Never Waive the Inspection Contingency (and always get the most out of it)

Buying a home is a big deal. It’s a major financial commitment — up front, and for the long haul.

A home inspection is critical.

If you buy a house in poor condition without realizing it… well, it is the stuff of legend. To avoid a lousy outcome, a buyer simply must inspect the home before buying it. Never waive the inspection contingency.

Hot market? Get a pre-inspection before making offer.

Here in Seattle, we are just now emerging from an historic sellers’ market. For several years running, bidding wars were the order of the day. To compete, some buyers skipped the home inspection entirely. Some of those buyers ended up in real money pits — without the happy ending.

The better solution was — and still is — a pre-inspection. A pre-inspection is a shortened version of a standard inspection. It covers only the big systems and highlights, and ends with just an oral report. It usually costs about half as much.

A buyer gets a pre-inspection before making an offer. They get some basic protection, and can account for the condition of the home in the offer amount. Only then can they reasonably waive the inspection contingency (by skipping it entirely up front). Not perfect, but the minimum any buyer should ever accept. Anything less is plain foolish (unless you’re Tom Hanks and Shelley Long).

An inspection contingency provides the best protection.

In normal markets, buyers simply include an inspection contingency in their offer. If the parties reach agreement and enter into a contract, the buyer then has the right to inspect and approve of the home. The initial inspection must happen usually within the first 7-10 days, and the buyer can get more time if follow-up or specialized inspections are needed.

Under the inspection contingency, once the buyer has inspected the property, they can back out of the contract and get their earnest money back. It is a true “get out of jail free” card. Or the buyer can demand that the seller make certain repairs or corrections. And of course, the buyer can simply waive the inspection contingency and accept the property in its condition — knowing its condition.

Renegotiation after the inspection is key.

If the buyers demand repair or correction, then the seller has three options: reject the demand (and probably kill the deal); accept the demand (and likely close on schedule); or negotiate further.

Many buyers would rather do the work themselves. The seller, after all, has little incentive to do a great job. So instead of asking for repairs, some buyers ask for a reduction in price, or payment of their closing costs. This is a mistake.

Every single seller hates the inspection contingency. They are convinced that the buyer will use it to squeeze them out of even more money. When a buyer then asks for a price break? It isn’t well received.

A far better tactic is to ask for the repairs. If they are significant, include a bid showing the necessary scope of work and expected cost. Most sellers would rather give the buyers some money back, rather than dealing with the hassle of making the repairs. The buyers get what they wanted initially.

The key to good negotiations is knowing and respecting the perspective of the other side. Asking for repairs is most likely to get the best result.

There are few exceptions to the Home Inspection Rule.

Yes, every rule has its exceptions. And this very important rule is no different. It is conceivable that a buyer could reasonably skip getting a professional inspection. The best example is the buyer who is a contractor (and can inspect for herself) or a developer (so the house is getting scraped regardless). Other examples? Well… uh… let us know in the comments. We’ll see.

I can help.

That’s a lot to remember. And there is a lot at stake. Think about hiring me. Particularly if you’re interested in skipping an agent and saving a bunch of money….

How to Read (and understand) a Title Report

What’s a “title report”? Heck, what is “title”? And why should a home buyer care in the first place? Here are the answers.

Title Report Explained.

“Title” is legalese for ownership. If you are “on title” then you are an owner.

When buying a home, you want to make sure you know what you are buying. Real property (legalese for land) is a complicated thing to own. Other people usually have some legal right to or interest in the land too, besides the owner.

A review of title shows who these people are and what they have to do with the property. So before buying it, a smart buyer will review title as part of their due diligence.

Encumbrances on Title

The legal right of someone other than the owner in property is called an “encumbrance” on title. A “lien” is one type of encumbrance. A lien is the legal right to force the sale of the property to satisfy a debt of the owner (or a prior owner).

The loan you take out to buy a home, the mortgage, is a common type of lien. If you default on that loan, the lender can foreclose the lien, which means the house is auctioned and the proceeds used to pay the debt.

Thankfully, a typical contract for sale requires that the seller pay these liens at closing. So the buyer doesn’t have to worry about them.

Other encumbrances, though, can be of real concern.

Covenants, conditions, and restrictions… oh my!

Covenants, conditions, and restrictions (or CC&Rs) are common in newer areas. Starting in the 1930’s, they were imposed by builders of new neighborhoods. They were used in part to enforce racist restrictions on housing. Indeed, progressive cities today are reckoning with this aspect of our racist past and attempting to move beyond it. And since the 1960’s these restrictions have been unenforceable and illegal.

CC&Rs impose restrictions on how an owner can use the property. In modern neighborhoods, they often create a Homeowners’ Association. Concerned about the environment, and want to dry clothes on a line in the yard? Probably not allowed (this was practically a crime in the 1960’s and CC&Rs of the time routinely ban it). Thinking about updating the exterior and giving it a modern PNW feel? The Architectural Review Committee of the HOA will need to weigh in.

Of course, an owner benefits like all the others from a tidy, uniform, well-maintained community. But don’t be surprised by the restrictions (and the costs, an HOA has dues that must be paid or they become a lien).

Easements can create problems.

An easement is the right to use someone else’s property for a specific purpose. A common type is a utilities easement. This gives the utility provider the right to maintain lines over (or under) your property. They have the right to come onto your property as needed to work on the lines, but once done they must restore it. Utility easements are very common and generally not a concern.

An ingress and egress easement is another type. This would cover a shared driveway, and in some instances even a private road that serves a bunch of parcels. These can be a problem.

Shared driveways are notorious flash points between neighbors. Many people share a driveway with a neighbor for decades and never have a problem. Others are not so lucky — as any real estate lawyer can tell you. Just be aware up front.

Reading a Title Report

Part of the sale process includes making sure all liens on the property are paid at closing. Here in WA (and many other states) this is done using a title insurance company.

So once the parties have a contract, it is sent to the title insurer. They issue the title report that shows all of the encumbrances on title to the property. The insurance company then works with the closing agent to make sure that all liens are paid and taken off title before the buyer becomes the owner.

A buyer will get a copy of the title report when it is first issued. Usually a buyer, under a title contingency, has five days to review and approve the title report. If the buyer objects to any encumbrance, the seller must have it removed before closing. If the seller cannot do so, then the sale fails and the buyer gets her earnest money back.

The encumbrances that will survive closing and bind the buyer are called “Special Exceptions.” These are listed in the section entitled “Part II Schedule B Special Exceptions.” Review this section closely.

Do not rely on any summary. You must follow the hyperlink to the actual document that creates the legal rights and obligations. Review that document. Are you OK with this? If so, cool!!! If not, well that’s the whole point of due diligence, avoiding a mistake.

We can help.

That’s a lot to remember. And there is a lot at stake. Consider hiring a lawyer, the only professional actually qualified to read and interpret a title report on your behalf.

Due Diligence Checklist for Home Buyers

Craig provides this checklist free of charge and without any warranty or guarantee whatsoever. Use this checklist at your own discretion and risk.

Homebuyer Due Diligence Checklist

“Due diligence” is how a prudent buyer goes about making sure it is a good decision to buy a particular house, warts and all.  Since every house has warts, it is essential that you identify them prior to closing.  If you don’t, you may end up making a very expensive mistake.  Here is a checklist that you can use to make sure you complete your due diligence.

⎕  When will you complete your due diligence?  Before your offer, or after?

In a hyper-competitive market, where there are more buyers than houses, you may need to consider completing your due diligence prior to making an offer.  If you do so, your offer will be a whole lot stronger.  But you’ll also incur costs even before you know whether you will get the house.  In addition, due diligence prior to making an offer is not as in-depth or thorough as due diligence after you have the home under contract.  You need to balance the risk (of incurring unnecessary costs, and not discovering all of a house’s warts) versus the reward (of having your offer accepted) in order to answer this question.

⎕  Review the Seller Disclosure Statement (aka Form 17)

In Washington, most sellers must provide the buyer with a completed Seller Disclosure Statement.  The form is commonly known as the Form 17, the designation of the Northwest Multiple Listing Service.  

• The Form 17 requires the seller to disclose what the seller knows about various aspect of the property. Review it closely. That said…

• The Golden Rule of Due Diligence: You should confirm for yourself anything that is important to you. Do not rely on what the seller or the real estate agent may have said, even in writing, whether in the Form 17 or anywhere else. If it’s important, you must confirm it for yourself!

⎕  Inspect, and re-inspect…

The heart of due diligence.  Only the most reckless of buyers would even consider buying a house without inspecting it first.  Because owning a home can lead to some nasty surprises.  You don’t want to be surprised.

• Begin with a general inspection. Find a home inspector. Your agent may be a good referral source, or use an online review site to find a good one.

• The general inspection is likely to reveal other aspects of the home appropriate for further inspection by a specialist. Common examples include a stonemason to inspect a chimney, an electrician to inspect the electrical system, a roofer to inspect and assess the roof, etc. Follow up as necessary.

• Don’t forget the sewer or septic system, a common and expensive “must-fix” item after closing. Particularly for any home 40+ years old, a sewer scope is a good idea.

⎕  Review Title

When you buy a home, you will get a title insurance policy to insure your ownership.  The initial step in issuing such a policy is to generate a preliminary title commitment (also known as a title report).  The title report gives excellent insight into the condition of the home’s title.

• The word “title” essentially means “ownership.” Ownership of a house can be complicated with lots of other people having some degree of “ownership” in it. For example, there may be liens on the property, or an easement across it. These encumbrances will be revealed by the title report.

• Have an attorney review the title report and explain its contents and significance to you. An attorney is the only professional qualified to do so.

• Do not rely on a “courtesy review” or any other sort of review by the title insurance company. The insurance company’s review is limited to issues that are important to it and not necessarily those that may be important to you (such as an easement).

• Make sure your review includes the declaration (if you are buying a condo) or any conditions, covenants, and restrictions (CC&Rs), which are common in newer communities. These documents impose restrictions on how you can use the property. Make sure you are OK with these restrictions.

⎕  Review the HOA finances and management

Many homes are subject to a Homeowners Association (virtually all condos, and many newer communities).  Particularly where the HOA is responsible for the upkeep of some or all of the property, like a condo or a community center, it is essential to review the HOA’s financial documents to confirm that it is in good financial health and well managed.  Because at the end of the day, if the HOA doesn’t have the money it needs, you will be on the hook once you close.  And you will be stuck with the HOA’s decisions, even if you don’t agree with them.  Good management is essential.

⎕  Check out the neighbors

There is no cure for the proverbial “Bad Neighbor,” other than to move away.  So due diligence requires that you look around: Does the home next door look like a junkyard, or a dog kennel?  That’s a red flag.  Knock on some doors and introduce yourself.  Does the guy across the street seem like a cranky hermit with a nasty temper?  That’s another red flag.  If there is an HOA, review the meeting minutes (both the HOA, usually annual, as well as the Board, usually monthly).  If there is a difficult member of the community, you will likely learn as much from the minutes.  

⎕  Confirm the house works for you

Take some time to fully imagine yourself living in the home.  Does it work for you?  For example, does your car fit in the garage?  Will you be able to tolerate the only bathroom being on the ground floor?  Once you close and move in, it is too late to discover something about the house that doesn’t work for you.

⎕  Review the closing documents before signing

If you have a lawyer on board, you’ll likely be able to get a copy of your closing documents in advance. Otherwise, be prepared for 100+ pages for your review and approval at your signing appointment. Plus