A recent experience with a buyer brought to the fore several issues around home purchasing that I think are worth sharing. One of these has to do with due diligence on the part of the buyer. The others have to do with the broker’s role and with the seller’s disclosures; I’ll cover those in future articles.
What is a buyer’s due diligence? It’s the investigation of a property to find out how suitable it is for that particular buyer. In this article I’m mainly writing about homes, not bare land, though much still applies to both. In property showings a buyer decides to write an offer because the property appeals to them - it’s location, style, amenities, positioning on the land, all sorts of reasons that make someone decide this is a home worth trying to buy. The due diligence period allows the buyer to dig deeper into the home to make sure it is a good fit and that all is in working order. For example, everything about the property may be perfect except that the cost of a new roof is more than a buyer can afford. If the buyer and seller can’t reach an agreement on who is paying for this roof - was the price discounted already because the seller knew the roof had reached the end of it’s life? Or did the buyer discover an leak that had caused damage but that was not yet visible to the seller? - then it may turn out that this is not the home for the buyer after all. Typical areas of inspection are wells, septic systems, the main systems of the home (heating, cooling, plumbing, foundation, etc.) and whether or not there are pest or fungus issues. Add to this fire insurance - can a home even get insurance? Then there are things that are important to individual buyers - internet availability and speed, quantity of water available, whether or not the improvements are permitted, and so on.
When I first started in real estate in this area over a decade ago it was not common to find disclosure packets on properties. This was likely for several reasons, but one big reason was the length of time a property could sit on the market prior to receiving an offer. The market then was anemic, buyers were few and prices eventually dropped to half the 2005-2006 highs. There was little incentive for sellers to complete their disclosures or order any inspections knowing that in six months they would be out of date and there still might not be a buyer ready to make an offer.
As the market slowly improved I did not see a great change in this non-practice of completing disclosures or doing inspections. In other places disclosures were completed early, as were inspections and I would often be asked by out of area agents, particularly Bay Area agents, for copies of disclosures and inspection reports. I would have to explain that I didn’t have any and why that was.
All this meant that a buyer would look at a property, get whatever information their agent could provide and make an offer. Disclosures would be completed by the seller once the property went into contract (meaning the seller had accepted the buyer’s offer, perhaps with some back and forth, and escrow had been opened). Within a short time frame, usually seven days, the seller’s agent would provide the buyer’s agent with copies of the disclosures. Based on the information in these disclosures and on general practices, the buyer would arrange for various inspections to happen at the property; these usually consist of well tests (for both quantity and quality), septic system test, a home inspection and a pest and fungus (aka termite) inspection. At the end of the inspection period, anywhere from 15-30 days, the buyer would have completed the inspections, reviewed the reports from those inspections and read through the seller’s disclosures; if any major deficiencies were discovered - a leach field no longer working, a heretofore unknown leak that had caused damage, a roof in need of replacement sooner than later, etc. - the buyer would often renegotiate the sales price, either asking for a credit or a price reduction.
Since the boom that started shortly after the Coronavirus lock-down things have changed in our area. Now it is normal for sellers to complete their disclosures at the time the property is listed; it is also common for sellers to order some if not all inspections. New tools have been added to the MLS system, allowing brokers and agents to include links to these disclosures as part of the property information (not the public information, but available for agents to request for their buyers). This allows a buyer to make an offer on a property that may not need to be renegotiated after the inspection period - though in reality I have still seen some of this happen due to new information being discovered during a buyer’s inspections that the seller was unaware of.
Most buyers feel more confidence in making an offer now that there are often disclosures and reports available to them early in the buying process. Not all - and that is where I come to the title of this piece. How not to buy a house - at least in the current high-demand, low inventory market we find ourselves in where multiple offers are common. My recent experience was with a buyer who insisted on knowing everything there was to know about a property before considering making an offer. I understand the need to want this but the reality is that while other folks were making offers, this person was still doing due diligence and ultimately did not get the house. Sadly, this was not the first time this person experienced this.
The lesson here is to do what you can within a short time, then do the rest of your due diligence during the inspection period in escrow. I realize that in the Bay Area there isn’t really any due diligence period - there are so many buyers that most sign away their inspection rights in order to even be considered as a buyer - but we haven’t reached that point here (yet). The inspection period is the time to do any inspections that haven’t already been completed by the seller, to visit the Planning and Building department to confirm the status/existence of permits, ask for and receive insurance quotes and so on. This is the definition of a sellers market - there are more buyers than sellers and a buyer is going to have to act quickly to get a property into contract, then take the time to do their due diligence. Or you won’t be buying a house.