Archive for the ‘disclosure requirement’ Category

Due Diligence Part 6, Tricks Sellers Use to Avoid Inspections

Tuesday, February 19th, 2008


Continuing the Due Diligence series for those who buy fixer-upper properties. The due diligence period is the time period between the acceptance of the offer and the close of escrow. It is the time to find out if you really want the property. If its not as good as you thought, you can ask the seller for adjustments, or get out of the contract. Following the outline in “Investing in Real Estate for Dummies,” here are

Two tactics that sellers use to avoid a thorough and detailed property inspection

1. The buyer offers the buyer a warrenty or property protection plan that covers repair costs for major systems and appliances of the property. Although they may sound good on the surface, in my opinion these plans don’t usually live up to expectations because:

a. they can have an up front cost of several hundred dollars;
b. there is a deductible of $25 to $100 each time you file a claim; and,
c. when you file a claim, you may find that what you thought was covered may not
actually be covered due to exemptions in the policy.

About four years ago, I bought a house with a pool and the seller included a property protection plan that purported to cover the pool too. When I called the company to get the pool repaired, I was informed that the contract included an exeption that excluded any work on underground pipes. This must save the plan’s company a lot of money, as I imagine that most pools have underground pipes. Granted, I never read the fine print in the contract. I just believed the splashy promises on the cover of the information brochures that said the pool was covered. My bad, but the brochures are misleading at best.

2. Sellers have a house inspection done ahead of time, so they save you the time and the money by providing you with a copy of an inspection report. If the seller was trying to put something over on you, they may contract with an inspector that has a reputation of not being diligent when examining the house. I think this can also be a good thing, as you can review the seller’s inspection report and pass it along to yourinspection team. It may give you a good general idea of the condition of the house to start with.

When to make use of inspections

Looking at it another way, when you are selling a house, I think it is a useful step to have an inspection done by a reputable inspector. This way you show you have nothing to hide, and it serves as a good starting point for negociations. The buyer may have another inspection done, and if it turns up the same things that your inspection did, it may serve to build trust with the buyer.

In his book “How to Sell Your House in 5 Days,” Bill Effros advocates having the house inspected by a professional home inspector, and if you have a well or septic system, have them inspected as well. He suggests using a company with reports that looks professional, and not a hand-written report with fill-in-the-blanks and check boxes. You want a report you will be proud to show to potential buyers. Effros says, by conducting these tests in advance, you answer buyers’ questions and reduce the time it takes to close on the sale. Since you’ve paid for tests often not performed by sellers, your home is even more desirable to buyers, who will save money and will know what they’re getting before they start bidding.

An earlier post with My Observations of a 5-Day Sale.

NEXT: NEGOTIATING CREDITS IN ESCROW

ABC of Wealth Building at moolanomy.com

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Due Diligence and Fixer Upper Properties Part 5 – the "as-is" sale

Thursday, February 14th, 2008


For many of us, fixer upper properties are the foundation for building wealth in real estate. Finding a good fixer-upper is one thing, but making sure we are getting what we pay for is something that often doesn’t always receive the same attention as the search process does.

Continuing with the Due Diligence series and following the outline from “Real Estate Investing for Dummies,” we now look at the “as-is” sale. The due diligence period is the time between the acceptance of the offer and the close of escrow, when the buyer must find out all they can about the physical and fiscal condition of the house. The purchase agreement should contain a number of contingencies that allow the buyer and seller the opportunity to cancel the transaction if certain things aren’t satisfactory.

Why Houses are Sold As-is

Some sellers try to sell their houses “as-is” to avoid disclosing any deficiencies in their house. They think that they don’t have to correct problems in the property during the due diligence period, and are not responsible for anything that crops up after the sale. They erroneously believe that their technique to dodge responsibility makes them legally bullet proof. What they don’t realize is that the as-is strategy actually only offers minimal protection to the seller. They may still be held responsible for misrepresentation, fraud, or negligence.

When you come across a house being sold as-is, a red light should start flashing in your mind. You could be dealing with a seller that is dishonest and trying to hide significant problems that would reduce the value of the house. A house offered as-is at an unusually low price may give you a headache for a long time to come, with no relief on the horizon.

Honesty the Best Policy

When you are selling a property, don’t attempt to hide anything from the buyer. For your own peace of mind, and to avoid long court battles, disclose everything of importance, and share copies of any invoices an reports that reflect on the value of your house.

An Early Experience with an As-is Seller

I once made an offer on a house that was listed “as-is.” At the time, it didn’t bother me that that the seller wasn’t disclosing everything. It would today though. But, what bothered me more, and set off alarms in my mind, was the egotistical attitude of the seller. He wasn’t willing to make any concessions and or negotiate anything. Everything had to be done his way. I was an inexperienced investor, but my sense of smell worked alright, and I could smell a rat. I think that the seller offering the property as-is was an insight into the whole self-centered attitude of the seller.

As you know, I prefer an open and friendly approach to negotiating the purchase of a house, as described in earlier posts with the “suppose that… technique” in House Buying Negotiating Techniques, and the Detective Columbo “just one more question” technique in Start Small Profit Big in Real Estate.

While I liked the property, my suspicions made me pull out of the deal. The seller blew up. I guess he had already started counting his money. He angrily told me that if I had signed a contract, he would have held me to it no matter what. I thought to myself, “I sure am glad I decided not to do business with this guy. If he harbors this much anger for someone he hardly knows, who know what lies he would tell to sell a house?”

NEXT UP: TACTICS SELLERS USE TO AVOID INSPECTIONS

How to Completely Remodel a Kitchen for Under $4,000

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Due Diligence, Part 4 — Disclosure Requirements

Monday, February 11th, 2008


Aimed at investors in fixer upper properties, this continuing discussion of Due Diligence from the “Real Estate Investing for Dummies” outline, ┬áturns to disclosure requirements. Due diligence is the time period between the acceptance of the offer to purchase a house and the close of escrow and completion of the sale. It is the time to get the answers to all of your questions about the house. You will never discover some of the problems that exist unless the seller tells you, which is what disclosure is all about.

The Tucson Police Example

The concept of disclosure reminds me of when the Tucson police were looking for a man they suspected of a string of burglaries. They had six photographs of the man, all taken in different locatoins and from different angles. They sent faxes of the pictures to police departments all over the country.

Three days later, Tucson received a fax from the police chief from a small town in Arizona. The report read, “We got right to work on those six pictures you sent. We’ver arrested five of the suspects, and we have the sixth under observation right now.” A classic case of a cloud of confusion caused by not enough disclosure.

Disclosure Requirements Vary

Many states have seller disclosure requirements fo residential renal property with four or fewer units. Sellers are required to supply the buyer with a written statement that identifies all known structural and mechanical problems, and in many cases, the seller must complete a comprehensive questionnaire.

However, buyers of residential investment properties with five or more units or any tyupe of commercial property usually don’t have the same protections. The idea is that buyers and sellers are more sophisticated and don’t need a formal written statement.

My opinion is that whether or not a formal disclosure statement is required, if you are the seller, it is in your best interest to disclose all problems that could affect the value or use of the house. Two reasons to fully disclose problems are: 1) morally, it is the right thing to do, and 2) the buyer could still come back and take you to court under claims of misrepresentation and fraud. Why take the chance? Once you sell a house, you want to be done with it and not have to worry about being dragged into court.

What about if a seller offers a house on a “as-is” basis? Does he or she still have to disclose problems?

The “as-is” approach to selling is the next article in this series.

How to Sell Your Home Smart

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Conducting Formal Due Diligence

Wednesday, January 30th, 2008

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I am currently reading “Real Estate Investing for Dummies” by Tyson and Griswold, a well-written and thorough book that covers the basics of what real estate investors should know. I’ve long considered “Investing in Real Estate” by McLean and Eldred as one of the best introductory texts for real estate investing. Yet after reading the “Dummies” book, I find it equally as good, and perhaps a little more accessable for the new investor.

Here is my list of Top New Real Estate Books that I posted on Amazon.

To assist those who invest in fixer upper houses, I’m incorporating key parts of the “Due Diligence” chapter from the “Dummies” book with my own real estate observations.

Once you have made an offer on a house and it had been accepted by the seller, the “due diligence” period begins and you have until the close of escrow (or completion of the sale) to check out the physical and financial condition of the property. If you discover that the property has problems, but you think the deal is still worth pursuing, the seller may be willing to correct any deficiences, or give you money to to complete the necessary work yourself.

It’s during this time frame that you must get all of your questions answered and be sure you know what you are getting. If done properly, it will require quite a bit of effort on your part. But it must be done, if you wait until after the property is in your possession, its too late to ask the seller to replace that broken furnace.

You should work closely with the seller but take his word for anything. Only trust what you have in writing.

In my case, most of the house that I buy aren’t bought from the owner. They have been reposessed by a bank, the Veteran Administration or HUD. But I still do due diligence by having my friend/handyman go through house with a fine tooth comb. He knows more about the house repair than anyone I know.

There are two key components of due diligence process:

1. review of books and records
2. the physical inspection

A thorough look at these two components should allow you to determine if the property is worthwhile, priced right, and your goals. The due diligence is your last opportunity to either complete the transaction, or cancel the escrow, have your money returned, and look for another property.

Next post: Reviewing Books and Records

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