Buyer pre-sale inspections can cause trouble
Originally appeared in Bay Area News Group publications on August 16, 2013
“What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.”
– Mark Twain
The current seller’s market has led to numerous properties receiving multiple offers. In an attempt to beat the crowd and gain an accepted bid, there has been a recent epidemic, in some parts of the Bay Area, of buyer pre-sale inspections, often without the seller’s knowledge or permission.
The theory is that the buyer can write a cleaner, more appealing, contract for the seller because of the omission of an inspection contingency. There is much more to the story.
Seller pre-sale inspections
There are good reasons why sellers should have their own pre-sale inspections before they price and market their property. One is that this gives prospective buyers valuable information about the house that helps them evaluate whether to make an offer and/or how much to bid.
Even if structural pest control and general home inspection reports are available, it is wise for buyers to hire their own inspectors after they have an accepted contract. Doing so before being in escrow, however, can have unintended consequences and costs to both the buyer and seller.
Buyer pre-sale inspections
From the buyer’s standpoint, he is having them done to reassure the seller he will not back out or ask for money as a result of unsatisfactory inspections.
From the listing agent’s view, fewer contingencies mean a stronger contract that has a greater likelihood of closing. This perspective ignores the fact that the buyer can still void the contract for other reasons, such as the mandatory Transfer Disclosure Statement that was not fully completed and signed when provided to the buyer before acceptance.
Further, even if the escrow closes, there can be later problems for the seller who accepts a non-contingent offer.
Problems for potential buyers
Each time a buyer spends money on a pre-sale inspection, he is gambling on getting the house. If his offer does not result in an accepted contract, he has lost from $600 to over $1000, depending on the inspectors and type of inspections. After repeating this scenario many times before prevailing, it could unnecessarily cost the buyer many thousands of dollars.
These pre-sale inspections can lead to complications when, for example, the general home inspector recommends numerous other inspections and/or bids, such as roof, furnace, foundation, drainage and electrical. If asked, the seller may be uncomfortable with these additional inspections from someone not in contract. Not getting the seller’s permission in advance can lead to possible liability on the part of the buyer and his agent.
Even if permission is granted, a number of further inspections could take a week or more and will likely make the potential buyer feel rushed. This is generally not an issue once in escrow, but is tricky to navigate before an offer has been made and accepted.
Another question involves written reports. Although the inspector may charge less for an oral report, it is always advisable to get it in writing. Nevertheless, written reports can create a headache for the seller.
Problems for sellers
Sellers are required by law to disclose all “material facts,” i.e., information that could affect the buyer’s decision to buy or not and/or how much to spend. If a seller allows any buyer pre-sale inspections, he runs the risk of having to disclose the results, as reported by the buyer and/or his inspectors. This is so even if the inspector’s conclusions and/or credentials are questionable.
It is not unusual for a potential buyer to have a friend or relative who is in one trade, such as a plumber, inspect and comment on all systems in the house. This is despite the fact that it is beyond his expertise.
Unscrupulous buyers may try to create or exaggerate deficiencies in order to negotiate a lower price. Even if done unsuccessfully, this can end up as a disclosure conundrum for the seller.
I always suggest that my sellers not allow buyer pre-sale inspections and I never suggest them to my buyers for the above reasons. On my listings, I recommend the buyer actually have inspections, even in multiple-offer presentations where the buyer has no inspection contingency.
My sellers consistently provide buyers with pre-sale inspections. It is, therefore, not necessary for buyers to inspect before being in contract. This protects both the seller and buyer and has never resulted in a negative situation for my sellers.
Potential problems for agents
Realtors who allow their buyers to do pre-sale inspections without written permission from the seller risk a complaint against them for failing to follow Multiple Listing Service and/or Code of Ethics rules. In addition, the agent and his company may have liability to the seller if his inappropriate actions damage the seller financially.
Many agents incorrectly tell their sellers, and are convinced themselves, that having a contract with no contingencies is always best for them. They do not understand that a buyer who writes a non-contingent offer in competition sometimes, after close, locates an attorney who finds reasons why the buyer was not treated honestly and fairly.
The point is not to prematurely handcuff a buyer from canceling the contract, but to allow him to reasonably satisfy himself about the condition of the property during a contract inspection period. Multiple offers do not change this imperative. Keep this in mind whether you are a buyer or seller.