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Protect yourself: When good homes go bad

By   |  Posted in First-Time Homebuyers

Two years after she moved in, singer Rihanna's $6.9 million castle crumbled, due, she stated in a recently-filed lawsuit, to shoddy construction and faulty design. The singer will undoubtedly have her day in court, but what about those of us who don't have Rihanna's resources? How can you protect yourself in real estate deals and who pays when good homes go bad?

The following cases illustrate the range of behavior that real estate wrongdoing can take. Learn how to avoid these situations and understand your options if your mansion malfunctions.

They bought a house but got an ark

In this Alabama case, property owner Judith Johnson was quite upset when Mobile County constructed culverts nearby to channel the runoff of water. She complained that the culverts were causing her property to flood, and decided to sell up and get out.

She did not disclose the flooding problem to her buyers, Ross and Waylene Teer, and when the property flooded they sued to undo the transaction, claiming that she intentionally defrauded them. Surprisingly, the case was not a slam-dunk for the homebuyers. While it's pretty obvious the seller lied to them, she had slipped an "as-is" clause into the purchase agreement, which got her off the hook as far as the state of Alabama was concerned.

What can you learn from this case?

When there is an "as-is" clause, the seller is pretty much telling you that if you knew everything about the property, you wouldn't buy it. In some states, "as-is" does not absolve them of their disclosure obligations, but in others it does. Consider yourself warned.

The short sale surprise

In California, Phil and Jenille Holmes contracted to buy a home in Huntington Beach for $749,000, arranged their financing, sold their old home and prepared to move. They were shocked to discover that their purchase price was actually about $400,000 less than the total of mortgages on the property, and that the three mortgage lenders involved had not approved a short sale.

When buyers know they are involving themselves in a short sale transaction, their expectations are different. They usually understand that the odds are against them actually closing the deal, that they will likely be in escrow for a long time, and that there will be a lot of aggravation involved. For this reason they offer a lower price or choose another property.

In this case, the real estate broker deliberately concealed the fact that the transaction was a short sale, causing the buyers to pay a higher price and have an unrealistic expectation that the sale would close. The California Court of Appeals found that the broker did harm the buyers and that damages could be awarded. To avoid ending up in court over a similar issue, you can easily verify the liens against the property by checking with your title company.

See no evil

In New York, Joshua and Ellen Dicker hired home inspector Charles Hennessy to check out a property before buying it. He assured them that the home was in fair condition, and they completed the purchase. After moving in, they discovered a very large leak in one of the bathrooms, and that water rot and mold had caused extensive (and expensive!) damage.

They paid for the repairs and then sued the inspector. And, as in nine out of 10 lawsuits against home inspectors, the plaintiffs lost. The fact that an inspector misses something doesn't automatically make him or her negligent. And the contracts inspectors use do a good job of reducing their liability. The Dickers' agreement, for example, specified that they were getting a limited time/scope visual inspection; any defects not easily seen, like mold or wood rot, would not be covered.

Merely ordering a home inspection does not protect you from plumbing purgatory or electrical exasperation. You should be present when the inspection is conducted, because all a seller needs to do to keep an inspector from noting a problem is to make that part of the home "inaccessible," perhaps by piling boxes in front of a basement door or locking up a room. If this happens, you need to know.

More insider tips and tricks

Kevin Sher, attorney with Greenberg, Glusker in Los Angeles:

Reliance on a general inspection only for the physical condition of the property is often the biggest downfall of a residential buyer. As generalists, general inspectors often lack the expertise to identify specific issues with major systems (e.g., roofing, plumbing, electrical, heating and air conditioning). It is therefore worthwhile for a buyer to pay extra to have more specialized inspections by a licensed and experienced roofer, plumber and electrician. And don't rely on anyone who stands to gain from the transaction to refer you to a particular inspector. Each real estate broker or salesperson has his or her favorite inspector whose allegiance and economic interest often lies more with the broker or salesperson than the buyer.

Craig Delsack, real estate attorney, New York City:

These days a buyer should have a trained dog sniff for bedbugs (which could cost thousands to eliminate.

Millbrook, New York real estate broker Neil S. Charge:

The best prevention is time. Don't be in a hurry to close a deal just because the price is right.

Sam DeBord managing broker, Coldwell Banker Danforth, Seattle:

Buyers should read all seller disclosures thoroughly and point their inspector to any minor issued listed. At the same time, they should assume that not all issues have been disclosed, proceed with a thorough inspection, and then follow up with more questions to the sellers.

Chris Howell, associate broker, ReMax Olympic:

A buyer should consider a home inspection PRIOR to putting forth an offer for a home if there are obvious concerns with the condition of the home. They can then negotiate the repairs into the agreed upon price rather than relying on the seller to agree to fix them as a condition of a home inspection contingency.

The bottom line

Homebuyer lawsuits are expensive and time-consuming to pursue, and there is no guaranty of success. Making an extra effort on the front end of a transaction could save you a lot of money and aggravation. However, there are laws to help you if you need them. As former Marin County, Calif. Realtor Bonnie Russell puts it, "90 percent of California real estate related lawsuits come from a failure to disclose. Tell me now--or pay me later."

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