Note: This is my next blog post in my series on the ABCs of buying, selling and investing in real estate. I pick a letter (X this post) and write an advice piece on real estate that is totally fiction. The story is fake but the advice is very real(ty).
Xavier was a mind reader. He had been doing it his whole life in his career as a professional negotiator. He seemed to know what the other people at the table were thinking which allowed him to find common ground in almost any negotiation. He was widely regarded in his field as someone who could get the job done. Xavier called me one lazy Wednesday afternoon looking for some real estate advice. It seems that Xavier had decided to try his hand at flipping properties. He had a property in escrow and they were in the middle of the option period. He said he was having a difficult time understanding some of the resistance he was seeing from his seller when it came to repairs. It seemed to Xavier that the seller was being too stubborn in his refusal to do repairs. He wanted to know from me how he could get some more information about the property so he could state his case more clearly on the needed repairs. He said he used certain “Xray” techniques to see through a situation and gain some objective background on his clients during a negotiation. He wanted to know if there was any of these techniques he could use to get some background on the property and the seller.
This is what I told Xavier….
I told him that real estate transactions always had a degree of trust involved that you generally don’t see in other high risk business processes. When is the last time, you got a job without having a background check done on you? Lenders, both for automobiles and real estate, will do some digging into a client’s past in order to judge their credit worthiness. Real estate sellers and buyers, however, are left to trust that the other party is “who they say they are” and their information about the property is true and correct. In other words, buyer and sellers really truly do not know that much about each other. I told Xavier that I often have thoughts that it would be nice to know if the person on the other side of the table is a credible legitimate party in the transaction. Many times they are not and this is wasted resources of time and money. It would be very beneficial to know a little about the other parties background. Of course, there are privacy issues involved in this discussion as to when one crosses the line to an invasion of privacy. It is a very fine line to walk in a highly litigious culture. With all this in mind, there are some “x-ray” techniques one can use to learn more about the other party and the property itself without crossing that line.
1. Get an Inspection – I told Xavier that the best way to do a real estate property analysis is get a property inspection done. These inspections are best done during the option period when a buyer has the ability to get out of contract legally and get their earnest funds back more easily. Since he had already done that, he knew the benefits of getting one. Most homes are staged nicely by the seller and the listing agent to make the property shine at its best. Sales is all about presentation and sometimes presentation will hide the faults of the property, which are only discovered through a property inspection. From the inspection, you can get a really generally idea of the seller’s attention to detail by how well they maintained their home. If the inspection report came back with a lot of small repair jobs, there is a good chance the person did not put property maintenance at the top of their priority list. A seller who puts their property maintenance at the bottom of the list has probably gotten more of a laid back attitude about the property and how it is sold. A clean inspection report shows pride in the property and if any repairs are requested, you will probably find a seller unwilling to do much since nothing can be wrong “with their precious house.” Of course, you will have all types in between the extremes, but I told Xavier he might be able to see right through the seller by reading between the lines of the inspection report.
2. Look over the Seller’s Disclosure/other documents provided – A seller’s disclosure is a document that outlines everything a seller knows is wrong with a property. Agents will tell sellers to be as precise as possible in filling out the disclosure because many lawsuits have happened because a seller has neglected to disclose an issue with the property. Sellers should do a comprehensive real estate property analysis of their home to ensure that they have disclosed all the things wrong with it. If you want to know more about the seller, look closely how well they filled this document out for the buyers. Was it sloppy with many spots in the form left blank? Was it there shortcuts taken in filling out the form? Did the seller really take the time to do the form justice? If you feel like you know the property well after reading the seller’s disclosure, then you can expect the seller to be honest in their dealings with you about the sale of their property. If it is not, you need to approach negotiations carefully. Of course, there will be exceptions to this general rule (there always is), but seeing how much care a seller took to fill out important forms can tell you a lot about a seller.
3.. Look over Property Records/Title Commitment – The last “Xray” technique I mentioned to Xavier was to look closely at freely available property records (gotten through your real estate agent) when doing a real estate property analysis. These records will include information about any financing that was taken out on the property. Did the owner ever get close to having their home foreclosed on? Did they ever take out many different refinancing on the same home? You can’t get all the dirt on a property from these records but you can ascertain a lot by looking at the sales and financial history of a property. In addition, I told Xavier to make sure to look over Schedule C of the Title Policy Commitment (see a good introduction to Title insurance here) sent to him. This part of the commitment will include any exceptions to the policy including liens, encumbrances and any other claim on the title. If Schedule C lists a lot of different items, you can bet the seller has had some difficulties in the past. It can give a general idea of the quality of person on the other side of the table from you and give you some additional hints on how to approach negotiations.
Xavier seemed pleased with my tidbits of advice and said he would look over these documents more closely in the future. He said that inspections were always going to be part of his home buying process, but now he knew to read between the lines of the report to get a better understanding of the type of owner the seller was. The Seller’s Disclosure notice can show how careful the seller is with filling out important documents. Finally, he said he would pay more attention to the title commitment letter and be on the lookout for the public records of a property.