Imagine that you and your family are searching for a new home. You walk into an open house, only to see a large crack in the living room wall, then later sloping kitchen floors, plus a cracked window. All of these defects are fairly obvious. They are thus “patent defects”: problems visible to the naked eye. Because of their obvious nature, the seller might have already set the asking price on the low side.
Far more concerning for buyers are so-called “latent defects," which are not visible to the naked eye. Spotting them can require expertise in construction, architecture, or engineering. Examples might include asbestos in the ceiling tiles, carbon monoxide leaking into the air, or rusted basement pipes that are close to bursting.
If you can't see these serious problems, how can you find them, and take them into account in setting your offer price and negotiating the sale? This article will discuss:
- how much the seller's disclosures might tell you about latent defects
- the role of a home inspection in revealing latent defects, and
- your options after discovering defects, such as walking away from the sale or negotiating for repairs or a price cut.
How Much Can You Learn From Home Sellers' Disclosure of Property Defects?
Many states' laws require sellers to formally disclose certain material defects in the property prior to the closing, usually in writing. Each jurisdiction is different, and f few embrace the caveat emptor approach, where buyers are pretty much responsible for discovering problems with property before they buy.
But the majority of states impose more regulation, requiring sellers to give buyers a written report, typically on a standard form, disclosing all known material defects and past repairs made on the premises. This is a good start in cluing you in, since someone who has lived in the house is likely to know more of its problems than you can see by visiting.
Regardless of which state the property is located in, property sellers are ordinarily prohibited by law from flat out lying to buyers about the condition of a home. In other words, if the seller affirmatively tells you that he just replaced the septic tank and the plumbing is in perfect condition—when in fact the septic tank and plumbing has not been examined for a decade—this could constitute fraud. In such a situation, buyers can actually sue their seller if they later learn about the deceit.
In short, you should be able to glean useful information from the sellers' disclosures, which can inform either your desire to purchase the property or the amount you offer for it.
Doing Home Inspections to Identify Patent and Latent Defects
Most home sellers are not intentionally deceptive (though they ordinarily try to make their property look as nice as possible, with cleanup and staging or other décor). More often, sellers genuinely do not know about the latent defects in their home, particularly if they do not use certain elements of it (for example, they never swim in the pool that happens to leak, and rarely enter or use the moldy garage).
Whether or not the home seller voluntarily discloses a defect, tries to hide it, or is truly unaware, you as a buyer need to know about as many material defects as possible before you close the deal. Consequently, it is customary and advisable for buyers to perform a detailed home inspection during escrow (between your offer being accepted and the deal closing). A home inspector (typically a professional with experience in construction, architecture, or engineering) will visit the property and then produce a written report discussing any patent or latent defects.
Read it carefully, and follow up if necessary. The inspector might also recommend that you bring in specialized inspectors for issues like mold, or a seemingly unstable large tree near the house, or an unusual structure such as as a boat dock.
Walking Away From the Sale Based on Defects
Once you learn about a home defect, either from the seller’s disclosure report or from your home inspector’s report, one option is to simply cancel and walk away from the sale. Most purchase contracts contain clauses allowing the buyer to void the contract if some sort of material defect is discovered prior to the closing and they're not willing to accept the property with it.
Do not make this decision lightly. Consider a number of factors, including the scope of the defect, the cost of repair or remediation, the speed with which you'd need to make the repairs (some lenders won't even let you move into a house before major concerns are cleared up, so as to protect the value of their collateral), and the potential safety implications. You might also consider whether the property seller likely knew about the defect and purposely failed to tell you. If that is the case, you might have understandable trust issues in going through with the sale, and wonder what other defects haven't been revealed.
If you wish to back out of the transaction, have your real estate agent and real estate attorney (if any) review the purchase contract to ensure that you will not incur financial penalties for your decision.
Negotiating With the Home Seller Over Repairs or Price
Perhaps the defect is not terribly serious, or perhaps you still believe that the seller genuinely did not know about it before your home inspector revealed it. The question then becomes: Who pays to cure the defect?
One option is to simply move ahead with the sale and deal with the repairs yourself after the closing. But if the defect is serious or expensive, you might not be willing to do that. In fact, it might not be safe to live in the home before the defect is fixed, or during the repair or construction.
You have the opportunity to negotiate with the seller over the costs of repairs. Of course, there's a chance that the negotiation could fall apart and you could lose the house to someone else—who might already be waiting in line, if you're in a hot market. You are nevertheless in a relatively strong negotiating position. The seller likely wants to move forward with the transaction. Finding a buyer who is actually capable of paying the list price, and ready to do so in the short term, is not always easy. What's more, the seller will, by law, likely have to amend the disclosure form to mention these newly found defects, so the next buyer might offer a lower price anyway.
In addition, the seller might already have bought a new house, and have either moved (in which case they're paying two mortgages and sets of utility bills) or want to move relatively quickly, anticipating that this transaction will close.
In raising the issue of the seller paying for repairs, it's wise to have your home inspector recommend capable contractors (or architects or engineers, as needed) who can prepare neutral estimates of the cost to remedy the defects. Once you have a sense of the price, ask that your seller pay (either by paying the contractors directly, or paying you, or lowering the purchase price) prior to the closing. Your real estate agent will take the lead on these negotiations.