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Real Estate Due Diligence for Homebuyers: Under Contract

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You've made the offer on the house and the seller has officially accepted in writing. Now, this means you’re under contract! This is exciting, but also perhaps scary and overwhelming for a first-time buyer. This is the start of your inspection period. Here's what to expect when you’re inspecting (your future home)...

In part three of Real Estate Due Diligence for Home buyers, we discussed some of the common and not so common closing costs a homebuyer will find on the contract before signing.

 

What is an inspection period? 

It’s the specified amount of time agreed upon by the seller and buyer in which the buyer may examine the property and request for repairs or cancel the contract. This is where the rubber will hit the road and the bulk of a home buyer’s due diligence goes into action. On average, the period lasts 15 days following the Effective Date, so be prepared to act quickly!

Each state has different kinds of contracts and regulations a seller must meet prior to closing, so looking in detail at your contract is important. If you are unsure of anything reach out to your agent or attorney.

What should a home buyer do during the inspection period?

Here is a list of real estate due diligence to follow up on during this time:

  • Professional Home Inspection
  • Municipal Lien Search (be sure your real estate agent requests information on permit history as well)
  • Review association documents if the property is in an HOA or COA
  • Pest Inspection
  • Lead, Radon, and Smoke & Carbon Monoxide Inspections (depending on the age of the home and your state’s regulations)

The Home Inspection

This may seem like a no-brainer. Of course, you inspect the home during the inspection period! But not all inspections are the same or are performed by the same caliber of professionals with the same kind of certifications, knowledge, and experience.

According to the American Society of Home Inspectors, there are an astounding 22 states WITHOUT licensing requirements for private home inspectors! If you are buying a home in one of these states, like California, be sure to inquire about experience before hiring anyone. At the very least, be sure that the inspector you choose is certified by a trade association. That affiliation tends to offer some assurance that the inspector has received some sort of training and possesses adequate knowledge. But it’s no guarantee.

This is why having an experienced buyer’s agent or real estate attorney on your side will help you find other reliable professionals and give you proper guidance.

A private home inspector is not the same as a Municipal Building Inspector.

If you're buying a brand new home, it will be built to code, but the majority of older homes don't comply to current building code standards. How do you ensure you're doing proper due diligence and your future home doesn’t violate any of these standards? The problem is, not all general home inspectors check for code compliance during home inspections.

A professional home inspection is the examination of the current condition of the home. They check for obvious signs of shoddy workmanship in addition to major issues like water damage or unsafe electrical work. Their main objective is to report maintenance issues rather than code issues. A Building Inspector is an employee of the municipality that has jurisdiction over the property. These inspectors are responsible for building code compliance and issuing fines for owners who fail to meet standards.

It's really only the city or county building inspector that is will primarily be concerned with checking the progress of a new construction or work permit throughout certain stages of the work to ensure that the work is up to code. Depending on where you live, some municipalities will require a home to pass a building code inspection before a sale. On the flip side, some states, like Wisconsin, prohibit that requirement.

Getting a private home inspection that comes back as clear doesn’t necessarily mean that there aren’t potential building code violations with the city or county that could end up costing you money. In many states, municipalities are allowed to charge the new owner for fees on expired permits or fines on home improvement projects without proper permits that were pulled under a previous owner’s name. A municipal lien search will reveal any hidden issues like this before you close.

What’s a Municipal Lien Search?

A municipal lien search is a property report which will reveal hidden property debt as well as any open or expired permits held by the municipality. Other information in a municipal lien search includes code violations and fines, special assessments, and utility billing history.

This information is not typically public record, so requests must be made to the property departments to retrieve it.

A municipal lien search is often listed as an item on the contract under closing costs, but not always. Some areas may not require it while other buyer’s agents may simply not be aware of how important this search is. Be sure to ask your agent about whether they regularly request this search.

Learn more about the Common Misconceptions of Municipal Lien Searches

HOA Homework

Don’t skip this! If you decide to buy a home in an HOA, be sure that you know and understand all the bylaws, Covenants, Conditions, & Restrictions (CC&Rs) and the rules and regulations. There are lots of upsides to living in an HOA or COA. But all those amenities cost money, and sometimes the scheduled dues aren’t enough to cover all the costs of living in an association. That’s when an association will levy a special assessment on its residents for various project like building a new pool or repairing roofs after an unexpected storm.

If your home is in an association, your agent will request documents from the management company for you to look through. These documents will tell you all legally binding obligations expected of both parties and any unpaid dues or upcoming assessments. Sometimes these documents will also contain a reserve study, which will give you an idea if the association has enough funds for unexpected issues. If the reserve is low, you can expect a special assessment to hit you at some point during your ownership.

A proactive seller with a seasoned agent will already have all this information along with other disclosures, a municipal lien search, and closing instructions prepared before you even write a contract, so inquire about this information as soon a possible.

Other Important Types of Home Inspections

 

Pest Inspection

Whether a pest inspection is required is up to state and local regulations or, in some cases, if the appraiser notes condition that raise suspicion about pests or dry-rot. The buyer’s lender will then usually require a pest inspection, especially for FHA and VA loans. A private home inspector is not qualified to do this type of inspection, so a real estate agent will provide referrals of pest companies to the seller. It’s the seller’s responsibility to order the inspection if it is required or if they desire to have one done depending on the condition of the house and the type of market they are selling in.

 

An older home may give some buyers pause in making an offer, so having a recent pest inspection that clarifies any issues will make the house more marketable. A pest problem may not deter some buyers, but if that information isn’t disclosed upfront, the seller may see a lot of cancelled contracts, especially if they are in a buyer’s market. Providing this information in the seller’s disclosure package will be a huge selling point.

If it’s a hot market with low inventory, a buyer may not request a pest inspection in an offer and may be willing to waive home inspection contingencies. This, unfortunately, is a risk you may have to take depending on where you are buying and how motivated you are to close on a house.

Lead, Radon, and Smoke Carbon Monoxide Inspections

Again, whether these types of inspections are completed or not will depend on your state’s regulations and what sort of market or condition the house is in.

 

If you’re buying an older home, safety tests to determine if the home has lead, radon, asbestos or other potential health risks are a good idea, so you may want to consider this being a contingency of the contract or closing costs the seller agrees to pay. But if there are multiple offers on the table, you may want to take a gamble and pass on these types of safety inspections before closing. Lead and asbestos are typically a problem if left undisturbed, so unless you have plans to remodel, it may not be an issue.

In Massachusetts and some other states, for example, a seller is required to have installed smoke and carbon monoxide detectors prior to closing. It may seem overbearing, but the intention is clearly to ensure the safety of civilians. Considering there are 2,500 fatalities due to house fires and about 200 people are killed by carbon monoxide each year, properly functioning detectors are important.

The seller’s agent will be sure to have all this information available in the disclosure documents when it is required.

Your Dream Home will have defects

Every home has defects, even your dream home. What’s important to keep in mind is to decide how you will prioritize requests for repairs in negotiating with the seller. You may have to settle on some things and fix it after closing if you are serious about home ownership.

Except for ordinary wear and tear, the seller should maintain the property in the condition existing as of the Effective Date. Be sure to do a final walk through and leave time to review and negotiate the terms of the contract. If you decide to cancel, do it in writing.

After all the inspections are completed, the next step will be to prepare for closing on your home!

common misconceptions about lien searches

How a lack of surveyors may slow down your closing
Is a new homeowner responsible for previous utility bills?

About Author

Amanda Farrell
Amanda Farrell

Amanda Farrell is a digital media strategist at PropLogix. She enjoys being a part of a team that gives peace of mind for consumers while making one of the biggest purchases of their lives. She lives in Sarasota with her bunny, Buster, and enjoys painting, playing guitar and mandolin, and yoga.

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