In the realm of the stock market, Benjamin Graham, the dean of value investors, counseled buyers to look for undervalued securities with a built-in “margin of safety.” As the prices of homes decline in many areas, there are opportunities to find homes that are more realistically valued than in recent years. But buyers must take care to protect the “margin of safety” they obtain if they purchase a home at a “bargain” price.
This objective is underscored by the fact that no one can predict with certainty when the decline in housing prices will end. In 1993, Los Angeles County housing prices began a 6 year period of decline. The present downturn began in late 2006. The excesses of sub-prime loans and creative financing are still unraveling. Buyers should educate themselves about the following risks so they will not surprised to learn about problems with their house negatively impact its value. A buyer’s “margin of safety” may be enhanced thorough due diligence. Some of the measures discussed in this article cost more than simply hiring a home inspector. It may be money well spent.
1. You Can Be Outsmarted By A Superficial Home Inspector
Most buyers hire a home inspector which is prudent, even with new construction. However, as with all professions, not all home inspectors are equally adroit in sleuthing for serious conditions. Inspectors are limited to viewing “accessible” areas of a residence. Many inspectors use forms with checklists to scout for obvious problems. Buyers will be well served to find a home inspector who is skilled enough to seek out warning signs of more serious problems, such as potential plumbing, electrical, structural or roof problems. Buyers should also get a good estimate of how much it will cost over the next few years to correct any deferred maintenance or significant defects, and that doesn’t mean fixing a leaky faucet or broken gate latch.
Have your real estate agent recommend an inspector who will act like a detective and discover significant potential problems. Then interview the person before you hire him or her. Ask what will they do to find potential “big ticket” problems, ask for examples of how they have done this recently, and ask if they will give you an estimate of the cost of future repairs of systems that may need work within 5 years. Nothing will reduce equity in a home faster than a superficial home inspection that fails to uncover detectable problems that are costly to correct.
2. You Can Be Misled By A Hastily Prepared Real Estate Transfer Disclosure Statement
Sellers of residential real estate in California are required to fill out and deliver a Transfer Disclosure Statement under the Civil Code § 1102, et seq. The form requires a seller to disclose whether he is aware of a variety of problems with the property and improvements. After receiving the completed form, the buyer has three days to cancel the transaction. Most sellers fail to recognize that the form may be their salvation in the event of a future dispute with a buyer who claims they were not informed of a problem with the residence. Instead, they provide little information other then checking the boxes where there are obvious problems. Take for example the questions about “any fill (compacted or otherwise) on the property” and “any settling from any cause . . .” If a buyer has concerns about these questions, he would be well advised to test the seller’s response with the input of a geotechnical engineer. Fill soil in Southern California is as common as smog in August, and many years ago there was no requirement that fill be compacted. Settling of homes in Southern California with its predominately clay soil is a byproduct of cycles of rainy years and dry years; this is normal. Some – but not all– settlement cracks may be a symptom of major problems and they should be evaluated by an expert during the inspection period.
Another problem area is the question about “Neighborhood noise problems . . .” in the Transfer Disclosure Statement. Buyer be aware. If you are concerned about noise, visit the property at various times of day during the inspection period and listen for barking dogs, loud music, rush hour traffic and other noises you might find annoying (but that the seller might be used to or might not highlight in the Transfer Disclosure Statement).
3. A Termite Company May Not Find, geotechnical engineer Let Alone Solve, Problems Caused by Pests
Pest control companies are like home inspectors, not all of them are created equal. They will inspect the property for pests and probably will “bag” the dwelling to fumigate for termites. Again, buyers should be pro active and make sure the seller has chosen a pest control company that will seek out harder to find problems such as dry rot under recently painted exterior eaves. Missing such a problem can cost a buyer $10,000 20,000 unless the buyer sues the pest control company and recovers damages.
The pest “du jour” is mold. Realtors now commonly provide buyers with a “mold advisory” to encourage a mold inspection and to protect themselves in the event the buyer uncovers a mold problem after closing. The question is, when should a buyer pay approximately $750 for a mold inspection (this requires hiring a specialist who will take samples of ambient air or drywall and submit them to a lab for testing). First, use your nose; if there is an odor of mildew or the like, hire a mold specialist. Second, use your eyes; if you see walls discolored from water intrusion or there are dark splotches around windows, on walls, or in closets, mold testing may be in order.
4. Good Fences Do Not Always Make Good Neighbors
The most unpleasant lawsuits between neighbors involve lot line disputes which arise when one owner discovers that the neighbor’s fence encroaches on his property by a few feet or inches. Most buyers of residential property fail to understand that they can purchase title insurance for such a problem. When in doubt about the property boundaries, a buyer should obtain an ALTA title policy, even if the buyer must commission a survey.