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Is Buying Sight Unseen Properties Worth the Risk?

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For most individuals, the journey of acquiring a house typically commences by assessing affordability, seeking a suitable lender, engaging a real estate agent, outlining personal preferences, perusing numerous property listings, submitting offers, finalizing mortgage arrangements, and ultimately, completing the transaction. While the process of physically inspecting properties demands time, it remains a crucial step. Many buyers prioritize this aspect and are unwilling to forgo it, regardless of their busy schedules. However, not all buyers share this sentiment.

Remarkably, there has been a surge in sight-unseen real estate transactions. Some purchasers rely solely on online resources such as MLS listings, photographs, descriptions, and virtual tours. Certain investors are eager to capitalize on what they perceive as lucrative deals online, thus opting to bypass physical property inspections. For some, the allure of certain properties outweighs the associated risks, particularly if they are situated in desirable locations where delaying could result in losing the opportunity altogether. Nevertheless, engaging in such transactions entails significant risk, necessitating thorough risk assessment prior to proceeding.

 

Distressed Properties

Distressed properties encompass those that are damaged, in a state of disrepair, facing imminent foreclosure, or actively marketed for sale. Banks, burdened by the expenses of ownership, are motivated to offload these properties swiftly, often at reduced prices. This presents an opportunity for buyers and sellers to transact at below-market rates.

Competitive Markets

In regions with limited housing inventory, buyers may feel compelled to purchase sight-unseen properties due to competitive pressures. Despite the absence of physical inspection, prices of such properties typically reflect market values, if not higher. In highly competitive markets like Boston or New York City, bidding wars drive prices upward. Investors in such markets may assume the risk of sight-unseen purchases based on the promising property values in those areas.

Pre-construction Opportunities

Certain properties are available for sale before or during the construction phase, offering buyers the chance to acquire them at significantly lower prices compared to their anticipated post-construction values. This arrangement benefits both buyers, who secure favorable rates, and sellers, who utilize the proceeds to fund construction.

Competition

In the realm of real estate investment, fierce competition often arises from entities known as flippers. These individuals or organizations acquire properties at low prices, undertake necessary renovations, and subsequently sell them for substantial profits. Flippers assess the potential profitability of a property by estimating its After Repair Value (ARV) and subtracting acquisition costs and other expenses. While some flippers may refrain from sight-unseen purchases due to perceived risks, others capitalize on opportunities even amid property damage or unfavorable conditions.

Real estate wholesalers operate similarly to flippers but focus on facilitating quick transactions without property improvements. Acting as intermediaries, wholesalers purchase properties and assign contracts to other investors for a profit, without assuming the responsibilities of property rehabilitation.

Institutional investors, characterized by their ability to acquire numerous distressed properties simultaneously, pose formidable competition in the real estate market. Their substantial resources and market influence enable them to secure advantageous deals, often to the detriment of individual buyers.

Individuals may find themselves compelled to pursue sight-unseen purchases out of necessity, particularly when relocation impedes their ability to physically inspect properties. In such cases, entrusting a local agent to identify suitable properties becomes imperative, albeit accompanied by reliance on photographs, virtual tours, and online information. When considering sight-unseen purchases, it is crucial to specify not only desired property attributes but also preferred neighborhoods or locales.

Risks

Sight-unseen property acquisitions entail inherent risks, as certain deficiencies may remain undetected through remote assessments. Structural issues, infestations, mold, and water damage are among the potential concerns that may elude photographic documentation. Additionally, environmental factors such as noise levels, pollution, or undesirable neighbors may only become apparent upon physical visitation.

Time represents a critical risk factor for investors, as prolonged property ownership translates to increased carrying costs and potential financial losses. The objective for investors is to expedite transactions to mitigate these expenses.

Protective Measures

Incorporating contingency clauses into purchase agreements represents a fundamental strategy for mitigating risk in sight-unseen transactions. Inspection contingencies afford buyers a specified timeframe to conduct property inspections, empowering them to negotiate or withdraw from the deal based on inspection findings. Similarly, walkthrough contingencies enable buyers to conduct on-site visits prior to finalizing the transaction, although sellers may adjust prices to offset associated risks.

 

Engaging a reputable real estate agent provides both buyers and sellers with added protection and guidance throughout the transaction process. A trustworthy agent, committed to safeguarding clients’ interests, can facilitate informed decision-making and advocate for favorable outcomes.

Despite the allure of seemingly advantageous deals, the risks inherent in sight-unseen property purchases necessitate careful consideration and proactive risk mitigation strategies. Collaborating with experienced professionals and leveraging contractual safeguards are essential steps in safeguarding one’s interests in real estate transactions.

Breaking Down the Offer

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For a seller who has had their house on the market for some time, receiving a call about an offer can be a thrilling experience. Initially, there’s a rush of excitement, but then reality sets in, and worries about the offer not meeting expectations start creeping in.

Agents typically refrain from disclosing the price offer over the phone because there are numerous other factors to consider beyond just the price, such as contingencies, seller concessions, and real property requests.

It’s crucial not to solely focus on the price; instead, carefully examine the entirety of the offer, particularly considering how much net profit you stand to gain.

Your agent should be capable of explaining the different sections of the contract, but having prior knowledge of real estate contracts is advantageous. While specifics may vary by state, the general structure remains similar.

Here are the fundamental components you can anticipate in a contract:

  1. Earnest Money Deposit: This deposit demonstrates the buyer’s sincerity and is often held by a third party like an escrow, attorney, or broker’s trust account. It’s typically applied towards the downpayment and returned to the buyer if the sale falls through.

  2. Purchase Price: While this is of primary interest, it’s essential to consider what else the buyer is proposing.

  3. Mortgage Contingency: This contingency outlines the terms of the buyer’s loan, including the term, rate, and time limit, which must be analyzed carefully to ensure realism and prevent being tied up unnecessarily.

  4. Seller Concessions: Buyers may request various concessions, especially in less competitive markets, though in hot markets, these requests tend to be minimal.

  5. Inspection Contingencies: These allow buyers to back out if inspections reveal significant issues, and they should be reasonable.

  6. Personal Property: Buyers can request items physically attached to the house, while sellers can specify items to be removed before closing.

  7. Appraisal Contingency: This ensures that the house’s appraised value meets the sale price, which can be complicated if there are significant concessions involved.

  8. Buyer Selling Property Contingency: This applies when the buyer needs to sell their property first, potentially prolonging the process. A kick-out clause can protect sellers from extended delays by allowing them to continue marketing the property if another offer arises.

12 Red Flags That Should Raise Concern

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According to HouseMaster, a leading home inspection company with offices in over 390 cities across the United States and Canada, at least 40% of homes on the market have one or more major defects. Kathleen Kuhn, CEO and President of HouseMaster, notes, “Virtually every ‘used’ home needs some repair or improvement. That’s to be expected. But with today’s high prices, you want to be aware of any major problems in a house you’re considering purchasing and what it will take to fix them.”

Based on over one million home inspections, HouseMaster has identified the most serious home defects to watch for:

  • Aluminum wiring
  • Cracked heater exchange
  • Chimney settling or separation
  • Defective roofing and/or flashings
  • Environmental hazards (radon, water contamination, asbestos, lead paint, underground storage tanks)
  • Horizontal foundation cracks
  • Insect infestations (termites or carpenter ants)
  • Major house settlement
  • Mixed plumbing
  • Moisture in the basement
  • Undersized electrical system

Kuhn emphasizes that while most of these defects can be repaired, the cost can be significant depending on the severity of the damage, particularly if major systems are involved. This is an important consideration when buying a house. For example, a new air conditioning compressor might cost around $1,200, while fixing damaged plumbing in a basement could cost about $5,000. When negotiating the purchase of a house, ensure there is a provision to back out if the home inspection reveals too many or too severe problems.

Eric Tyson and Ray Brown, authors of “Homebuying for Dummies,” explain, “If the property inspectors find that little or no corrective work is required, you have little or nothing to negotiate. However, if inspectors discover that the $200,000 house you want to buy needs $20,000 of corrective work for termite and dry-rot damage, foundation repairs, and a new roof, big repair bills can be deal killers.”

If you decide to proceed with the purchase despite needed repairs, consider these options:

  1. Ask the seller to allocate sufficient funds in escrow for repairs, with instructions to pay contractors once the work is completed.
  2. Have the lender withhold part or all of the loan amount in a passbook savings account until the work is finished.
  3. Request the sellers to provide a credit for the repairs, although lenders may disapprove as there’s no guarantee the repairs will be made.

Hire a qualified home inspector, whose fee typically ranges from $250 to $400. Look for inspectors affiliated with organizations like the American Society of Home Inspectors or the American Association of Home Inspectors, which require members to meet professional qualifications and adhere to business ethics. You can also ask for referrals from friends.

Make sure you are present during the home inspection. The time and money spent on this is a wise investment. During the inspection, ask about potential problems to expect and warning signs to look for. Learn how systems work and how to maintain them. “A pre-purchase inspection is your best protection against buying a home based more on emotions than as a sound investment,” says Kuhn of HouseMaster.

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