Emmanuel Jun/ 24/ 2014 | 0
The real estate sales market is picking up. Some say it is getting HOT! But should you act any different and believe it is a seller’s market? Should you bow down to the seller and waive your home inspection rights believing there are other ways out of that purchase contract?[tab: Introduction]
I recently had an incredible conversation with a licensed Texas Real Estate Salesperson (Real Estate Agent)! A question was asked about the how long should a buyer ask for their “Due Diligence” time period? Here in Texas we call this an “Option Period” where the buyer can pay a nominal fee (typically $10 per day) for the right to back out for any reason at all. During that option period the buyer performs all of their due diligence inspections, contractor estimates, and any other checks and research that might make them have a change of heart in buying that house. If they don’t like what they find they can completely back out of the contract and the only thing they lose is their “Option Period” money.
The typical option period here is 10 calendar days but longer ones have been asked for and been given. Even 10 calendar days can be to short depending on when you start your option period. One of the seller tricks I have seen is for the buyer to place an offer on a weekday (usually early week day) without putting a response time period required from the seller. The seller sits on the offer until later on a Friday evening and then accepts it and has their Agent send it back Friday evening which basically starts your option period clock on Saturday morning, and ending 10 days later on a Monday evening. If you are not ready for it then you might lose the first two days just trying to find an Inspector to come out to inspect the home. You might then not be able to decide until the next Tuesday what contractors to call out for further reviews and estimates after receiving and reviewing the inspection report. If you’re lucky you can get all of the needed contractors and final research finished by the weekend (in 3 days) since we all know how hard it is to get people out on the weekend. If not then you can easily go into the following Monday which is the day you have to tell the seller whether you are going forward or backing out.
What happens if you shorten your option period to 5 days and this same seller trick is pulled? Pardon my language but quite frankly you’re in a Deep Doo Doo situation! Hopefully you can get an Inspector for a Sunday inspection and then call out all contractors on Monday through Wednesday so you can make your decision by Wednesday night which is the end of the option period. Seller’s love this situation as do both the seller’s Agent and your Agent! After all you have little time to perform your due diligence before you’re “Stuck Like Chuck” with the house regardless of how bad it might be!
What does this have to do with the conversation I had with a licensed Texas Real Estate Salesperson? This Salesperson answered the question by intimating that the Texas market in their area was HOT! The Salesperson stated that buyers are reducing their option period to 5 days and waiving their inspection rights all because multiple offers are supposedly on the home, and with the standard Texas contract there are other ways out of the contract instead. That last part seemed to belittle the extreme importance of having the home inspected during a proper Option Period. It seems that attitude is that you should already know the full condition of the home before you put in an offer, not make an offer if something is wrong with it that you don’t want to deal with, and if you do later find something out there are other ways out of the purchase contract that you can use.
My thought to that Salesperson’s response was does this Salesperson truly believe that? Also is that what they are telling their buyer clients? Well I’m not an Attorney and this is not legal advice but it doesn’t take an Attorney to read and understand the standard Texas home purchase contract. In that contract there is NOTHING that you can count on to help you back out of the contract if you later find major deficiencies with the house itself! There are many points in the contract for “Outs” but let’s just touch on those that might involve the condition of the property and look at how these can not be counted on. You can view a copy of the Texas required contract on The Texas Real Estate Commission WEB site and it is Form 20-12 for the resale of an existing home.
Seller’s Disclosure – The buyer has 7 days to review the seller’s disclosure notice once it is delivered to them. If the buyer was not provided a seller’s disclosure or if the has objections to anything on the disclosure they can cancel the contract and suffer no penalties except their option period money. The problem here is that the buyer is typically provided the disclosure before they even make an offer on the home. The disclosure is almost always added to the MLS listing information and the buyer’s Agent pulls it along with any other MLS information and gives it to their buyer client before they make an offer. Even the standard Texas contract covers this. The only time this out would be applicable is if the buyer makes an offer before they are provided the disclosure notice which rarely happens.
Appraisal Report – With all of the problems during the economic crash the role of the Appraiser has changed a little (very little). Some Appraisers are now making annotations in the appraisal if they happen to see some type of problem with the home that would reduce its appraised value. However Appraisers are not Inspectors and they do not perform anything even related to an inspection. Appraisers don’t crawl through attics and crawlspaces, thoroughly test plumbing, electrical, and heating/cooling, do not fully inspect structural, etc., etc. Appraisers only note glaring issues that even you can see. Appraisers are there to do their job and their job is not to inspect the home! So when that Appraiser misses the $20,000 structural issue, or other high dollar issue who do you think will be paying for it? Why you of course!
While we are on the topic of appraisals after my conversation with this Salesperson the Texas Association of Realtors (TAR) published their latest magazine with a very interesting answer to the question if a buyer can back out of the contract if the appraisal came in lower than the contracted sales price. The TAR Legal Beagles basically answered “Maybe”. Basically they stated that it is possible if the buyer placed a large enough down payment on a home then the lender might still approve the loan based on the lower borrowed amount. So let’s use an example of how this could potentially also kill your appraisal “Out”. You make an offer on a home for $150,000 and put $20,000 down. The appraiser does luck out and finds $5,000 in deficiencies and notes it on the appraisal. Well the lender can still feel even with the $5,000 in repairs needed the home is still worth the $130,000 they plan to loan you and approve the loan anyhow. Now you lose your appraisal “Out” and have to come up with another and unexpected $5,000 to repair that problem(s). This leads us into our next potential “Out”.
Lender Required Repairs – If the lender specifies that repairs must be performed before they approve a loan then you can back out of the contract. First off you have to ask how is the lender even going to know that repairs are needed? With the exception of some special loans the lender typically never sees any inspection reports. Sometimes the lender might require a specialty inspection for items like termites, septic systems, water wells, or other specialty systems. Unless the lender has a suspicion or standard policy for requiring and receiving inspections about the only thing they do see is the appraisal report we already discussed, and maybe a termite report. On typical conventionally financed loans I have rarely heard of the lender requiring whole home inspections or even wanting to see one you had performed yourself. So if the lender never finds out about those major deficiencies how can they require them to be repaired?
Unable To Obtain Homeowner’s Insurance – If you are unable to obtain homeowner’s insurance on the home that is acceptable to the lender then you can cancel the contract which is one “Out” provided in the standard Texas contract. However the insurance industry is another problem industry and you certainly can’t count on them for this “Out”. When you apply for your insurance the underwriter will perform a basic check of the home using the insurance underwriters CLUE database. All they are looking for are past reports of claims and problems. Some underwriters will perform a very basic “Fly By” inspection where they view the house from the outside for issues, but even this “Fly By” inspection might not occur until well after you close on the house and certainly is nothing in comparison to a proper home inspection. Most likely the underwriter will write a valid binder for a policy that is acceptable to the lender and your loan will go sailing through complete with the significant deficiencies that have yet to be found!
So there you have it, the real story behind why you should not waive your right to an inspection and why you need a sufficiently long Option Period to perform your inspections! One thing that you need to pay particular attention to is Item 7.D Acceptance Of Property Condition. You have two choices with one being if you did see something you want repaired it can be placed under option “(2)”, otherwise you must select option “(1)” which states you are buying the property “As Is” regardless of what is found outside of your option period if you choose to inspect it then.
What you should take away with you from this explanation are four main points.
- Do not be bullied or scared into thinking you have to waive your rights to a proper home inspection, or other inspections, because it is supposedly a “Seller’s Market” and you might lose the house. If it was meant to be that you have that house then it will be even if you maintain your rights!
- Make sure that you have a sufficiently long enough Option Period to perform your due diligence.
- If anyone makes a claim to you that sounds to good to be true then make them put it in writing and sign it! Verbal claims and assurances mean nothing and what is written and agreed to is what you will be held to!
- Take charge of your home purchase as it is the biggest one you’ll probably ever make!
Good luck on the purchase!
[tab: Links and References]
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