Due Diligence

The Arizona Association of REALTORS residential purchase contract is 9 pages long. Section 6 is about Due Diligence on the part of the buyer. Inspections, square footage, termites, sewers, swimming pool barriers, home warranties and a final walk through are all covered. It’s a very important part of the contract.

The default for the inspection period is 10 days from contract acceptance. This means that the buyer has 10 days to have any inspections done (usually a whole house inspector and an Insect or termite inspection) and to submit a BINSR (Buyer’s Inspection Notice and Seller’s Response).

Quite often the inspection is not handled well at all, by the new or inexperienced agent. Here are the steps I think should be followed in the best interest of all parties.

First, hire a licensed home inspector that will inspect the entire home. Don’t hire a roofer for the roof. A plumber for the plumbing. An A/C guy, a landscaper, a structural engineer, an electrician and so forth. Too many cooks in the kitchen. And don’t hire your uncle Stu who once had a job on a construction site. A licensed home inspector looks at homes every day, knows what to look for and will advise you if you need to hire a specialist to look at a particular part of the home.

Second, know the objective of the home inspection. It’s not to have everything fixed so that the home is brand spanking new. If that is what you want, then you need to buy the more expensive new home that is being sold down the street by the builder. It’s not to have the home upgraded so that it meets todays code standards. It’s not to fix cosmetic items like the tile that looks ugly in the hall bathroom. It’s not to ask for new features to be put on the home like a ceiling fan in the basement or sunscreens on the back of the home.

The objective of a home inspection is two fold. First, it’s to create a long term document for the new buyer so that they can fix, replace and upgrade their new home as time and money allow. Hopefully, when you were making an offer your agent and you discussed a fair price based on condition of the property. The buyer should have this document to refer to over the next few years. Then, they should call the inspector up and have him do a new inspection. Yes, have your home inspected every 3-4 years, regardless of your plans to sell it. Second, the home inspection should disclose safety items and any big ticket items.

Safety items are things that might cause a fire, be hazardess to your health or make the home less safe to live in (such as security locks). These items the buyer should expect to be repaired, unless the buyer knew about them going into the transaction. I’ve been in home where the front door did not lock. We made offers on it based on the fact that my client would need to fix this problem.

Big ticket items or those that are expensive to fix – a home that needs a new roof, the a/c is shot, or a home has inadequate that electrical or plumbing systems. The last thing a buyer needs is to be told a week after moving in that something needs to be fixed and it is going to cost $5,000. When a big ticket item is discovered during the inspection, the buyer can safely say that the offer they made did not take into account this cost and can then negotiate with the seller on this item.

After the buyer has hired a licensed inspector and knows the objective of the inspection, he can then go on to the third step. Reviewing the inspection with his agent and the inspector. Deciding which items are safety related or beyond a reasonable expense and asking the seller to correct these issues. In Arizona, the buyer cannot dictate who fixes the items, just that they are fixed. A buyer cannot ask for money alone. The buyer can request that the items be fixed or a be given credit to fix the items after the purchase. For the buyer, receiving the money for the repairs might be the best outcome. Sellers sometimes will do the work on the cheap, since they will no longer be living in the home.
Finally, the buyer needs to verify the work is done. Which often times means having the inspector come out again at an additional charge to the buyer. Or, asking for receipts to show that the work is done.

This is just the first part of the Due Diligence section of the contract. We’ll leave the rest for later. If you have questions about the inspection of a home purchase, feel free to leave a comment.