Most Important Question on Seller's Disclosure?

Sellers Who Don't Know the Condition of their Homes

What's the most important question on the Seller's Disclosure? (in Minnesota, a 9 page, single-spaced document with perhaps over 100 of them)

At least in my opinion, the one asking whether the owner has continuously lived in the home the last 12 months.

That's because the answer to that colors all the other answers.

Legal Standard

Critically, the responses on the form are to the best of the owner's knowledge; if they've spent 9 of the last 12 months at their Sun Belt condo, they may not know that the roof has sprung a leak, there was water in the basement after a particularly heavy rain, or that the fridge's compressor is suspect.

Of course, a good Buyer's inspection should reveal all those things.

But if they don't, and the Buyer is adamant that the Seller's disclosure was deficient, the legal standard for recovery is proving that the owner knew or should have known about the problem.

Exhibit A in the owner's defense to any arbitration action or lawsuit is likely to be the line in the Seller's disclosure indicating that the owner hasn't continuously occupied the home the last 12 months.

P.S.: Of course, an owner who's truly unaware of the condition of the property -- say, because they've rented it for several years -- is better advised to tell Buyers that, and either sell "as is," or pay for a third party inspection.

Delivering Bad News -- How & When

Scoring Points for Courtesy

It's never great when one party to a transaction has to deliver bad news to the other -- like, for example, when the Buyer's inspection reveals a major issue (or several of them).

But it's always better to deliver such news quickly and directly, for three reasons:

One. Getting the issue(s) on the table gives the parties more time to resolve them.

While the timetable for resolving inspection issues can always be extended if both sides agree, it's good for a deal's momentum to get a head start understanding the scope of the problem(s), lining up second (or third) opinions, etc.

Two. If the problem(s) can't be resolved, both sides get to move on faster.

That's usually especially important to Sellers, who want to know if their deal is still intact -- and if not, to get back on the market as soon as possible.

Three. Good Will.

It's the unusual (or unusually confident) Seller that isn't at least a little bit anxious waiting for the results of the Buyer's inspection.

Minimizing the time they have to wait -- anxious and in limbo -- helps create/preserve good will -- good will that will be especially important negotiating the issue(s) to come.

Bank Foreclosure "Gotcha's" :)

"Inspect All You Want" (They Said)

Welcome to the Hotel California
Such a lovely place, such a lovely face
They livin' it up at the Hotel California
What a nice surprise (what a nice surprise) bring your alibis

Mirrors on the ceiling, the pink champagne on ice
And she said we are all just prisoners here of our own device
And in the master's chambers, they gathered for the feast
They stab it with their steely knives but they just can't kill the
beast

Last thing I remember I was running for the door
I had to find the passage back to the place I was before
Relax said the nightman We are programmed to receive
You can check out anytime you like but you can never leave

--"Hotel California" lyrics; The Eagles

While it's still fresh, I thought I'd start a collection of favorite "gotcha" clauses in bank foreclosure contracts that I've run into recently.

Actually, "gotcha" would suggest purposeful intention; what often seems to be going on is that . . . no one's home -- in every sense of the word.

Examples:

--One size fits all. Once upon a time, Target sold mittens in its Southern California stores. Today, lenders with foreclosures in Florida -- where defective Chinese dry wall has been a big problem -- are requiring disclaimer language in Minnesota, where no one has heard of the issue.

--"Inspect all you want." Another bank included an Inspection Contingency that looked like the standard Minnesota form up until the last sentence; that's where the Buyer waived its right to back out of the deal, regardless of what the inspection revealed.

Ummm . . . that would be the whole point of the inspection, especially one that turns up major issues that the bank won't address because it's selling the property "As Is."

Even if the property is being sold "As Is" -- make that, especially when the property is being sold "As Is," with no disclosures -- Buyers want to inspect to determine the property's true condition.

--The Bank can get out, for any reason. The flip side of locking the Buyer in is letting the bank out.

Another bank contract included a clause on the last line of a 28 page contract allowing the bank to cancel the deal, at any time, for any reason.

Such a contract really isn't a contract, it's more accurately a "memorandum of understanding."

By contrast, a contract imposes reciprocal rights and obligations, and is binding upon the parties.

--Bank language supersedes Buyer's language.

Every bank deal I've seen so far (more than two dozen) starts with the bank tossing out the standard Minnesota real estate forms, and substituting its own custom, undefined contractual language.

Typically, the first sentence of the bank's substitute forms states that the "bank's forms supersede the Buyer's, and wherever there's a conflict, the bank's forms govern."

So, not only are the bank's contracts often full of ambiguous, undefined language -- they trump the standard Minnesota contracts where there's a conflict.

--"Knock Yourself Out" Inspection clauses. Another variant of the "modified" Inspection clause I've seen allows the Buyer to inspect, but makes them responsible for de-winterizing the property, re-winterizing the property, and paying for any damage that doing so causes.

So, theoretically, a Buyer could arrange to have the water turned on, have the place flood because the pipes are busted . . . then be liable for the damage! (even though they decide not to buy the home).

Bottom line(s): a) foreclosures aren't for novices; and b) the price had better be attractive enough to compensate for all the foregoing risks and hassles.

Are Municipal Inspections a Waste of Time?

Inconsistent Provisions, Fees, Enforcement:
A-Not-So Necessary Evil

Until recently, I've always defended municipal point-of-sale inspections -- required by 14 municipalities locally, including Minneapolis, St. Paul, Bloomington, and St. Louis Park -- as a well-intentioned (if annoying and occasionally, expensive) hurdle for home Sellers.

Typically, so-called Time of Sale Inspections focus on safety-related concerns such as the working condition (or not) of the heating system; basic electric features (GFI's in Kitchens and Bathrooms); and plumbing (for example, back-flow preventers).

However, after seeing all the various inconsistencies and loopholes over the years, I've come to the conclusion that their costs don't justify their benefits.

Here are the five reasons why:

One. Buyer's inspections cover the same ground much more thoroughly.

Once upon a time, a Buyer's inspection was considered optional.

Not anymore.

In the nine years I've been selling real estate, I've never represented a Buyer who declined to do an inspection -- nor would I ever recommend it.

Even if a home was selling in multiple offers -- not so common these days -- I still wouldn't recommend waiving the inspection, as some especially eager Buyers have been known to do.

On a scale of 1-10, a good Buyer's inspection is a "9" or "10," typically taking 3-4 hours and costing $300-$400, depending on the size house.

The city inspection?

I'd rate even the best ones as no higher than "2" on that same scale -- and have seen them performed in less than 30 minutes (even though they can cost north of $200).

Two. Dubious logic.

By definition, point-of-sale inspections kick in . . . only when title changes hands.

So, Golden Valley wants to know that, prior to sale, each home's sewer connection to the municipal system meets minimum standards.

However, if that's such an urgent priority, Golden Valley should implement that requirement city-wide, immediately, not just require it as a condition of a home sale.

After all, most Golden Valley homes don't change hands in any given year -- and some don't sell for decades.

How is such spotty enforcement furthering the city's goals?

Expensive & Redundant

Three. Inconsistent Provisions, Fees, Enforcement.

Some cities have their own inspectors (St. Louis Park, Bloomington); others outsource their inspections (Minneapolis, St. Paul, Maplewood).

Of the latter, the primary qualification to become a "certified city inspector" -- as best I can tell -- is to fill in a form and pay a fee.

While each city's approved list of certified inspectors contain many experienced, reputable inspectors . . . I've certainly encountered my share of incompetent inspectors.

In fact, one of my first listings (representing the Seller) involved a Minneapolis home that had just gotten a clean "point of sale" inspection.

Unfortunately, the deal collapsed when the Buyer's inspection revealed -- with lots of documenting photos -- that my client's roof was clearly past its useful life.

My client ultimately put on a new roof (and, I believe, was genuinely unaware how bad the existing roof was) . . . but by then the Buyer had walked.

Less egregiously, I've seen homes blocks apart in the same city undergo city inspections within weeks of each other, and one will get written up for plumbing and electrical violations, while the other -- in worse condition -- gets a pass.

Four. Confusing compliance.

In some cities, home owners must correct any "repair or replace" ("R&R's") items before the home can be offered for sale (Minneapolis); in others, the items must be corrected prior to closing (St. Louis Park).

If the homeowner can't or won't address the R&R items, cities typically allow responsibility to be transferred to the Buyer.

However, the protocol for doing so -- paperwork, escrow provisions, post-sale timetable for correction -- vary widely.

Finally, at least one city (Maplewood) requires a point-of-sale inspection . . . and nothing more: there's no requirement that anyone fix anything, before or after the closing, let alone a reinspection requirement (which most cities require).

I suppose this state of affairs is more agreeable to homeowners, but then what's the point?

Five. Potential to Mislead Buyers.

At least some unsophisticated Buyers, when they learn that the home has passed the city inspection, erroneously conclude that it's in good condition.

For all the reasons discussed above, that conclusion is most definitely not warranted.

Ultimately, at least in my opinion, there's scant evidence that municipal point-of-sale inspections help to ensure that the city's housing stock meets minimum standards.

After all, some of the local cities with the best housing stock (Edina, Wayzata, Minnetonka, Plymouth, etc.) don't have them.