Why sellers should get their home inspections up-front.
A few weeks ago I took exception to a Wall Street Journal housing reporter's claim that home sellers are better off not getting "pre-listing inspections": professional inspections of the seller's home, paid for by the seller and done before the home is put on the market, then delivered to all interested buyers for their review prior to making an offer. The reporter asserted not only that seller ignorance is seller bliss (a dubious claim, whether we're talking sellers or anyone else) when it comes to home defects, but that making the buyer ferret out the home's dirty linen himself puts the seller in a better negotiating position.
Shortly after I wrote my typically caustic response to this typically wrong-headed real estate article, I ran across a hand-out, left over from some office training session held in the dim and misty past, called "20 Reasons To Get Inspections Up-front". So herewith a detailed and not-so-caustic run-through of the many reasons sellers should do their own inspections:
1. "Better disclosure—disclose with inspection reports." Since virtually all buyer-seller lawsuits involve Buyer suing Seller for failing to disclose some material defect, the value of better disclosure in warding off lawsuits should be obvious to Seller. If it's not, I suggest that Seller ask around for the name of a good real estate attorney before she puts her home on the market, because...
2. "Less litigation—better defense." Seller inspections, delivered to and signed for by all potential buyers, show a judge, jury or arbitrator that Seller has gone the extra mile in informing Buyer of any defects in the home. Buyer's claim that he didn't know what he was getting into will have less credibility with the people who decide who's right and wrong. In fact, disclosures with Buyer's signatures plainly on them may keep the matter from ever going to court.
3. "What to expect—fewer surprises to seller as to the probable value of her home": If Seller's home is worth, say, $1M with no major defects (every home has at least a few minor defects) but pre-listing inspections show it needs $7k in pest repairs and a $12k roof, the home is no longer worth $1M. The exact amount of the discount may vary, since every buyer's motivation and tolerance for defects varies somewhat, and a seller's market is more forgiving of a home's defects than a buyer's. But Seller now knows (or should know) that her home is worth less than she thought. At the very least, Seller will (or should) be more open to offers at the reduced market value. Worst case, Seller may be unable to sell the home for what she needs, at least without correcting its defects. In the hypothetical case I've described, the difference between expected sales price free of defects and likely sales price with defects may not be enough to derail Seller's plans to sell and move. But what if the home has a market value of only $500k, the pest bill is a whopping $30k and the five pages of maintenance items on the general inspection total another $50k or so? And Seller is on a fixed income and needs every dime she can squeeze out of her house to move to a retirement community near her daughter? Better to find out how dire the situation is now than after she gets in contract.
4. "No fumigation surprises." I'm not sure why the list breaks out fumigation for drywood termites from "fewer surprises" above, except perhaps that a) fumigation is often the most costly single item on the pest report, and b) so many homes, at least in this area, need fumigation, and c) it's an inconvenient and occasionally harmful (and not just to termites) process.
5. "Less negotiation—seller always loses." Contrary to what WSJ's housing reporter asserts, discovering defects after Buyer is in contract never works to Seller's advantage. New information about the condition of the home is a green light for Buyer to commence serious grinding on Seller's price. In fact, as a buyer's agent I mentally lick my chops whenever I hear a listing agent casually say, "yeah, we decided not to do our own inspections—we'll let the buyer do any he wants".
6. "Less fallout—[buyer] cannot back out due to property condition." It's an open question as to what excuse Buyer can or needs to use to back out of a transaction under the property condition contingency during the contingency period. Citing a defect already disclosed by Seller will not put Buyer in a position of strength, but then again, I'm not sure Buyer needs to cite any reason to back out. Only a good real estate attorney can tell you, which should be a clue that you should avoid putting yourself in a position to have to ask. I've been told that no court will order a buyer to buy a home, but as with any legal matter, it's probably not that simple.
7. "Shows seller in good faith." Very true, and perhaps too true, because I have to warn my buyers that they can't rely on the seller's inspections. The seller's inspectors are liable only to the seller—not the buyer—for any defects they miss. On the other hand, buyers definitely look with more favor on sellers who provide inspection reports, and the more the better.
8. "Gives you time—not rushing to get work done." Seller can correct any defects she cares to at her own pace, rather than scrambling to meet a purchase contract deadline and running the risk of jeopardizing the transaction.
9. "Buyer more willing to accept deficiencies up-front." Here are two handy rules for sellers. First, never blindside a buyer. Pre-listing inspections eliminate or at least minimize that possibility. Second, never make buyers guess about repair costs, because in the heat of the moment, buyers use a multiplier of 2x or 3x actual costs. Doing pre-listing inspections lets Seller not only uncover problems but also get estimates to hand to Buyer in case she's not willing to correct those problems.
10. "Shorter contingencies." I suppose this could be true. If Buyer feels comfortable about the condition of the home, Buyer may also be comfortable with, say, a five-day property condition contingency instead of seventeen days, or even no contingency.
11. "Faster close." Again, if the property condition contingency period can be shortened by a week or more, it's entirely possible that the escrow period can be shortened as well. Unfortunately, these days it's the financing end of the escrow that takes the most time, and seller inspections won't shorten that.
12. "Control expenses—no surprises." The idea behind this is that if Seller knows her home's defects ahead of time, Seller has more control over what gets fixed and what will be disclosed as not fixed.
13. "Down grade materials—saves money." Prior to being in contract, Seller has complete control over the quality of materials used to correct defects, as long as they meet code. Seller can specify, for example, standard grade tile and vinyl for bathroom repairs. All Buyer knows is that the bathroom passed the pest re-inspection and that the materials are new and look presentable. Of course, using only the cheapest materials can backfire, especially if the home is in a higher price range.
14. "Use non-licensee." The sales contract in this area requires the seller to use only licensed contractors when making repairs during escrow. However, not every job needs either the expertise or expense of a licensed contractor.
15. "Contractor control." Seller can use contractors of her own choosing prior to being in contract. Once in contract, Seller may have to negotiate with Buyer as to the choice of contractors.
16. "Save money by shopping repairs." Prior to getting in contract, Seller has time to get multiple bids. But when faced with a purchase contract deadline, Seller may not have this luxury.
17. "Can exclude items." Seller can do all the items on the pest report except, say, fumigation, which is a real bummer when the house is occupied.
18. "Sell as-is, as disclosed." Buyers are more willing to make as-is offers on homes that have been inspected, a tremendous advantage for sellers.
19. "Shows better." Let's go back to the example of the new bathroom. Even if it has inexpensive finishes, it almost certainly looks better than the old bathroom (although that's not always the case with homes built before World War II). Just remember, sellers, to put your money where it shows and disclose the rest. Don't throw money at stuff that can't be seen and expect buyers to fully or even partially reimburse you. The one exception to this is foundation work, since wonky foundations freak buyers out.
20. "Higher price." Yes, you'll get a higher price for a home with no or fewer defects—within reason. Again, put your money where it shows, or where the buyer hot buttons are.
Now let's quickly review the WSJ housing reporter's reasons for not getting pre-listing inspections.
1. "Gotcha." Once in contract, Buyer is supposedly so emotionally and financially wrapped up in the home that he's at a distinct disadvantage in negotiating concessions for newly-discovered repairs. A plausible idea if you're far removed from the reality of buyers, their emotions and concerns, and distinctly implausible if you're not. Not to mention the fact that "gotcha" is a hell of a way to sell anything, especially a big-ticket item.
2. "Costly." Yes but, then again, so is a lawsuit. Much more costly.
3. "Conspiracy theory." What the most naive critics of the real estate industry (or perhaps any industry) revert to when they can't think of anything else. The idea is that agents recommend pre-listing inspections not so much to protect their sellers as to use the inspectors as shields against getting dragged into a buyer-seller lawsuit. Like most plausible conspiracy theories, this one doesn't work in the real world. But who said the world of the industry critic has to be the real world?
So why do agents recommend pre-listing inspections? I'm not sure all of them do, but those who do are operating under a theory similar to the physicians' "do no harm" called "fiduciary duty" that might be sub-titled "prevent any harm". But after reading this kind of real estate reporting for years, the informed reader may wonder what standard of care reporters, those highly trusted advisors with their highly visible platforms, are held to.
"All the news that fits"? Darn! There I go getting caustic again.