Inspections for Hire

SELLER BEWARE!

Well, now that the contract has been signed, you're a happy seller, right? Hold on, there. An inspection has been requested by the buyer and rightfully so. No one wants to buy a home rife with defects and dangerous problems. So the inspector arrives, pokes around for a couple of hours, says little and goes his merry way. He tells you that he'll send the report within a day or so. Then it arrives. The report from Hell.

Upon first glance, the inspection report makes the seller feel like this house should really be torn down and carted off to an EPA toxic waste dump. You, the seller, can hardly restrain your shock and anger. Calm down. Let's talk.

First of all, remember: just as in any profession, there are good inspectors, mediocre inspectors and people that shouldn't be inspecting at all. Secondly, the reality is that if the buyer is paying three or four hundred dollars for this inspection the inspector has an implied duty to find anything and everything he or she can that's wrong with your home. We all feel like we must earn our money.

Thirdly, and this is the most important point, there are many things in these reports that must be looked at carefully. To wit: the word "recommended" (or "should"). When an inspector recommends something to be fixed or improved this is a suggestion that is not based on a code-required or legal need for something to happen. Restated, there is no law that requires a homeowner in Georgia to bring their home entirely up to current Building Code standards. For example, an owner of a 40 year-old home may or may not have a GFI (ground fault interrupter circuit) outlet in every location in the house that is currently dictated within present building codes. Again, there is no law that the seller, upon sale, must update the home to the current building codes. If a GFI circuit that exists in the home is faulty, then the seller is either morally obligated to fix the problem or provide a financial concession for its future repair, if they choose to. Typically, the seller does, or risks losing the sale.

Some recommendations have little to do with real concerns; e.g.: potential problems about water movement around and away from the house. If there is no clear sign that this specific issue has created water penetration in the structure, you're under no obligation to address this. Normal wear and tear is another area that unless it represents a deficiency that is a danger to the occupant, the seller should disregard the inspector's comments. If the buyer wants a new house, they should go buy one. In short, anything that is just cosmetic but not dangerous or harmful to the structure's integrity, you can forget it, if you wish. Maybe you're a motivated seller and don't think the cost of correcting the issue is worth fighting it. But do know your options.

Inspections that reveal damaged or faulty HVAC (Heating, Ventilation & Air Conditioning) equipment, electrical wiring or plumbing must normally be taken care of. Be sure it's not something that is simply a feature of the changing building codes dictating something that you don't have. If that's not the case, also be aware that some governmental entities do require trades in these disciplines to repair any real deficiency within current code requirements. That's a Catch 22 type dilemma that might not be worth fighting. The nuance here is that intact, properly functioning equipment, wiring or plumbing doesn't need to be brought up to current building code standards but repairs to faulty equipment, wiring or plumbing might very well have to be.

The roof is another favorite target of inspectors. If your roof hasn't been replaced in the last few years, chances are the inspector will look closely for some weakness in the roof system. Yes, there is concern when there is obvious evidence of a leak within the structure. No, typically these problems are very fixable and minor in scope. A piece of step flashing that has pulled away from your chimney can be easily resealed and stop a leak. Just don't let the buyer's inspection report become a mandate to rebuild your home. Make your own inspection or have someone you trust evaluate it for you first. I personally had a ceiling leak that was created by siding on an elevated section of my roof "cupping" from age. I caulked the siding joints and the leak stopped.

Chimneys are often suspect after being used over 30 or 40 years. The damper is less pliable, regular cleaning may or may not have been done and bricks work loose over time. Again, have someone you trust help you make a reasonable evaluation of any issue that a buyer's inspector points out.

In summary, look carefully at the wording used to delineate any issue that an inspector points to. Don't assume that just because it's in the inspection report that you are under any obligation to upgrade your home to current building codes. Heavily discount recommendations as being simply that: suggestions. If it's easy and you want to do it, fine. If some small concession will settle the concerns of the buyer, just do it. Remember that there are buyer's agents who will agree to most of your terms of sale subject to the inspection, which the agent, with the help of the inspector will then use as a bludgeon to bring down the final price of your house to what the buyer wanted it in the first place, usually as is. Yeah, it's a jungle out there.

Good luck.

The Seeds of our Discontent

A generation ago, there was a man named W. Edwards Deming that embraced the principles set out, in short, TQM. Total Quality Management was not his idea, but he was its Apostle. As the story goes, he went to American auto manufacturers about these principles and was summarily dismissed. Dr. Deming was told that they (auto manufacturers in the 50's and 60's) produced what they did and the American public just bought them. End of story. They evidently dismissed the [Ford] Edsel as some type of gross anomoly. Discouraged but nonetheless convinced of the TQM model, Dr. Deming went to Japanese manufacturers like Toyota and they were impressed. So much so that they adopted the TQM model. At that time, Japanese cars were somewhat of a joke. The same joke that their toy manufacturing was before it took over the world.

TQM basically proposes that whatever you produce should be produced in an environment that continuously reviews processes and procedures against the actual experience of the end user. In effect, you find your market, the price at which that market will buy your product and worry about profits later. As your refine your processes and product quality the profits follow. This in and of itself was probably what sent the American auto manufacturers into fits of roaring laughter. Our auto industry was supremely arrogant, blind and now, 50 years later, insolvent. With one-sixth of our economy tied to it, we all suffer for their myopia. What the heck does this have to do with real estate?

With home building and resale real estate in melt-down, what lessons can we learn from the auto industry and Dr. Deming? Simply this: Homebuilders and real estate firms have followed the same models for decades. They never change. They simply wait for the market to cycle through so they can continue building and marketing crap for us to buy. Since everyone is building the same crap, what choice do we have? The answer is not promising. Forgive the threadbare adage, but the Chinese symbol for problem is the same symbol for opportunity. We all need to reinvent our ideas about what we demand in our homes. We did it in automobiles and now Toyota is the number one auto manufacturer in America. They listened and responded to what we demanded.

The only way to get homebuilders and the real estate industry to listen is to demand that we change the way we build our homes. If we don't, we will be paying more for our utilities than we do for our mortgage in 10 years. If we don't, we will pay far more for homes built out of the same materials and with the same processes they are today in another 10 years. There are some decent starts to the solutions out there: water cistern systems that recycle rainwater; solar power breakthroughs by a Chinese company that makes it more efficient and affordable; energy-saving building techniques that are quite affordable and make energy consumption a fraction of the typically built home; recycling efforts that are in their infancy; heating and cooling technology that promises far less energy consumption and better interior air quality; architectural designs that better protect the home from catastrophic weather events and ordinary wear and tear.

What will have to happen is that everyone begins to demand of the builders and more importantly, of their representatives in government, building codes that define those instruments of change that must be implemented to give our children and grandchildren the chance at having the same, no, better quality of life than we have enjoyed.

Buy Low, Sell High

Bernard Baruch, the greatest stock trader of all time, was once asked the secret of his success. Upon momentary reflection, he offered: "I buy all the way down and sell all the way up". To any stock jockey, it made perfect sense. He was distilling years of experience into one sentence. What Mr. Baruch portrayed was a contrarian notion of running in the opposite direction of the herd.

As a former stockbroker, I can tell you that I have witnessed the herd instinct first hand and it's truly amazing. When the financial markets are overheated and pundits begin to posit that all of the old rules no longer apply, everyone seems to want to begin investing in stocks. When the financial markets are headed sideways to south no one wants to get involved. Hindsight being 20/20, the Baruch style would have us in cash at the top and buying everything on sale on the way down. Of course, the herd will be buying at the top and too scared to touch anything in "bad markets", afraid of not knowing where the bottom actually is.

Real Estate is simply another asset class from stocks and bonds. It has always been seen as a hedge on inflation, the only way to really accumulate wealth, Warren Buffet notwithstanding and for 50 years, with few interruptions, a safe bet for your serious money. Welcome to reality. As a realtor, I can now tell you that the herds haven't changed. Everyone wanted in when there seemed to be no end to appreciation and everyone is sitting on the sidelines now that the media has us in "the worst real estate crises in 50 years". Go figure.

Realistically, with most of our wealth typically tied up in our home(s), when we visit this type of economy, most of us have little chance to avail ourselves of the bargains that exist in real property. And of course, the bankers, who followed each other like lemmings off the cliff of "me-too-ism" aren't loaning anything to anyone. Getting a mortgage for one's primary residence can be an education about what your credit score really means.

If you're one of the lucky few that are sitting on cash and believe in real estate, now is the time to start really looking for investment property. Beyond the auctions of record foreclosures, there are true bargains out there. If you're new at this, start modestly and carefully but look in neighborhoods you know well. Reality hasn't quite set in for everyone so there will still be sellers trying to get the perceived value of 2006 from their home or land. Let them go. They'll still be waiting this time next year.

Basically, you will be looking for one of two types of property. Developed or undeveloped. Developed already has improvements of some kind on it. Undeveloped is basically land, or land that has some type of improvements to it that are unusuable. For our discussion, let's stick with improved property. In this group, there are again two basic classes- those ready to move in and those that need work. This applies to either commercial or residential property.

Normally, improved property that is in excellent shape will bring far more to the seller than a poorly maintained property or one that is so outdated as to be perceived as unusuable in its current condition. You must make your choice. Do you pay the premium and have little or no work involved in your purchase? Or do you assess the monetary costs associated with bringing a fixer-upper up to usuable condition which will also obligate you to manage that process.

Finally, will you be able financially to survive until the market recovers? For me, I would stick to single family dwellings in my area that are selling at distressed or even reasonable prices. Because I am a homebuilder, it matters not the condition. To you, rennovation costs need to be evaluated, both from a financial and knowledge perspective. Again, start modestly and see how you do. If you are awash in cash, you might want to take on partners who possess the knowledge base you don't. Find a niche that fits your interests and over time, you will accumulate wealth. Don't wait for the bottom. We're never going to know where it is until we read about it in the paper.....

For What It's Worth

Trying to write anything about the current condition of real estate will invariably lead to stating the obvious. That having been said, sometimes it's necessary to do so. In driving down my suburban street this morning, in the space of a city block, there were six "For Sale" signs fighting for my attention. This, along with a complete lack of interest from buyers led my wife and I to remove our home from the market two weeks ago. Not that we wouldn't like to sell, but we have a 30 year old home in need of TLC and the days of brisk traffic are, as they say, history. We could sell it but the price we'd receive would be significantly less than it was worth only 18 months ago. Familiar?

Which leads me to the raison d'etre for my rambling. First of all, I wonder why anyone who doesn't need to sell right now, would. Let's face it. The word "glut" comes to mind regarding the available supply of single family dwellings. This premise is not advanced physics. There are far too many people selling, or bailing out, to recognize the full potential for an individual piece of property in our current economic condition. We won't recount the endless news stories that depict this condition. You've read them. So what does one do if one has to sell?

Here's the good news. There is a price at which every single property will sell. It's usually much lower than one would like, but it's there. So why are some homes still selling? Deep down, you already know the answer: the better condition the property, the more appealing it is in terms of appearance, layout, location, schools, etc., the more likely it will sell and the more money it will net the seller. A case in point is a home we listed this Spring that went under contract 5 days later, very close to full asking price. This, during the worst real estate market in 50 years. Why? It shows beautifully, is in the "right" school district, is on a quiet culdesac, was priced accurately, is on a stunning lot, doesn't look like every other house in the neighborhood, has been updated and it was extremely well kept. Which of those factors made the difference? The answer is: All of them.

Our personal home did not sell for a lot of the same reasons, though from a negative perspective. We'll take another shot at it as we continue to update and renovate and the market gets healthier - maybe this time next year? What the heck. We really like our community.

If selling, don't get trapped in "magical thinking". You can't arbitrarily affix a hoped for price that doesn't reflect the reality of a property's value. It is worth what the market currently says it is. If you aren't getting nibbles, there's a reason. If time goes on and there aren't any takers, you really only have two choices. You know what they are.

Where's The Bottom?

Ever been on a rollercoaster? I admit it's been decades but I still remember the absolute thrill of the downward spiral. The ride back up the hills was pretty boring but the anticipation grew the closer we came to the peak. What strikes me with this rumination is that recessions in some way work just the opposite. We are self-satisfied as we ride the wave of prosperity and see our assets continue to climb in value. How smug we get sometimes. When the inevitable cycle ends and we begin the plummet down the backside of the proverbial parabola, there's certainly no thrill and shouting - just fear and quiet terror.

We are in a recession. There, the "R" word. I said it. How long and how deep? Ask the experts and line them up. Soon you'll have a long line of economists who can't agree on anything. The depth and length of this recession is anyone's guess. Most everyone who posits for a living have us near bottom and not recovering until late this year, early next. In truth, no one really knows. What is true is that everyone you talk to in the homebuilding industry has stories of companies - builders, suppliers and subs - shuttering their operations.

Several of the surviving home builders are out looking for lots again. For the most part, one local fairly successful local homebuilder, who shall remain anonymous, is fairly typical. He has gone from 80 employees to 8 in the last couple of years. He still sits on his lots. He has the financial ability to wait it out. Sadly, many do not.

The resale market is very spotty, with the accent on very. I build in the Buckhead area of Atlanta and the inventory (done well) over 2 million is selling briskly. Most buying those homes are writing checks. Same for the resale homes. Other resale markets in Atlanta are slow to dead. Stephanie and I live in an East Cobb community that is far slower than last year, yet the good houses are still selling - and close to asking price. The junk / overpriced properties still sit.

What to do? Don't sell right now unless you have a showplace that's not overpriced for the neighborhood. Or, be ready to be beaten up pretty severely by the current glut of bottom fishers, otherwise known as predatory buyers. Even Relo's know that there is a national glut of properties and come into town armed with the opinion that they can steal homes anywhere for any price. There is a learning curve even for buyers. The time-honored axiom of "You get what you pay for" has not been rescinded. Yes, there is some foreclosure activity out there with some decent homes selling for much less than they did a couple of years ago but remember, especially if they're in the same neighborhood of other foreclosures, the impact of those bailouts on the comparable values in the neighborhood may take years to shake out. Be prepared to be a landlord.

Of course, one can do what everyone does who has ever gotten wealthy in Real Estate - buy and hold on to whatever you can at the best price possible. If you plan on flipping properties and you have the ability to get builder contacts and prices (and your foreclosure is so cheap you can put your capital into the home and flip it at a profit even at the depressed comparable values in the neighborhood), go for it! Just be prepared to wait.

Don't know what to do? Buying or selling, talk to your neighbors. Interview some realtors. Quit watching the television news. Whatever it is, do your homework and quit worrying. All these cycles come and go.