the foundation, it might indicate that the foundation needs work, which could be costly. A structural engineer might evaluate the foundation and find that the cracks are typical for similarly aged homes in the neighborhood. They should be monitored, but there’s no corrective work recommended.
In other words, a red flag could point to relatively minor or major problems. In either case, they should not be ignored.
Real estate law and custom varies from one state to the next. In California, real estate agents are required to do a "reasonably diligent and competent visual inspection" of a one- to four-unit residential property. This means that the seller’s and buyer’s real estate agents are required to walk through the property and note in writing any red flags they see.
California real estate agents are even held responsible for failing to point out red flags they should have known about. For instance, if there are known slides in the area, an agent working there should be aware of that. If agents in the area see signs of sloping on a property in a slide area, they should include that in their agent inspection.
HOUSE HUNTING TIP: Even if you are buying or selling in a state that doesn’t require a real estate agent to inspect for red flags, ask your agent to walk through a property you’re considering before you write an offer and point out anything that might be considered a red flag. Then ask your agent to ask the listing agent if there are any reports or disclosures for the buyer to review.
By doing this, you could save yourself time and disappointment if the house appears to have serious problems that you can’t afford to correct and the property is being sold in its present condition with no concessions for repair work from the seller.
Sellers should ask their agent to do a walk-through and visual inspection before the property goes on the market. This will give sellers time to gather more information about a red flag. For instance, if you’re agent says that your roof has cracked tiles and looks weathered and old, call a reliable roofer for an expert opinion.
The roofer may feel that the roof is at the end of its life. If so, you can replace it before you sell, get a second opinion, or simply disclose this information and roof report to the buyers so that they can factor this information into the purchase price.
In some areas, the custom is to wait until there is a ratified purchase contract before giving reports and disclosures to buyers. A problem with this strategy is that buyers don’t have adequate information about the property’s condition before they make an offer. The roof report could become a negotiable item or a deal killer.
Sometimes sellers or their agents hold back "bad" information about a property for fear that the information will keep the property from selling. This is counterproductive if it results in a failed transaction when the buyers who are in contract receive the news.
If you have information pertinent to the sale, it is far better to make it available for buyers to review before they make an offer. That way, you don’t risk having to put the listing back on the market when the buyers discover they paid too much for a house that needs a new roof or foundation repairs.
THE CLOSING: A proactive approach usually yields the best results.