Caveat Venditor with the buyer’s Due Diligence

Home Inspection
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Home Inspection

Take a Close Look at Your Home

I have never worked as an agent in any other state aside from California, so I confess I am not an expert in the practice of real estate from coast to coast. I have however been to a number of industry conferences and talked with many of my peers from the majority of states, so I know that California is not alone in this regard: when you buy real estate, buyers are entitled to a period to perform their due diligence on the property.

In California, we call that the “inspection period” or “contingency period.” Some folks call it a “free look” – because until the period is up, the buyer’s earnest money deposit is generally fully refundable (less buyer’s fees and costs, if any). The standard California purchase agreement by default gives buyers a 17 day inspection period, and until that time elapses, buyers are able to withdraw from the contract based on their inspection findings.

The interesting thing to note about this is that, at least in California anyway, the buyer is not required to document what exactly their issue with the property is that makes them want to cancel the contract. It isn’t something that is subject to debate. It could be anything – from the amount of road noise, the amount of cars parked on the street at night, the way the sun hits the property at 3:45 PM in the winter, anything.

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And that’s why some folks call it a “free look.” The property can be tied up in contract, the buyer’s deposit is not at risk, and they don’t eve have to spend any money doing inspections during the due diligence period. They can tie up the property and literally just sit on it.

The Buyer's Home Inspector

He’ll Find a Problem if You Don’t

Of course, that isn’t what usually happens. Normally, buyers do in fact begin a whole host of inspections: a termite and home inspection are pretty much de rigueur. Beyond that, depending on the property and the buyer, there may be separate inspections for the septic system, well/spring, electrical systems, plumbing, mold, asbestos, radon, surveys, etc.

And of course, due diligence extends beyond just inspections. Buyers will also need to examine the title report, make sure the property can be insured at an affordable rate, verify school districts and school eligibility, and who knows what else. It’s anything and everything under the sun.

It’s a pretty nerve-wracking time for a seller in particular. While in California the standard inspection period is 17 days, the purchase contract is typically just 30 days – giving the seller only 13 days after the buyer has fully committed to the purchase, or not. If the seller is occupying the home as their primary residence, they’ll have to either take it on a wing and a prayer that the buyer isn’t going to back out of the deal based on their inspections…or make no solid plans on where to move until just a scant few days before the contract is set to close.

What can a seller do to increase the likelihood of keeping the deal together? As you know in real estate, it’s all about location, location, location. When it comes to selling a property though, it’s all about “disclose, disclose, disclose.” In California at any rate, the seller is not actually required to research or investigate any particular aspect of their property. They do have to disclose what they know, but don’t have to investigate any particular issue prior to or during the marketing period.

Lead Based Paint

Get the Lead out of It!

Lead-based paint is a classic example. Any home built prior to 1978 in California requires a lead-based paint disclosure to be signed by buyer and seller. The seller has to disclose if they have any specific knowledge of lead-based paint in the home.

It’s pretty rare that a seller does have any specific knowledge of lead-based paint – because most people when they buy a house do not scrape the paint down to the original layers and take it to a lab for analysis. The law does not require that either the buyer or seller do this – so the seller just says they don’t have any specific knowledge that the home has lead-based paint in it, although as the form says, since the home was built before 1978, it’s possible that there is some.

At a minimum, the seller must disclose all “material facts” (those which could be construed as affecting the property’s value) to the buyer which the seller is aware of. Fortunately, there are standard disclosure forms which ask the seller a number of questions about the property, and it is the seller’s responsibility to answer these questions as truthfully and completely, and to the best of their knowledge.

A savvy seller, though, will go beyond this. Although the seller is not required to inspect their own property prior to sale, it is the smart thing to do – and a huge time and money saver, too. The seller should perform their own home and termite inspections – and septic inspection, and well inspection, and whatever else may be warranted by the features or condition of the property.

Contents of a Real Estate Disclosure Package

The Real Estate Disclosure Package

The seller can then take everything – the thick sheaf of standard disclosure documentation, and a host of recent inspection reports – and create a complete disclosure package for any potential buyer. The buyer will then be asked to sign a receipt for these disclosures, inspections, and reports as “read and acknowledged” prior to submitting any offer on the property.

This does not relieve the buyer of their responsibility to do their due diligence, of course. The buyer can order the same inspections the seller just did, or additional inspections if they have any particular areas of concern. However, by giving the buyer a full account of the condition of the property before the buyer makes an offer, it greatly limits a buyer’s ability to renegotiate the deal based on their own inspection findings.

That will potentially save the seller thousands – or tens, hundreds of thousands! – of dollars at the time the buyer is negotiating to release their inspection contingency. But perhaps equally as important, doing the inspections up-front gives the seller some leverage in shortening the buyer’s inspection period – after all, if the seller has already done so much work preparing the reports, does the buyer need all those 17 days, when perhaps only 10 might do?

In addition, having a complete disclosure package ready up front can dissuade the wrong buyer from going into contract on the property. Going into contract, and then falling out because the buyer doesn’t like the inspection findings, can be very costly. What if the right buyer were to come along the next day, but saw the property was under contract, and moved on to another? Time is money, and as a seller, you don’t want to waste time in contract with the wrong buyer. Having a full and complete disclosure package ready from the get-go helps mitigate that risk.

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