Resources For Buyers and Sellers

HOW TO AVOID BUYING OR SELLING A BAD "LEMON" HOUSE
A special report from Real Estate Expert Bob Bruss

Recently I had the privilege of attending and speaking at the California Real Estate Educators’ Conference in Los Angeles. These events, held three times each year in San Diego, San Francisco and Los Angeles, bring college real estate instructors up-to-date on the latest developments of importance for our college students (if you teach California real estate classes and are not receiving meeting invitations, you can contact director Mario R. Yrun at City College of San Francisco 415-267-6550 or www.ccsf.edu/reec).

These conference sessions always open with what I lovingly call “News from the Government Bureaucrats.” These California state officials report on thrilling topics such as scholarships for real estate students, status of real estate course enrollments (still near-record highs), number of licensees (currently 462,000 in California; up 28% from two years ago!), and nationwide appraiser license requirement changes (it will become much tougher to become an appraiser after 2007).

The report I always enjoy most is from Betty Ludeman of the California Department of Real Estate. She has been with the DRE over 30 years and has a great sense of humor. Joking about the huge number of applicants for the real estate license exams (it’s now a two-month wait to get an exam date after taking the pre-license Real Estate Principles course), she joked “Our goal is to have a real estate licensee in every home!” More important, she informed us that after July 1, 2007, to renew California real estate broker and sales agent licenses, completion of a new continuing education class in “Risk Management” will be required.

Congratulations to the bureaucrats! It’s about time attention is paid to preventing lawsuits, forcing realty agents to make sure home buyers know how to avoid unknown property defect and purchase problems. Most states now have written home defect disclosure laws. But California will become the first state to require “a three-hour course in risk management that includes principles, practices, and procedures calculated to avoid errors and omissions in the practice of real estate licensed activities.” Betty Ludeman’s report reminded me it has been a long time since I wrote about “risk management” or how to avoid buying or selling a bad “lemon” house.

EVEN BRAND NEW HOMES HAVE DEFECTS. Years ago, the now-retired city building inspector where I live, Ray Marcotte, told me “Every house has defects. But some defects are more serious than others.” Then he explained most brand new houses have minor defects, but “As long as they meet the building code, inspectors must approve them.”

Incidentally , did you know building inspectors (and other public officials) are exempt from personal liability if they make a mistake while performing their duties? Only if a government building inspector was caught violating the law, such as accepting bribes from a contractor, can there be personal liability for inspection errors.

However, the goal of savvy home sellers and real estate agents should be to disclose known defects so buyers won’t later be surprised to discover a serious problem and sue the seller and/or realty agents for nondisclosure.

EXAMPLE: When I bought my current home (where I have lived over 27 years), my buyer’s agent pointed to a crack in the wall above a doorway (not an unusual situation, by the way) and suggested I investigate if there was a foundation problem. So when the termite (pest control) inspector was crawling around under the house, I asked if he would look especially close for any foundation cracks. He reported the foundation was sound. Just in case you are not aware, many houses have slight movement after construction and most minor cracks are not significant. Of course, if there are many or large cracks, that can be evidence of serious settlement or other problems.

The important thing is for home buyers to be aware of possible problems before purchase rather than to discover them after purchase. If the buyer is aware of possible problems, they can then be taken into consideration when making a purchase offer. With today’s high prices for new and resale houses and condominiums, buyers expect to purchase even resale homes in near-perfect condition. Because no home is perfect, the best way to prevent future lawsuits (called “risk management”) is disclose, disclose, disclose!

As a long-time buyer of rental houses, I’ve bought many “fixer upper houses” which offered superb profit opportunities. However, occasionally I ran into unexpected, costly surprises where the seller failed to disclose known defects. It’s hard to imagine, but there are dishonest sellers and realty agents out there! Although I’ve never sued a home seller for failure to disclose defects, I often thought about it. Just between us, thn only person who really wins such a lawsuit is the lawyer! Stay out of court whenever possible.

EXAMPLE: I especially recall buying a three-bedroom house occupied by a tenant, Mrs. McMahon. She seemed like a pleasant lady who would tell me the truth when I asked her “Are there any problems with this house?” Her reply was the landlord kept it in good condition and there were no problems. However, shortly after I took title to that house, I received a phone call from her explaining the roof was leaking above the kitchen sink (at least the drips were in a good spot and they didn’t damage anything!). When I asked my tenant if this had happened before, she said the roofer had tried several times to fix the leak on the flat roof. Then I asked her why she didn’t tell me before I purchased. She admitted the landlord paid her $500 to cooperate and help him sell the house! By the way, there should be a federal law against flat roofs – finding a leak is almost impossible because flat roof leaks “travel” under the top layer and the water usually comes out many feet away from the origin of the leak. If one or two attempts by a professional roofer to repair the leaky section of a flat roof don’t work, my best advice is replace the entire roof. My second best advice is don’t buy a house with a flat roof!

If you buy a house or condo where the seller and/or realty agent failed to disclose a serious defect, it usually doesn’t pay for the buyer to bring a lawsuit unless the defect will be very expensive to correct. The reason is, to win such a lawsuit, the buyer must prove the seller and/or realty agent knew of the serious defect and failed to disclose it to the buyer before purchase.

However, if you or someone you know did purchase a “lemon” bad house, the easiest way to prove the seller knew about the undisclosed problem is to ask the neighbors. Most homeowners know what’s going on at the neighbor’s homes.

EXAMPLE: My neighbor across the street recently had workers hauling away some dirt and bringing in several truck loads of small rock. When I saw her and asked in a friendly (snoopy?) way what she was building, she said the drainage around her pool needed improvement so she was installing French drains. Incidentally, French drains are quite common and are a very effective way to divert water away from flowing where it does harm, such as under houses and swimming pools.

THE DUMB AGENT PROBLEM – THE END OF “BUYER BEWARE.” The first court decision to require real estate agents and home sellers to disclose known defects was the 1984 landmark California appellate court case of Easton v. Strassburger, 152 Cal.App.3d 90. Shortly before that home sale, the seller had a hill slide corrected. There was clear evidence, including netting on the hillside.

But soon after the purchase, the hill slid again! The cost of repair was more than the house was worth! The buyer sued the seller and realty agent who, the buyer argued, should have disclosed the unstable hill situation. Because the realty agent failed to disclose the recent hill slide problem, the agent was held liable for damages to the buyer.

The result of this landmark court decision was California legislation requiring sellers of one-to-four residential units to provide a state-mandated disclosure form to buyers, signed by the seller and the realty agents. This disclosure form cannot be waived in California home sales! The seller’s and buyer’s realty agents must visually inspect the residence property and note on the form any observed defects which the home seller “forgot” to disclose.

This was the beginning of the end of the ancient “caveat emptor” (let the buyer beware) principle for home sales nationwide. Virtually every state has followed this major disclosure liability change, in various formats.

However, the old days of “caveat emptor” still apply in most states, including California, to commercial property sales. Presumably, commercial property buyers know how to perform “due diligence” inspections to discover defects before purchase.

GROWTH OF THE PROFESSIONAL HOME INSPECTION BUSINESS. In addition to written before-purchase disclosures of home defects to prospective buyers, another major result of the Easton decision was the growth of the professional home inspection business.

Before 1985, few homes were inspected by professional inspectors working for home buyers. Today, the majority of houses sold are professionally inspected by buyer’s inspectors, even when the home seller has provided a written defect disclosure form. The goal of these professional inspections is to let the buyer know in advance of any serious defects which the seller and/or realty agents failed to disclose (often because the defects are hidden and not easily visible). A secondary goal is to prevent after-sale lawsuits by the buyer against the home seller and/or realty agents.

Virtually all home purchase contracts should include a contingency clause making the buyer’s offer contingent on the buyer’s approval of a professional home inspection report. Smart home sellers obtain such a report at the time the home is listed for sale so any defects the seller’s inspector discovers can either be corrected by the seller or fully disclosed to prospective buyers.

Many times I’ve sold rental houses and my buyers accepted the professional inspection report and/or termite (pest control) inspection report I obtained at the time of listing the house for sale. However, I suggest home buyers hire their own professional inspector and/or termite inspector at the buyer’s expense to double-check on the seller’s professional inspection.

EXAMPLE: I recall selling a rental house several years ago and hiring a professional inspection company recommended by my superb listing agent, Larry Emerson, in whom I had great confidence. He suggested a new inspection firm which used a computerized checklist. The two inspectors checked out the house and found nothing wrong. I attended the inspection (as home sellers should) and was surprised they didn’t note any problems on their inspection report. However, after the house was sold, the buyer’s inspector (a retired contractor) found (1) the chimney needed a “cap” or spark arrester, and (2) there was a dangerous electrical junction box in the attic which was not properly installed. Needless to say, I was embarrassed my inspectors hadn’t found those obvious problems. Of course, I immediately had the defects corrected before the sale closed.

However, on that same house, I was glad I had hired my own professional inspectors at the time of listing it for sale.

EXAMPLE: My inspection report said the furnace was in good condition. But the buyer’s inspector, the retired contractor, said the furnace had a cracked firebox which had to be replaced. I challenged that potentially-expensive result (for me) by arranging to have the furnace inspected by (1) a repairman who works for the furnace company I used, and (2) by a representative of the local gas company. I invited the buyer and the buyer’s inspector to attend. Both the furnace repairman and the gas company representative agreed there was nothing wrong with the furnace! I think either the buyer’s inspector didn’t know anything about furnaces or he was trying to help the buyer negotiate a free new furnace out of me.

HOW HOME BUYERS SHOULD USE THEIR PROFESSIONAL INSPECTION REPORTS.After the buyer’s purchase offer has been accepted in writing by the home seller, the buyer should hire their own professional home inspector. I recommend hiring a member of the American Society of Home Inspectors (ASHI) because of their high membership standards. Local ASHI members can be located at www.ashi.com or by calling 1-800-743-2744.

At least 14 states now require some form of licensing or certification for professional home inspectors. They are Alaska, Arizona, Arkansas, California, Connecticut, Georgia, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Mississippi, Montana, and Nevada. However, many of these state laws only require paying a fee to obtain an inspector’s license without any exam or required training.

If you hire a non-ASHI inspector, inquire about your inspector’s experience credentials. Be wary of any inspector recommended by a real estate agent. The reason is many realty agents will recommend only an “easy inspector” known not to be a “deal killer” who finds serious defects that kill the sale.

Home buyers should always accompany their professional home inspectors. The realty agents and home seller should also accompany the inspectors. It is extremely important for buyers to attend the inspection to discuss any defects discovered. Often, what sounds very bad in an inspector’s report is relatively easy and inexpensive to correct.

EXAMPLE: I’ve told my “cracked fireplace story” many times. But it is worth repeating because it illustrates the point. After my purchase offer to buy a shabby “as is” house with a badly cracked fireplace was accepted by the seller, I asked my professional inspector if I should cancel the sale because of the obvious glaring fireplace crack. After he thoroughly inspected the fireplace, and checked the chimney in the attic, he said the crack could easily be repaired with special fireplace mortar for about $150. As a result, I got a bargain on that fixer-upper house which many other buyers had rejected because of that bad-looking crack. Incidentally, professional home inspectors should not also be in the home repair business, but they will often provide a helpful “guesstimate” of repair costs.

If the professional home inspector’s report shows previously-undisclosed home defects, the buyer has three alternatives: (1) use that report to justify rejection of the house (or condo) and obtain a full refund of the good faith earnest money deposit; (2) use that report to reopen negotiations with the home seller to get a repair credit; or (3) if the seller refuses to give a repair credit, but you really want the home anyway, then go ahead with the purchase knowing about the defects your home inspector discovered.

WHAT IS AN “AS IS” HOME SALE? Many houses and condos are sold “as is.” That means the seller and realty agents must disclose known defects, but the seller refuses to pay for any repairs. “What you see is what you get” is another way of explaining an “as is” home sale.

However, an “as is” sale doesn’t mean the home seller can conceal known defects or fail to disclose them to the buyer. Many sellers don’t want to be bothered making repairs or renovations before selling. To illustrate, if I sold my home today, I would sell it “as is” after disclosing in writing all known defects. Frankly, I don’t want to waste money repairing or renovating the few things which are perfectly fine for me but which a buyer probably won’t like.

EXAMPLE: I have one of those new water conservation toilets which flushes just fine if you hold the handle down until the flush is complete. However, if you release the handle too quickly, it doesn’t flush completely and has to be flushed again, wasting water. However, it’s not worth hiring a plumber to fix it (if that’s possible) until I have enough work to make a plumber’s visit worthwhile.

“ As is” homes can be very smart and profitable purchases, especially if the buyer plans to fix up the house. Such houses are usually sold at below-market prices to compensate for the seller’s reluctance to repair. Also, probate sales, foreclosure sales, and bankruptcy sales are usually “as is” sales (but the seller has no duty to disclose if the seller is unaware of any defects). For more details, please see my special report “How to Earn Up to $250,000 (or $500,000) Tax-Free Profits Every 24 Months Buying and Selling Houses.”

DON’T BE FOOLED BY A SO-CALLED “HOME WARRANTY POLICY.” Many home sellers and/or their realty agents offer one-year home warranty policies as a sales inducement to buyers. Another undisclosed purpose is to prevent home buyer lawsuits against sellers and/or realty agents. The policy cost to the seller or realty agent is typically around $300.

The exact coverage of each policy, offered by about a dozen warranty companies nationwide, is different. There is no standardized coverage, as there is for homeowner’s insurance policies. Unfortunately, home buyers usually don’t get to read their policies until several weeks after the purchase when they receive it in the mail and then realize how little coverage they actually received.

Typical home warranty coverage includes repairs (usually not replacement) to wiring, plumbing, built-in appliances, furnace (sometimes air conditioning is included), and the hot water heater. Usually available for purchase at an extra premium are coverages for the swimming pool, plumbing outside the home’s perimeter, roof, and structure.

Each home warranty service call costs the home buyer $35 to $50. Unless the problem is obviously covered, such as a water heater which springs a leak within a year after home purchase, the most frequent excuse for failure to pay for repairs is “pre-existing condition.” I’ve received many complaint letters and e-mails about home warranty companies which refuse to pay for repairs because the home seller “failed to properly maintain the equipment.”

That’s a very tough coverage issue for home warranty policyholders to fight. However, many warranty holders have the repairs or replacements made at the homeowner’s expense and then successfully sue their home warranty companies in local Small Claims Court for the reimbursement cost. However, use this technique only after first trying to get the warranty company to have the work done by their approved provider; ask to speak with a Supervisor before using this method.

My best advice is always accept a one-year home warranty policy paid for by the seller or realty agent, but don’t count on the warranty company to pay every legitimate claim without a fight or a Small Claims Court lawsuit.

DON’T ASK, DON’T TELL. Suppose the home seller and/or realty agent knows something about the house which isn’t an actual defect but which some buyers might consider a problem?

I’m specifically referring to situations such as a death in the home. Millions of residences have had a normal death in the home and it doesn’t concern buyers or sellers at all. Personally, I own a condominium where my dad died of a heart attack in 1986. That’s not something which requires disclosure if I decide to sell because it’s not a residence defect.

I’ve bought and sold houses where I knew there had been deaths from natural causes. I didn’t care. But some home buyers are concerned about such matters, especially if the death was due to suicide or a murder.

If an issue is important to you, such as death in the house you are considering for purchase, then ask about it before buying! However, don’t expect the realty agent to know the answer. Most sellers wouldn’t even know (or care) if there had been a death in the home before the seller purchased.

Some states even have statutes on the death issue. To illustrate, California Civil Code 1710.2 says the seller and realty agent need not disclose any death on the property more than three years before the home sale. That law also says the seller and realty agent have no duty to disclose a prior occupant was afflicted with or died of AIDS.

Unless the buyer asks, and the seller or realty agent knows the answer, any death on the property within three years before the sale need not be disclosed, according to that California statute. If a buyer asks about deaths on the property, unless the seller and/or realty agent knows for sure, the correct answer is “I don’t know.”

“If in doubt, disclose!” is a motto of some real estate agents. I disagree! Real estate listing agents must be especially careful about disclosing information which could harm their seller and/or the sales price of the home. Unless the information is factual and has a material effect on the market value or desirability of the property, it need not be disclosed.

EXAMPLE: Suppose a house or home seller has a local undesirable reputation. Must the seller and/or listing agent disclose that fact to prospective buyers, especially out-of-town buyers? To illustrate, a few years ago I asked my buyer’s agent about purchasing a specific house I had seen advertised and which had been on the market for sale many months. “Oh, you don’t want to buy that house. It’s haunted, you know, and the seller is a crook” was her reply. As a result I didn’t even inspect it. Was the agent right or wrong for disclosing that house’s reputation? I think she did a disservice to the seller although it wasn’t the listing of my buyer’s agent.

Incidentally, a few years ago there was a court decision involving an upstate New York house which out-of-town buyers purchased without knowing its local reputation as “the haunted house.” After strange things began happening and the buyers sued the seller and realty agent for rescission (refund of their money), the judge ruled, as a matter of law, the house was haunted. He ordered rescission of the sale. If any subscriber can find the citation to that New York court decision, I would greatly appreciate receiving it.

Virtually all states now have a “Megan’s law.” That law requires the local police or sheriff’s department to maintain a public list of registered sex offenders. Most real estate sales and lease forms now state the seller or landlord does not have a duty to disclose if any known sex offenders live nearby and the buyer or tenant may check the local registry for names and addresses of such offenders.

10 STEPS TO AVOID BUYING A BAD “LEMON HOUSE.” As explained earlier, a professional home inspection is the best way to minimize chances of buying a “lemon house,” also known as a “bad house.” Although the best professional home inspectors have checklists, if you are concerned about some physical aspect of the home don’t hesitate to ask your inspector and/or the home seller and the realty agents about that issue. But if you are worried about something unusual, such as the Feng Shui aspects of the home, you’ll have to hire your own expert on that issue. Here are the “top 10” steps to avoid a serious home purchase mistake:

1 – Mold and Moisture. A few weeks ago, I was listening to Dr. Dean Edell’s ABC radio network talk show. He was discussing the medical issues of mold in houses. His attitude seems to be that mold exists but it isn’t really a health issue. He implied mold isn’t harmful to humans and is, at worst, like an allergy.

Even the best homes, at one time or another, have mold or mildew. The cause is trapped moisture, usually due to inadequate ventilation. Normally, mold does no harm (although it looks ugly). In excessive amounts, such as after a flood, it can ruin a home because mold can be extremely difficult or impossible to remove. Sometimes it can be harmful to health, contrary to Dr. Edell’s opinion.

EXAMPLE: I’ve written before about my friends Gerry and Cathy. A few years ago they sold their home and moved into a rental house. Cathy, being a very smart lady, went with their infant son to visit her parents in Palm Springs while Gerry handled the household move. After Gerry had been living in the rental house for several days, Cathy and their son returned. Almost immediately, she became very sick. Gerry took her to nearby Stanford Hospital. Apparently, their young son was fine. The doctors couldn’t figure out what caused Cathy’s sudden illness, but after an overnight hospital stay she was fine the next day. However, when she returned to the rental house, she again became very sick. Gerry wisely moved the family to a nearby Marriott Residence Inn while trying to figure out the cause of Cathy’s unexplained illness. When Gerry phoned me, we discussed the possibilities. The next day, Gerry hired a “mold inspector” (yes, there really are mold inspectors!) who crawled under the house and discovered it had extensive mold. Although Gerry and the son weren’t sensitive to the mold, Cathy was (although she had no clue mold was underneath the house). They informed the landlord of the extensive mold, cancelled the lease, and moved out.

This example is the best I’ve encountered showing how toxic mold can affect some individuals but not others. A great book to read on this topic is What Every Home Owner Needs to Know About Mold by Vicki Lankarge (McGraw-Hill, New York), 2003, $12.95, available in stock or by special order at local bookstores, public libraries, and www.amazon.com.

2 – Radon. This is a naturally occurring radioactive gas created by decaying uranium or radium in soil and rock beneath about 1 in 15 U.S. homes (according to the Environmental Protection Agency). Radon allegedly causes cancer in some residents whose homes contain radon underneath. Kits are available in local hardware and home supply stores to test for radon which has been detected primarily in eastern states.

3 – Asbestos. This is a naturally occurring fibrous mineral with components which are fireproof and excellent insulators. Asbestos was routinely installed in millions of homes and commercial buildings for many years in fireproofing, insulation, roof shingles, and floor tile.

In good condition, there is nothing harmful about asbestos. However, when it deteriorates or the particles become airborne, asbestos can cause fatal lung disease to those who live and work around it. Personally, I had a friend who worked around asbestos in a U.S. Navy shipyard during World War II who recently died of asbestosis lung disease which as no cure. Thousands of others who worked around asbestos have died of the same disease.

Asbestos is safe unless it becomes “friable” when it is possibly dangerous. Home buyers, and their professional home inspectors, should be on the lookout for asbestos, especially insulating pipes. If it is deteriorating, it should be removed by qualified personnel who use approved methods.

4 – Lead-Based Paint. Lead-based paint was used in most homes built before 1978. It can cause brain damage to young children who ingest it, usually from flaking paint chips. However, lead-based paint is not dangerous if it is in good condition or painted over with a non-lead based paint.

Federal law requires sellers of homes built before 1978 to provide home buyers and tenants with (a) a federal booklet about lead-based paint dangers, and (b) a disclosure form revealing if the seller or landlord has had lead-based paint tests performed. Home buyers have 10 days to have a lead-based paint inspection performed, at the buyer’s expense, if desired. The booklet and disclosure form can be obtained on the Internet. Most real estate agents also have these publications.

5 – Formaldehyde. Manufactured houses often contain this material. When a home seller knows their home contains this material, it should be disclosed because some buyers will be adversely affected by eye, nose, and throat irritation, as well as coughing, rashes, headaches, and dizziness.

6 – Carbon Monoxide. Malfunctioning furnaces, wood stoves, kerosene heaters and lamps, fireplaces, water heaters, and gas stoves can produce invisible but deadly carbon monoxide in homes. The result can be death. The easy solution to detect this lethal gas is to install a carbon monoxide detector, usually costing $25 to $40.

7 – Defective Well Water. If you are considering purchase of a home which is not on a community water system, be sure to include a contingency clause in your purchase offer for a test of the well water quality. If the level of lead, or other pollutants, is above acceptable standards, don’t buy that house. Also, have the well’s pump tested before purchase to be certain it is in good working condition.

8 – Septic System. A home which is not connected to a public sewer system probably has a septic system which drains the waste water into the soil. Be sure the septic system is located a substantial distance from any well. I grew up in a home with such a system (although we were on the public water system) and we never had any problems.

However, trouble can develop if the home seller has a small family, perhaps one or two individuals, and the buyer has a large family which uses the septic system more heavily, thus causing the need for periodic pumping.

A potential problem can occur in areas where the public sewer was installed within the last few years and not all homes were required to connect. Be sure the seller’s written disclosure statement reveals if the home is or is not connected to a public sewer.

9 – High Voltage Power Lines. Although government tests have been inconclusive if adjacent high voltage power lines cause cancer and other diseases, they certainly don’t benefit health.

More important, the presence of nearby high voltage power lines hurts the resale value and certainly doesn’t enhance the market value of a home. Consider it a serious negative factor if a home is located close to high voltage power lines, regardless of the research facts.

10 – Other Negative Influences. The list of possible negative influences affecting a home’s market value is endless. Beyond the property boundaries, there can be potential problems such as heavy street traffic, poor location, high crime rate, poor quality public schools, lack of public transportation, and nearby noisy railroad tracks.

Inside the house or condo you might find drawbacks such as a poor floor plan, inadequate or dangerous wiring, galvanized pipes, an old furnace, no air conditioning, and leaky gutters which are detriments which most home buyers don’t want. Fortunately, most of these negative influences are either obvious, easily detectible, or should be discovered by your professional home inspector.

Just in case that isn’t enough, additional possible drawbacks of a home purchase might include being within a Federal Emergency Management Agency (FEMA) flood zone (requiring costly flood insurance), high fire hazard area, earthquake fault zone, or seismic hazard zone. Additional potential problems include easements and encroachments, survey boundaries, high property taxes, and unverified disclosures. When buying a “For Sale by Owner” house or condo, it’s best to follow the “trust, but verify” rule for all statements made by the seller.

SUMMARY. As stated earlier, no house or condo is perfect (if you are considering buying a condominium, be sure to study the special report “The 10 Key Questions Condo Sellers Hope Buyers Don’t Ask” for unique problems with condos).

Purchase of a house or condo is a series of compromises. Most homes have drawbacks which are acceptable. Others have incurable defects which are cause for rejection – such as being located on top of or near a toxic waste dump (remember the infamous Love Canal?). The secret to avoid buying a “lemon house” is to be ever observant, ask lots of questions, insist on a professional home inspection contingency in your purchase offer, and learn all you can about the home before buying.

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