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Caveat Emptor and the real estate transaction.

Caveat Emptor and the real estate transaction

Latin for “let the buyer beware”, caveat emptor is the legal principle which basically dictates that as the purchaser of real property, the buyer alone is responsible for what they are buying. This is a very old approach in real estate and should still be a primary concern to anyone buying a home. If you choose to buy a home that turns out to not be quite what you wanted or what you thought it was, then with the exception of cases of gross negligence or fraud on the part of one of the professionals involved in the transaction, the responsibility for any loss incurred is yours and yours alone. Knowing that, anyone buying property should do a healthy amount of due diligence.

That said, over the last hundred years or so the real estate industry has created mechanisms to help buyers mitigate their risk. The four I am going to talk about today are the home inspection and response, the appraisal, title search and insurance, and the two agent system where both the buyer and seller are equally represented by a Realtor.

Home Inspection.

Once a purchase agreement is reached, a home inspection is the single best opportunity you have as a home buyer to avoid buying a lemon. Fees for home inspection range from $300-$2000 depending on what you are having done. A basic three point inspection shouldn’t be over $500 (at least in central Indiana) and quite frankly is the best $500 you will spend in your lifetime.

A good inspector will find every little thing wrong with a house, tell you how to mitigate the problem, and put it all in a report that you will then use to work with the sellers to either correct those deficiencies or financially adjust the contract to account for them.

This is one of the things that really takes the caveat emptor weight off of the shoulders of the buyer, as a licensed home inspector is liable (and insured accordingly) for any defects in the home that they did not include in their report.

I do want to note that as a buyer you are not required to have any form of inspection, unless a lenders underwriter requires it…but at the same time you would be foolish not to. Even if you are a professional general contractor with 20 years experience, a second pair of eyes with no emotional attachment to the home is invaluable in discovering what may be very expensive flaws that you may miss. So don’t pass on this chance to mitigate this bit of risk when making what is likely to be the largest purchase of your lifetime.

The home appraisal.

Lets make no bones about this. The appraisal that the bank orders and requires you to pay for is for the banks protection. The lender wants to make sure that they can recover the capital they have risked in the event you default on the loan.

That said, the appraisal also serves to protect home buyers from making an emotional purchase that may not serve their financial interests. When people buy a home, they don’t typically view it as an investment. They are looking for a place that they will be happy to live in and with the exception of especially savvy buyers, they expect to spend their entire lives there. The truth is that people move every 7 years on average, and when you buy a home you are likely to be reselling it at some point. If you pay more than a home is worth at the time of purchase, it is highly unlikely that you will get a decent return on your investment… and every real property purchase is an investment. In fact, it is more likely that you will sell at a substantial loss if you pay too much at first.

All of this adds up to an appraisal not just protecting the lender, but the home owner as well.

I personally take this as far as recommending that even my cash buyers have an appraisal done, and especially when they are buying a property that is difficult to find comparable properties for. The comparable market analysis that us Realtors do is a useful tool, but it is not an appraisal. The appraisals value over a CMA’s even more when there are not obvious and easy to locate indicators of the homes value.

So when buying a home, another $500 or so dollars spent on an appraisal is a great way of doing that due diligence that the principle of caveat emptor requires.

Title Search and Insurance.

Technically you can buy a property from someone just by filling out a purchase agreement, exchanging funds and filing a bill of sale with your county clerk. No title company involved at all. This would be a fine approach if everyone in the world was honest, never made errors, and never got sued.

Here in the real world, none of that happens. In fact, even with all of our checks and balances people still attempt to commit fraud in real estate transactions with a regularity that would shock you. Fortunately, our systems catch and prevent 99.99% of them when they operate within our licensing system.

Note that I said that operate within our licensing system. When you buy or sell a home on your own or take short cuts to cut costs, you expose yourself to very serious financial risks.

When a title company handles escrow for a real estate transaction they take a great deal of responsibility and liability on. They ensure that the deed is square, that there are no debts or liens against it. They even check out the parties involved to ensure that all funds are transferrable without issue.

Given that almost everyone uses title companies these days there is no need for me to overstate all of this, but if you were thinking of saving some cash by just filing a bill of sale with the county clerk…well, just don’t do it. OK?

The two real estate agent transaction.

Having two agents involved in the transaction seems like overkill and an unnecessary expense on the surface. In truth, two agents is just enough to ensure that both parties are adequately represented and advised during the transaction. In our office we take this a step further and operate with a team concept so that we can provide multiple agents and viewpoints to a transaction and further ensure that our clients get the best representation, but I digress.

One again, you can purchase a home with only one agent involved (in Indiana), or even none.

None is obviously not the best choice because without a professional Realtor involved, odds are your transaction will fall into one of the 4,263,233 pitfalls that can happen and not get closed.

A single agent would be more than competent to get the deal closed, but what happens when there is a disagreement? What if you hit a tough negotiation point?

If there is no agency agreement with the buyer I will tell you what happens. The agent will side with the seller, giving them consul and working hard to get them advantages in the deal. He is required to by both law and our code of ethics.

If there is an agency agreement between the buyer and the Realtor another messy situation arises. The agent has to step back and not offer advice to either party. Sure the deal can still get done, and if the agent is truly professional he will walk the tightrope and do what he can to protect both interests by dealing fairly and honestly with both, but are the buyer or seller getting what they pay for in this instance?

So the reason two agents in the transaction is superior to a single agent handling both sides of the purchase is agency. If both parties are represented by their owner Realtor, they both can expect to get the best advice, the most complete information, and the knowledge that they have someone fighting hard for their interests at the negotiation table.

In Summary.

At the end of the day Caveat Emptor still rules the land, but by taking advantage of these four opportunities you can greatly mitigate the risks involved when buying a home. The inspection will keep you from buying a money pit (at least from buying one without knowing it). The appraisal will give you confidence that the property is a sound investment. The title search and insurance will ensure that you are actually buying the property and not someone else’s debts, or other title issues. The two agent system will ensure that you get just as much representation during the transaction as the seller is enjoying. Together these items will make doing your due diligence that much easier and complete. Please take advantage of them when you buy your next home.

If you are looking for a home in Indianapolis and want to make sure a Realtor properly represents you in the purchase, call Robb right now at 317-657-8059 or email robb@yourrealtylink.com to set up your buyers consultation.

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