Risky Business (aka: The 2016 Market)

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Risk is an amazing concept. We take risks every time we try and cross a busy street or decide where to invest our money. We also know that often with risks come with big rewards… or big losses.

Buying a home is the single biggest purchase most people will make in their lifetime. As with any major decision, there is always an element of risk. Traditionally, when home buyers have found a home they want to buy, they have 4 common ‘subjects’ to the deal to help reduce risks.

Subject-to-Financing
In the earlier phases of life, home buyers typically are stretching their finances in order to afford a starter home or a home for a growing family. Finances (banks and other mortgage lenders) share the purchase risk of a home with you as if you can’t pay, they may end up involved with your home. As such, your lender may want your home appraised to make sure it is worth the value you are paying before they lent you the money.

Pre-financing is a common concept now where the bank pre-approves an amount they will lend you so you can go house shopping with some confidence. This is not a guarantee the bank will lend you the money though as they may not agree the house you are buying is worth what you are paying. Lenders may also not be willing to fund two homes if your current home is not sold and may put a condition on your purchase that your old home is sold.

Lastly, if your house burns down, lenders know their investment is worth less so they will require you carry home insurance.

Subject-to-Insurance
Home insurance is not a guarantee. Issues with wiring types, wiring capacities, plumbing materials, and location issues like flood plains may prevent you from getting the home insurance you need to protect your investment and satisfy your lender.

When you call for insurance quotes, you will be asked what types of materials and methods are present. This is one place your home inspection report can be very helpful.

Don’t presume because the current owner has insurance you can get insurance. Insurance concerns change over time and people with existing policies may be ‘grandfathered’ in with issues that would not be insurable with a new owner.

Subject-to-Home Inspection
This is where obviously I’m a little biased but a home inspection is the single biggest way a home buyer can reduce the risk of a home purchase. As I tell my clients, my job is to help make sure what you think your buying is what you are buying. If you think the home is in near perfect condition and I tell you it needs a new roof, new furnace, and a re-wire of the addition, you may be in for $10’s of thousands of dollars of unexpected expenses.

The value of a good home inspection goes well beyond just confirming the purchase condition of the home and could set you up with a good plan for budgeting major expenses for years to come.

Subject-to-Sale of Current Home
Should you sell your current home first and look for your new home and take the risk you can’t find what you need at the right price? Or, should you find the new dream home you want and then try to sell your current home? Market conditions can help dictate this as in a sellers market it is easier to sell than to buy and in a buyers market it is harder to sell than to buy.

If you don’t have your current home sold, it is typical that you would put a subject-to-sale clause in your new home purchase so you don’t end up owning two homes (if your lender would even let you do this in the first place).

2016’s Risky Business
2016 has not been a ‘typical’ year. This year has been a very strong ‘sellers’ market meaning sellers are in control of the marketplace and home buyers are competing against each other for limited houses available for sale. This is driving a competitive house buying market where buyers offers have to ‘win’ in order to get a deal, and this is creating some risks for home buyers:

  • Price Risk - Are you paying too much for your house in 2016? Only time will tell if prices stay above these record highs.
  • Condition Risk - Is the home actually in the condition you think it is in? What if you had to spend $35,000 on a new roof in the next year?
  • Insurability Risk - What if you could not get insurance on the home? Can you still get financing?
  • Home Sale Risk - What if the market changes and you can’t sell your current home?

Final Thoughts 
As a home inspector, my job is to help people understand the home they are buying and in 2016, we are seeing so many people giving up the opportunity for a home inspection in order to ‘win’ a home purchase. While yes, this is a lost business opportunity, I’m even more concerned that so many buyers are going to discover problems that could have been detected if we only had a day or two to get in and do our job. A $500 home inspection on a $1,000,000 property is 0.05% of the purchase price of the home but could save buyers a major headache in dealing with costs later.

I for one am hoping the 2016 sellers market cools down a little and gives some room for cooler heads to prevail.

By James Bell - Author | Owner/Operator of Solid State Inspections Inc