Buying a House? Do your Due Diligence.
Let me start this article by saying that the real estate industry, especially the resale market, operates on the same principle as any used goods market: the principle of “Buyer Beware”. It is really the responsibility of the buyer or his/her agent to ask for information, questions and satisfy themselves of the fact that the house does not have any issues and all the elements of the house are in good working condition. When we are representing our clients, we do absolutely everything we can to make sure that the house does not have any major issues and the imminent costs are highlighted to the clients, so they can make an informed decision.
Below is a list of items that a buyer must think about before buying a house and by checking off all the items below, you are well ahead in ensuring there are no surprises later.
If you are a first-time home buyer, getting a home inspection is a must. A good inspector can teach you a lot about the house, about water management, air flow management, regular maintenance requirements of HVAC and everything in-between. With that being said, getting a home inspection is not a 100% guarantee that you will not have any issues with the house. Home inspectors can only do visible inspection and they only see what we can see but with far better training and experience. There are lot of buyers out there who found issues even after getting a home inspection and that is because of the non-invasive nature of home inspections. Home inspectors cannot rip out walls and ceilings to see what is behind them, however they do have tools that can detect moisture levels behind the walls and, combined with other factors surrounding the house, provide them with a very good picture and knowledge about the house. Although home inspections are not an absolute guarantee, they can detect a lot of issues and concerns about the house and should be a must for first-time home buyers.
Another major due diligence item is looking at sold comparatives. There are two kinds of houses you should never buy: the most expensive house in the neighbourhood and the most expensive house in the neighbourhood. In Manitoba, only realtors have access to the sold information, so ask your realtor to give you that information before you write an offer on the house. This information is also important if you are bidding for a house on offers date and you are planning to bid significantly higher than the asking price. If you pay too much for a house, it is very difficult to recoup that money in a reasonable amount of time. Buy close to the average price for the neighbourhood and you will never have issues with reselling your house, assuming you don’t spend unnecessary money on renovations.
Multiple Listing Service (MLS) House History
MLS history of a house can tell a lot about the house and renovations that have been done to the house over the years. Only realtors have access to this information, so ask your realtor about the history of the house on MLS, particularly when the house was last sold, any issues noted in the past listings or property disclosure statements from the past if still available on MLS etc.
Property Disclosure Statement
Property Disclosure Statement, or PDS, is a three-page form that buyers can request sellers to fill out. It has 19 statements asking the seller about the condition of the house, asking if the seller is aware of any seepage, roof leakage, asbestos, defects, deficiencies, etc. One caveat with property disclosure statements is that they are based on seller’s actual knowledge and the accuracy of his or her recollection. While the seller is required to give true and accurate responses based on his or her knowledge, the responses do not constitute warranties as to the actual condition of the property. In my opinion, PDS provides a great starting point for the home inspection and any issues highlighted in the PDS should be further checked during the home inspection. Many times, we find common problems in the PDS – seepages in the basement and minor cracks in the foundation that have been fixed – which is a great information to know for the buyers before they decide to go ahead with the house.
It is a good practice to ask the seller to provide utility bills from a summer and a winter month. First, it gives you an idea of what the monthly cost of ownership would be and, second, it can hint at the efficiency of the HVAC system of the house. On average, we tell clients to budget anywhere from $200-300 for utilities per month. Another great source is Manitoba Hydro for finding out average gas and hydro bills for a property.
Age of Major Elements in the House
There are five major elements in the house and it is important that you know the age of these elements: furnace, air conditioner, hot water tank, windows and shingles. A furnace usually lasts anywhere from 15 to 20 years and can cost around $3,000-$6,000 to replace. AC units can last anywhere from 10 to 15 years and can cost around $1,000-$4,000 to replace. Hot water tank can last anywhere from 7 to 10 years and can cost around $700-$1,000 to replace. Windows and shingles can last anywhere from 20 to 40 years; shingles can cost anywhere from $5,000-$8,000 to replace and the cost of the windows varies depending on how many windows, quality and type chosen. Knowing the age of these elements will help you budget for any units that might need replacing in the first five years of your ownership. These elements are necessary for the function of the house but do not necessarily increase the value of the house, so if you are not thinking of staying in the house for a very long time, find a house that wouldn’t need any of the above replaced for the time of your ownership.
Another great item that should be part of your due diligence process is the Winnipeg Permit Search online. The system can display any permits pulled by the home owners for a specific address since 2000. Many homeowners do upgrades and renovations to their house without proper permits, whether it is because of the hassle of pulling a permit or just lack of knowledge, there are ramifications to the buyer of work completed by the seller without permits. The city could technically ask the current owners to pull permits and ensure that the work is completed to code at any time regardless of which owner completed the work. So, there is an ounce of risk that a buyer takes if the work completed by the seller was done without permits, however, if you are aware of that and are willing to take that risk, it is fine by us. Our job is to provide you with all the information to help you make an informed decision.
City Assessment Value and Property Taxes
It is prudent to check the city assessment value and the property taxes for the property. The property taxes are based on the city assessed value and, in most cases, city assessment value lags behind the market value of the property. Although city assessment value is not a good measure of the market value of the property, it does provide a different measure for the value of the property. And, depending on the lender you are using, some lenders will request an appraisal done if the assessment value is less than the market value; however there is only handful of lenders that have such a policy.
Before I get into this due diligence item, I want to clarify that there is no comprehensive list out there that realtors can check from to make sure the house is not a grow-op. The best resources we have are the Winnipeg Police grow-op list online — which is quite limited to the last 12 months — and Google search. There are a few other lists out there that span few years in between, however, it is difficult to assess the accuracy of such lists. Although not a comprehensive search, a simple Google search can reveal quite a lot and, in most cases, is a sufficient search for a grow-op history. We always include this as part of our due diligence to make sure our clients are protected on all fronts.
The last item but not the least is checking if the house is bound by any rental contracts. The most common item is the alarm monitoring contract, which, in most cases, cannot be cancelled and the buyer must assume it as part of the purchase. Recently, we are seeing rental contracts for furnaces and hot water tanks; it is important that you understand the terms of such contracts. Most contracts will have a buyout option at the end of the rental term and the buyer would be liable for the payment at the end, so it is prudent to include such rental contracts as part of the offer to purchase.
These are major items that are part of our due diligence for a buyer to ensure that their interest is protected. If you are represented, ensure that your realtor checks off these items for your benefit, and if you are not working with a realtor, give us a call!
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