Weekly Rate & Market Update 5-12-17
Question of the week: We are buying a home that has just been completely remodeled/rebuilt, should we still get a home inspection?
Answer: YES!
In case my answer was a little vague, yes, get a home inspection if you are buying a home that has been recently completely remodeled or rebuilt, I almost want to say especially if buying a home that has had extensive work done recently. (Or a brand new home from a builder for that matter.)
Let’s quickly review the home inspection and its purpose for new home buyers who have not been through the buying process yet. Once you have an offer accepted to purchase your new home one of the conditions of sale you will most likely enact is the right to have a professional inspect the dwelling. The home inspector will spend quite a bit of time in, under, on and around the structure testing all the electrical, plumbing and HVAC systems, inspecting the structure and grounds for apparent water seepage or leaks. At the completion of the inspection you will be given a very comprehensive report that details the quality of condition of all the systems and aspect of your home and note any deficiencies, concerns or items you may wish to have further inspected by a specific professional. The purpose of the report is to notify you of any work that may need to be performed to eliminate a safety issue, ensure that a specific system is working, if anything is not to code, or is deferred maintenance you will want to keep an eye on for future repair or replacement.
Once you have the inspectors list you have the ability under your purchase contract to provide the seller with a list of repairs/replacements you want the seller to perform or you will not proceed with the sale. The seller can agree to the list, part of the list or none of the list of repairs. Essentially the inspection can create the opportunity for additional negotiations between the buyer and seller.
When you are buying an existing home there is a decent chance the inspector will come up with items that s/he recommends be corrected—after all their job is to find things wrong. Once you have the report you and your agent can determine what items are very important, what items are “it would be nice if this was fixed…” and what items are not worth potentially upsetting the transaction over, i.e. cracked electrical switch face plates or hairline plaster cracks in 80 year old home.
Many buyers expectations are that if they are buying a home that is being advertised as completely remodeled/rebuilt that everything with the home should be in perfect working order, after all the seller just spent a lot of money repairing/replacing everything that was wrong with the home and put it on the market as “like new.”** A reasonable expectation and sometimes one that some sellers count on.
The newly remodeled/rebuilt home is pretty common on the market and is most likely a “flip.” A flip is when someone purchases a property that is in distress below market value due to its condition, rehabilitates the home and then puts the property back on the market as a complete remodel, or “like new.” The Flipper’s objective is to make money, hopefully a lot, by selling the home for more than the cost to acquire the property, pay the holding costs of the property between purchase and sale (i.e. any mortgage costs, insurance, taxes, utilities), the rehab costs and the costs of sale. The biggest variable in the cost-profit equation is the cost to rehabilitate the property.
It is not unusual, I will not it is common because there are plenty of Flippers in the market who do not do this but enough to make it not unusual, for a Flipper to put most of their rehab money into cosmetic repairs and maintenance, masking some serious issues that can only be found with an inspection.
A very recent example occurred this week with a buyer we are working with. He purchased a flip that looked fantastic with new paint inside and out, flooring, kitchen counters, cabinets, appliances, bathrooms completely redone with tubs, toilets and sinks. Perfectly staged with nice furniture, wall hangings, etc the place looked like it was in move in condition—and our buyer was ready to move in.
Not so fast. Wisely he understood while what he could see looked great, there was a lot he could not see so he hired a professional home inspector. The inspector’s report brought forth many deficiencies that the buyer would not have been aware of until he closed escrow and moved in. The heater was not properly installed, the electrical system was fifty plus years old and unlikely to be able to handle modern appliances and constant loads with today’s electronics, many of the “fixes” the seller had done through the rehab were not up to code. Essentially the house looked great but underneath the cosmetics it wasn’t so great.
Our client drew up a list of repairs and items to be completed before he would close escrow. The sellers did not want to spend the money and said they would not do any of the requested repairs. Our client cancelled the escrow and will receive his deposit back from escrow. He is out the cost of the inspection, however he saved himself tens of thousands of future dollars by spending several hundred dollars on the inspection.
An interesting result for the sellers, should they follow real estate law and operate ethically, because they have been made aware of the issues brought forth by the inspector, should they not complete the repairs they are obligated under California law to disclose the issues to the next buyer as part of the Transfer Disclosure Statement that almost every seller must provide a buyer of a single family residence in California. If they do not disclose the deficiencies to the next buyer that buyer may have a case in the courts to seek damages after they close escrow.
**A very good friend of mine was an inspector in California for many years, and he was very, very thorough. He had several occasions when he inspected homes that were brand new and constructed as part of a tract of homes and discovered many deficiencies, items that were out of code and issues that would come up later as the homes aged. Just because they are brand new does not mean everything in the home is perfect and that the builder did not cut corners or the work performed was of a quality to last.
Every buyer of every home should engage a property inspector to provide an objective and clinical look at the property and structures so you can have a thorough understanding of the current and potential issues with the property.
The cliché for humans is that for someone their beauty is only skin deep, the same can be said for shiny looking, “like new” homes.
Have a question? Ask me!
The price is right….or is it? We have price data for April and it is good and not as good reflection the overall economy. The Producer Price Index for April was pretty strong, especially after the drop in March, up 0.5% for the month and 2.5% for the year (0.4% and 1.9% stripping out food and energy, the “core” rate). This is a positive number and not real favorable to lower rates. What is favorable to rates is that the Consumer Price Index rose below expectations at 0.2% (better than last month’s drop of 0.3%) in April and 2.2% for the year (core rate 0.1% and 1.9%). This is weaker than expected and shows that retailers do not feel higher prices can be supported in the market. Overall the price indexes are choppy from March to April and from producers to consumers—a sign that our economy could be in transition.
Not showing a lot of support for economic strength were retail sales in April. After strong decline in sales from February to March the expectation in a strong economy would be a strong increase in sales from March to April. A 0.2% increase is not a “strong” increase, more of a “well its okay, not great, but okay” increase. As we have been writing about for the past several months, consumers are not putting a lot of gas on the economy. Prices remain low, wages are increasing and the number of people collecting regular paychecks is increase, but there has not been a translation to cash registers with consumers spending those wages. As regular readers know consumer spending is about 60-65% of our economy, slow consumer spending does not result in a strong and growing economy. Bad news for the economy is good news for rates, okay news for the economy is okay news for lower rates.
Rates for Friday May 12, 2017: For the third Friday in a row rates are unchanged, which we like. With the economic data the past several weeks it is hard to see any economic report that will come out to jolt rates out of their current range. If we saw really strong corporate earning reports that move the stock markets up we could shift rates up, or some international event of a catastrophic nature could shift them down. With the economy floating along there is not a lot of momentum, or sentiment, to cause a big rate shift.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 3.875% Flat
30 year high-balance conforming 4.00% Flat
30 year FHA 3.25% Flat
30 year FHA high-balance 3.75% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.
Happy Mother’s Day to all the moms! I was unfortunate to lose my mother while in high school, the silver lining, if there can be, is that throughout my life I have had the benefit of several great women who have filled in some way or another the “mom” role and I am very grateful for the support, guidance and love they have given.
I am even more grateful for the Mom in our home. As a sometimes bumbling dad with two teenage daughters I am so thankful that Leslie has the relationship she does with our kids, and is able to interpret to the guy in the house so I might closer to understanding the teenage female. I am very happy as well that the girls reflect the beauty, wit, wisdom and fun-loving spirit of their mom.
There are a lot of wonderful moms out there, not looking for accolades or rewards but getting them every day as they see how their children treat others and contribute to their communities. Thanks to all of you!
Happy Mom’s Day, and have a great week,
Dennis
