"To See, or Not to See?" (that is the question)

"Sold, Subject to Inspection" -- Explained

Upper bracket Twin Cities homes may not be moving quickly (if at all), but the pace of sales for more affordable housing -- say, under $300k -- is surprisingly brisk.

Accordingly, more would-be Buyers are being told that the home that they just asked to see is already "sold, subject to inspection," even though its status on MLS is still showing "active." (There's actually a further refinement to that status -- namely, either "good to show" or "no more showings." By definition, if the latter status applies, there's nothing for other, would-be Buyers and their Realtors to discuss.)

What does that mean? And what should prospective Buyers do with that information?

"Sold, subject to inspection" means that there's already an accepted offer on the home, but that the Buyer hasn't removed the Inspection Contingency yet. Until that happens, other Buyers are welcome to view the home (assuming the contract between the Buyer and Seller provides for that).

Which prompts the next question: should other Buyers still bother looking?

"To See, Or Not to See" (That is the Question)

Standard Realtor advice is "no." The reason is that the vast majority of the time (say, 85%-plus), inspections don't scuttle deals.

That's so either because inspections don't reveal any major issues, or, if they do, the Buyer and Seller are able to successfully negotiate them.

Per Minnesota law, a Seller who learns about a material defect in the course of a Buyer's inspection is obliged to update their disclosure. So, the choice they're confronted with is, reduce the sales price an appropriate amount now, with this Buyer -- or take a similar discount with any future Buyer.

Alternatively, the Seller can elect to fix the problem themselves, then put the house back on the market.

Either way, the cost of the repairs comes effectively comes out of their pocket.

Not surprisingly, most Sellers in this situation opt to "take their lumps" now, vs. later.

Inspection Blow-Ups

So what about the other 15%?

Three types of situations account for most of the "inspection blow-up's."

First, the inspection reveals a major issue, and the Buyer and Seller can't come to terms about an appropriate discount.

Given that there are standard price ranges for things like roofs, furnaces, radon remediation, etc., there's really no reason for that to happen if both sides are negotiating in good faith.

Second, the Buyer and Seller disagree about whether there is a material defect.

Fortunately, most home issues are objective rather than subjective in nature: the roof leaks or it doesn't, the heat exchanger in the furnace is cracked or it isn't, etc. Usually, bringing in qualified third parties -- typically, knowledgeable contractors -- can get Buyers and Sellers past this impasse.

The third type of inspection failure is when the inspection is such a disaster that the would-be Buyer isn't interested in negotiating a discount (however sizable).

More than most consumer purchases, for many people, a home purchase is especially emotional.

A disastrous inspection can cause the Buyer to "fall out of love" with a home.

When that happens, often times no amount of "rational" inducements (read, financial) can un-do the damage, and the best course of action is to simply move on.

What's Selling: Fern Hill Foreclosure

Where: 2641 Kipling So. (St. Louis Park's Fern Hill Neighborhood)
What: 3 BR/2BA; 1,678 FSF
List Price: $165,000
On Market: 2/4/09
Time to sell: 2 days (*estimated)
Tax assessed value: $392,000

[Reader's note: for related posts, see, "Multiple Offers and $40k Over Asking" and "Fern Hill Flip]

Even in a soft market, a starter home in St. Louis Park's high demand Fern Hill neighborhood still fetches low $200's. (My unscientific definition of a "starter home" is anything with less than 1,000 FSF, and 2 BR/1BA).

And this Kipling home is substantially more house than a starter: in good condition, it could easily be worth high-$200's, if not more. (I think the tax-assessed value is way off here).

While this bank-owned home struck me as rough -- I previewed it for a client who decided to pass -- I'd estimate that a well-spent $20k-$30k would take care of everything. That leaves plenty of upside for anyone paying close to the $165,000 asking price.

In fact, based on the deep discount and fast sale, you'd speculate that there were multiple offers, and that the ultimate Buyer overshot the asking price.

We'll know March 10, when it's scheduled to close.

*According to MLS, this home was actually on the market for 5 days. However, it's a good bet that most of that time the home's status was actually what Realtors call "sold, subject to inspection." By convention, most homes remain "Active" until the Inspection Contingency is removed.