The Pre-Purchase Process

I am a home inspector and not a real-estate professional but I have watched my clients navigate the pre-purchase process for over 25 years. I have seen the "pros" who have bought many properties and have also seen the "first timers" who get bamboozled by the process. Here are some tips based upon my observations.

Index

  • Purchasing or selling a home or a property is a big job. It is often one of life's biggest transactions. Owning property can be one of the best investments that you will ever make, it can also be one of the worst. Real estate is a non-liquid asset, in other words, you can't always sell the property quickly or for the desired price.

    All of this and other factors dictate that the purchase and sale of real estate is a very big job. This job requires time, effort and money. When professional buy or sell commercial property they go through a "due diligence" process. That is, they follow a set of rigorous procedures that help them analyze the property. Residential property purchase requires a similar process and it is here that most of the mistakes are made.

    As a home inspector I believe in the value of a good home inspection. But that is not enough. A thorough real-estate purchase and sale process also requires that many other aspects of the transaction be investigated.

    Its a very big job. Take the time you need. Make the required effort. And spend the money to do it right. Learn what you need to know now, it maybe too late after closing the transaction.

    If all of this sounds daunting, remember that millions of people have been successful. There are lots of resources to help you to do the job right.

  • Yes, there are times during very hot markets when it is necessary to make a quick decision in order not to lose an attractive property. But in my work I see too many folks being rushed to make decisions when there is really no need to do so.

    A typical example:


    You are the buyer; you have completed a purchase and sale agreement that allows for:

    • a certain amount of time to have a property inspected,
    • time to have the documents reviewed by an attorney and,
    • for the review of documents provided by the home owners association (if it is a condominium).

    In most instances, you are able to use all of that time without any danger of "loosing the property." My advice: take all of that time you need and use that time to do a lot of research about that property, about the different financial options and about your plans for the use of that property.

    I have heard all sorts of poor reasons to rush:

    • "Let's not make the seller nervous" (Your response: "Sorry, I don't mean to make the seller nervous but do want the time I needed to make informed decisions.") or,
    • "Interest rates are about to go up." (Your response: "The rates might come down.") or,
    • "Their agent is going out of town." (Your response: "I would prefer to have their agent ask a colleague to substitute in their absence.").

    Remember: You need not give any reason for your requests. Simply say, "I prefer to or not to."

    In the book Freakonomics, Steven D. Levitt and Stephen J. Dubner conclude that Realtors who sell their own homes tend to wait longer for a higher price, receive a higher price for their properties and have little incentive to do the same for their clients. While this conclusion is controversial its worth considering. If nothing else it points out that the motivating factors for Realtors, mortgage brokers, appraisers and yes, even home inspectors like me are not necessarily the same as those of the buyers and sellers of a property.

    My advice: be sure of your deadlines and then take all the time you need to make the best decisions for you.

  • I make part of my living inspecting homes and as such have a vested interest in having more customers. But that's only part of what I am talking about here. Most people do have their homes inspected during the pre-purchase process. I am advocating for a lot more than that. Here are a few examples:

    • You need to have an attorney look at the purchase and sale agreement and help you throughout the purchase process. Real estate transactions involve complicated legal matters and documents. For some examples of that, take a look at http://www.soundhome.com/article/real-estate-legal-terms.
    • Consult with your accountant or independent financial adviser. Find out different ways to own or finance the property that may help you with your taxes. You might even want to know if you can really afford to buy (or sell) this property.

    One lesson from the sub-prime loan fiasco is that loan officers, brokers and investors didn't ask tough questions about these loans. As the home buyer, you need to know what would happen if things do not go as expected. For example: what if, home values drop? family income drops? interest rates go up and...?

    There are very few "free" things in life and one of the free things that maybe of very little value to you is the bank's appraisal of the property. What the bank wants to know (or at least what they ought to know) is if the property is worth at least as much a the loan value. They need to know that in order to be sure that they can get their loan repaid in case you default on the loan. Many banks didn't get accurate appraisals during the sub-prime loan fiasco and even if they did, they weren't really looking for the data you need.

    • You need to know if the property is worth the purchase price and not just the value of the loan. So if you need an appraisal, try to find an independent party and pay them to work for you. And then look at the results and see if the comparable properties and all the calculations make sense to you.
    • If you have any doubt about the boundaries of the property then you need a survey. Even if you don't have any doubts but your wife (or husband does) then get a survey. I for one had no doubts about the boundaries of some land we bought and only agreed to have it surveyed for the sake of "family harmony". That survey did help with our family's harmony, it also helped us avoid a very costly problem!

    Who else should you hire for a consultation?

    • Architects or contractors if you plan to remodel the house.
    • Structural or soils engineers if you have any idea that there might be some structural, slide or other soils issues.
    • A laboratory test for environmental issues or water quality.

    And what will all that cost? It might cost a few thousand dollars. Most probably less than 1% of the value of the property you want to purchase. By comparison to the cost of complications, that's a bargain.

    And some of these investigations will not cost you more in the near term but could save you a lot of money. For example: if the furnace has not been inspected by a specialist in the last year, you should have it inspected before the next heating season anyway. You might as well do it now and find out in the process if it needs major repairs or replacement.

    Can't afford all of these "extra" costs? Might that indicate that you can't afford to buy a house? Remember, properties require an average of about 1-2% of their value in annual maintenance.

  • So you drove up to the house, or were driven to the house and fell in love with it. Next you made an offer and the offer was accepted. Ok, that's fine. You are now in the inspection contingency period of the process. You have a a certain number of days to do some of your own research. Here are a few suggestions:

    1. Go back to the house on your own and spend some time walking around the neighborhood. If there are folks weeding their flower beds, introduce yourself, tell them that your are thinking about buying the house down the block and ask them some general questions about the neighborhood. Now comes the most important part - listen to what they have to say.You don't have to believe everything you hear but you will be surprised how much you will learn.
    2. Visit the local grocery store and see what you can learn about the area by the types of foods (or books, cloths, whatever) are available. Can you walk or take a bus to the stores?
    3. Visit the local schools, religious institutions, libraries and community centers. This will also tell you a lot about the services in your new neighborhood and about your neighbors.
    4. Spend a few hours with the folks at the local zoning and building departments. They will be able to tell you a lot about the property you are thinking of buying and about the various new projects and issues in the neighborhood. See: http://www.soundhome.com/article/purchasing-undeveloped-land
    5. See what the traffic is like at the time when you need to drive to work or school. Is the property located near convenient bus routes?
    6. Go back to the neighborhood on the following Sunday and visit other open houses.

      Consider this as your opportunity to research your new neighborhood. Remember that you can make a lot of changes to the home you buy but not to the area around your home. Take your time and talk to a lots of people. You will gain invaluable information!

  • Here are some other sections of The Sound Home Resource Center that may help your in purchasing or selling a piece of property:

    George's House Hunting Tips

    Real Estate Legal Terms by Mary Anne Vance

    Condominium Ownership and Maintenance

    Condominium Practices and Procedures by Dale Galvin

    Closing Home Loans - Tips from an Expert by Joel Wilder

    So: take your time, ask questions, make the effort and get the professional help you need. Buying and Selling property is a very big job and mistakes can be very expensive.

  • I asked my friend, colleague and attorney Mary Anne Vance to answer this question. Here is what she had to say:

    "Ever wonder what al