October 2, 2019
Every student who graduates from Garden State Real Estate Academy’s New Jersey real estate licensing class knows this: how to pass the state real estate exam. But so should students from any real estate school. The difference is what legendary radio commentator Paul Harvey would call, “The rest of the story.”
Throughout the 75 hours students are with our instructor, the question most-often asked is, “How much of this will I need to know once I get my real estate license?” And the answer is . . . maybe fifty percent! Realtors® don’t need to know about redlining—that applies to mortgage and insurance companies! They never need to manually calculate transfer tax or mortgage payments—we have apps for that! Most licensees, when asked about the different types of ownership or deed would—or should—refer their client to an attorney for the answer.
What our instructors do take time to teach, in addition to what students need to pass the state exam, is a lot of real-world real estate best practices that come from instructors having decades of successful sales experience in the marketplace. One of those topics is a subject barely mentioned in required exam studies: the home inspection.
What is a home inspection?
The standard New Jersey real estate sales contract provides buyers the right to have certain inspections. These include inspections of the home in general, plus inspections for lead-based paint, radon, wood-destroying insects, of well water, and the septic system.
Each of those provisions has clearly stated dates within which the buyer must perform the inspection, and then the number of days beyond that in which they may request the seller to rectify the problems found by the inspector. It is very important for licensees to note those deadlines and to point them out to their buyer clients as a buyer could miss out on the seller remediating an enormous problem if they requested the repair one day late.
These checks must be done by a licensed inspector. A seller could legally refuse to honor a request for repairs if the buyer (or the buyer’s favorite uncle “who knows everything”!) conducted the inspection.
Why can they be “deal killers”?
The contract states that the proper procedure is for the buyer to send a copy of the inspection report to the seller (usually through their agents or attorneys) with a written request of the repairs the buyers want done at the seller’s expense.
And that’s where the problems start.
The old standard contract was much more descriptive about the types of issues that could be included. It had language saying, “The fact that a system or item is at or beyond its normal expected life does not create the obligation by the seller to repair or replace that item if it is working at the time of the inspection.” Sound reasonable, don’t you think?
Today, the contract has no such language. The entire paragraph relating to the home inspection ends with verbiage that essentially allows the buyer to request as many items as they wish, and to then cancel the contract if the seller refuses to comply with even one of those requested repairs. One of the last sales transactions I had before becoming a full-time instructor was a listing where the buyer submitted a list of 42 items! Under the contract, if my poor seller had agreed to take care of 41 of them but not the “Replace the entire roof and HVAC system” in Item #42, the buyer could have walked away and received a refund of their deposit.
Unfortunately, as unethical as it is, some buyers get into a multiple-offer situation and bid high to win the bid, and then come in with ridiculous inspection repair demands. They know by that time the other buyers have moved on and they may say to the seller, “Instead of you having to do the repairs so close to settlement, we will take a credit of $X.” The buyer either caves in, or puts the house back on the market if the buyer refuses to negotiate.
Their repair list could well have been justified, but there are also cases where the buyer—and sometimes, an unethical agent—had this as part of their plan from the time they made their winning bid.
What’s the solution?
It starts with integrity. And education.
On the seller’s side, listing agents should prepare their sellers for the home inspection by pointing out that an inspector will always find something. It is a good idea to have a preemptive home inspection before putting the house on the market so at least the seller can become aware of any serious issues. That way, they will have time to get multiple quotes on repairing the problems. They will also have a baseline report with which to refute a claim by a future buyer, although this does not reduce the legal obligation for the buyer to still make demands from the report of his own inspector.
At the time of listing a property, an agent should provide the seller with an estimate of the net proceeds after settlement. I always put a line item in that estimate for home inspection repairs. Depending on the age and condition of the house, I may have inserted anywhere from $800 to $1,800. I would point this out to the seller as being an allowance for the inevitable repair request that will be coming. That way, you have prepared your client. If the repair list came in and the cost to remediate the problems was $1,500, you could point your seller to the estimate you had provide weeks earlier and say, “Look! You are actually $300 ahead of the game.”
Agents should also educate buyers about inspections. Of course, agents represent their clients, but not to the point where they should participate in unethical conduct.
Not all inspectors are the same
Some home inspectors are looking for significant defects in the home’s systems and structure; others will write a report that is so critical that one would expect it to collapse at any moment. A seller should be expected to address structural issues, such as a leak in the roof or structural cracks in the basement. Ditto for systems: if he tests the outlets and finds no electricity, or the air conditioning or plumbing does not work, the buyer has every right to expect the seller to resolve those issues, unless he has disclosed in advance that they are defective and will not be repaired.
If a serious defect is discovered that has not been previously disclosed by the seller, no matter what happens to that transaction, the seller and the listing agent are now duty-bound to disclose the material defect to future buyers. The argument could thus be made to the seller that he could spend $X fixing the defect now, or the buyer could walk away and when the next buyer comes along—perhaps months from now and at a lower price—he will still have to disclose the discovered defect and that buyer’s inspector may find even more problems.
I had a listing last year where the first two buyers walked away for various reasons not related to the inspections. On the third time we went under contract, the home inspector found more than 20 items that had not been reported by either of the two previous home inspectors.
When the market is really strong and buyers have already lost out to competing bids on their last two or three home choices, they may be willing to overlook some inspection problems that would have been deal-breakers in a weak selling market. In my experience, more transactions fall apart, and clients get more worked up over home inspection negotiations than they do during price negotiations. And once you hear your client say, “It’s not the money, it’s the principle of the thing that makes me so angry . . . “ you know all reason has been lost!
Our job as brokers is to represent our client while helping mediate these situations so that both sides still feel like they won. They may each have given a little, but when the buyer still gets the home they love, and the seller walks away with an acceptable end result we know we have served our clients well!
At Garden State Real Estate Academy, we teach students how to learn the complex topics they need to know to pass the state licensing exam. Our small class sizes and great instructors have helped our students attain an 85% pass rate on the first attempt at the state exam, compared to 62-63% from all schools combined. But we go further. Our instructors are experienced in the real world of real estate. So we also pass on tips from decades of expertise that will help them “hit the ground running” after they earn their real estate license. Come join us at Garden State Real Estate Academy and let New Jersey’s top-ranked real estate school help you get your license soon!
David C. Forward is a licensed real estate broker and instructor and was first licensed as a Realtor® 31 years ago. During his career, David and his business partner sold more than 450 homes in South Jersey. He is now School Director of Garden Real Estate Academy, has won numerous awards for real estate sales, is a much-requested public speaker who has addressed audiences on six continents and is the author of 14 books. You can reach David at David@GSREacademy.com