Home Inspections and pitfalls

I have written about the use of home inspectors to prevent yourself from becoming the victim of real estate fraud. I stressed that hiring a home inspector is only the beginning of the process. The buyer must follow through to determine what areas the inspector's report may have missed. Inspectors will not move items in the house and will not speak with the seller. Piles of boxes or furniture can easily conceal a defect.

Inspectors have missed roof leaks and other areas of water seepage. Inspectors have missed floor damage as well as mechanical failures. That the inspector missed these items does not relieve the seller of responsibility for fraud, but the buyer should not wait for the outcome of a lawsuit to protect himself.



The same policy that causes inspectors to miss concealed items often causes them to report items as faulty that have nothing wrong with them. Inspectors confronted with unplugged items have reported those items as faulty rather than plug them in before completing the report. The inspectors' refusal to alter the status quo may be quite sound from the perspective of protecting the inspector and the buyer from claims for damaged items in the home, but that policy places limits on what the inspection might accomplish.

As I wrote before, use home inspectors when you purchase your home. But know the limitations of the inspection process and work to overcome those limitations.

Home equity, savings and the current economic crisis.

A recent quote from David Goldman ("Spengler") helps put the role of home equity in context in today's economic crisis:

Americans have saved almost nothing during the past 10 years, relying instead on home equity that now has vaporized. The proportion of Americans over 60 will jump to 25% from 19% during the next 10 years, an unprecedented shift. Americans must save to compensate for past profligacy, from a lower starting point after the destruction of so much wealth, and with lower prospective returns.

Remember, equity in an inflated asset does not take the place of actual savings.

Home Inspectors - the beginning of the story; hidden home defects;

I have written previously about the use of home inspectors for buyers seeking to avoid being defrauded on the purchase of real estate.

If you are a buyer, do not simply send a home inspector to the home you wish to purchase and expect that any issues will be discovered with no further effort on your part. Sellers have become good at hiding defects from inspectors. Sellers will frequently leave debris piled up against walls that otherwise would bear obvious signs of water leakage or other defects. Inspectors will not move any item in the house. If a defect is somehow concealed, chances are that the inspector will not find it. The inspector will identify all obstructed areas on his report. It is up to the buyer to demand that all obstructions be removed and arrange for followup inspections.

Talk to the inspector, ask him how difficult it would be to expose common areas. Ask him how common it is for defects to exist in the particular type of obstructed area in the home you are buying.

The inspector's report is only the beginning. A buyer must follow through and make sure that the report is as complete as it can be before the buyer closes on the deal.

previous - Mortgage foreclosures - a catalyst for real estate fraud?

Dr. Seuss, inflation and the reinflation of the real estate bubble

It has been eight months since Congress passed the nearly 800 billion dollar "stimulus" bill. We continue to await its effects on the economy in general and on inflation in particular. Most of the stimulus money has yet to be spent by the federal government. There are those who hope that the stimulus money and the $8,000 new home buyers credit will spur real estate sales and, in effect, reinflate the bubble. For those of this mindset, nothing could be better than another round of inflation to restore real estate values and start the good times rolling again. If you are one of those people, remember the old phrase, "Be careful what you wish for."

Most people do not know that Dr. Seuss used to write political cartoons before he produced books for children. I found this cartoon from April 19, 1942 on the University of California at San Diego website.

Dr. Seuss on inflation





Do not be in such a hurry to see the government spend the "stimulus" money. Once Washington begins forcing the money through the economy, you won't like the consequences.

Inflation adjustment clauses in leases.

Ever since the "stimulus" bill was passed in February by Congress, we have been waiting for the inevitable inflationary results. We do not know how bad the inflation will be. We do not know how fast the government will force the new money into the economy.

In any case, real estate investors should prepare for the worst. If you own property and lease it to tenants, it would be wise to include a clause in your lease that allows the rent to be adjusted to keep pace with inflation. Otherwise, you will see your expenses skyrocket while your rents will be locked in by the term of your lease. This is especially true in commercial leases that last longer than one year. Over the course of a year or more, inflation could skyrocket more than we have seen in our lifetimes, depending on how fast the government lets the new "stimulus" money percolate through the system.

Real Estate Prices, Diana Olick, inflation, Richard Daughty, stimulus money

Earlier this week, I summarized the conflicting forces that may affect housing prices:

Long term price trends will depend on whether the FED's next rate hike and the next wave of foreclosures will take effect before the "stimulus" money has a chance to generate inflation.

If the foreclosures and higher interest rates win the race, long term trends will favor lower prices. But if the stimulus money percolates through the economy first, then nothing will stop the price of housing (and everything else) from skyrocketing.

Diana Olick of CNBC believes that the foreclosures and general economic bad news will win the race over the inflationary stimulus money:

There is now an estimate out there that rising foreclosures will add 7 million homes to the for-sale inventory over the next two years. Inventories of new and existing construction have been falling, but that could U-turn this fall, as foreclosures rise, banks let go of the homes that didn't qualify for modifications, and job losses push good quality borrowers into default. Pile that on top of seasonality, and I'd watch for home prices to dip again as we get readings on the fall months

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Diana Olick - [CNBC photo]













On the other hand, the federal government and the Federal Reserve are trying to reflate the bubble so as to avoid this outcome. Richard Daughty of the Daily Reckoning has tried to place the stimulus package and related efforts in context:

. . . the Federal Reserve (as expressed in their secret motto "We Are Evil") created, out of thin air, a new US$29 billion in bank credit! Wow!

The interesting part is that the Federal Reserve used that new money - and a lot more - to buy $62 billion of US government debt last week! . . . . . And now here - here! - is Greenspan successor Ben Bernanke’s monetary insanity to create, in One Freaking Week (OFW), $62 billion whereas it took old Greenspan an entire month to come up with $10 billion!

This type of currency expansion cannot exist without disastrous consequences for prices in general. [Daughty's column appeared in April, but it reflects the worst trends in monetary policy for the past year.]

If the stimulus package has its predicted effect and results in disastrous inflation, all prices, including those of housing, will rise. But the price of housing in real terms relative to other products may still fall due to the inventory and foreclosure concerns voiced by Olick. If you rely on real estate values to keep up with inflation, you may find yourself falling behind quickly.

Home Inspector organizations; NACHI, ASHI, NAHI

I have written previously about the use of home inspectors to assist buyers in avoiding real estate fraud. Using an inspector does not guarantee that a buyer will discover every defect in the home, but using an inspector is a good start. Make sure that your inspector belongs to one of the three main home inspector organizations - ASHI, NACHI or NAHI. A qualified inspector can show you his credentials and his proof of affiliation. Do not use an inspector with no affiliation.

There are additional steps you must take to make sure that you will get the most out of your inspection process, as I will discuss in future posts.