Finding properties with defects is one of the three essential elements of profitable lead generation. Home defects are damage, imperfections or faults due to the neglect, poor workmanship or normal wear and tear. Homes with defects are opportunities to drive the appraisal price down and setup the justification to purchase the property below list or market value.
Identifying defects in a property also protects the homeowner / investor from buying a home that could be a money pit. The buyer will be responsible for additional repair liabilities after purchase that could be expensive.
The number of defects and the seriousness of damage has a profound effect on negotiation of the list price.
The onus is always on the buyer to perform due diligence before making a purchase. You can’t judge a home by it outward appearance. You must know exactly what you are buying. Every homeowner should have a home inspection before purchase. This is the only way to make an informed decision.
The McGuires bought their dream home which quickly turned into a house of horrors. The downsizing baby boomers purchased a newly renovated three-bedroom, three-bathroom home that had been recently enlarged by a local flipper developer. “That was actually part of the appeal — to have something that was completely finished, from top to bottom had been redone. All new electric. All new everything in it. High-end appliances. All of those things were part of the appeal for us,” McGuire said.
A home inspection was completed and everything looked good. Six months after their purchase the McGuires got a call from a city housing inspector, who was investigating claims against the developer by other buyers.
“They gave us list after list after list of things that were either not permitted or violations or weren’t zoned correctly”. The home was originally a one-bedroom, one-bathroom. The developer never filed permits and the city told the McGuires they had the legal right to make them tear off the back end of the house where the rooms were added.
caveat emptor is a maxim, or a very widely-accepted Latin phrase which means “may the buyer beware”
The home that an appraiser is examining is called the subject. When a residential property is inspected by an appraiser they take an accurate accounting of amenities of the home. Room counts, square footage, car storage, flooring types, acreage and property “condition”.
The subject is then compared to other like properties that have sold recently in the area called comparables. These comparable homes should be similar in features and proximity. When the comparable properties have features that are superior to the subject the appraiser makes adjustments down on the price. When a comparable is inferior to the subject the appraiser adjusts the price upward.
Once the adjustments are completed the value of the home is based on the modified values from the comparables. These adjustment are opinions of value so they are “subjective”. The opportunity to lower the list price of the property below market value or renegotiate the contract lies within the condition adjustment.
In Florida, a disclosure from the seller must be presented to the buyer before the execution of contract for sale. The seller must detail anything that they know that materially affects the value of the property. It is illegal for a seller to withhold any of this information. When defects are found that are not on the property disclosure or have not been adjusted in the listing agents appraisal then the price MUST be lowered.
The explanation as well as the amount of the condition adjustment is based on the cost to repair, replace, renovate or remediate the issue. Most realtors and appraisers will not dedicate the time that it will take to get cost estimates to submit with their reports. Our inspection and contract reports are used to justify the price and are usually not challenged. When the new price is tested fact based opinions support the adjustment downwards.
In the case of the McGuires, I would have loved to represent them. In Florida, any improvements to a property in violation of building codes or without necessary permits is illegal. Once my inspector notified me of the illegal addition I would immediately disclose the knowledge to the seller. Moreover, I would let him know that if he chose not sell to my buyer he would have to disclose the bedroom and bathroom additions to the public per Florida law when the home was relisted. The other option is to “tear it down” and start all over. This Flipper would have no choice but to lower his price drastically.
If you would like to learn more about negotiating lower prices for your buyer contact Keith Jackson at 321-662-0422 or KJ@EurekaFlorida.com