From last month’s article, How Do You Select a Home Inspector? , we continue the discussion on “Caveat Emptor” (Buyer Beware).
Careful with what?
1) Buyers often have less information about the home they are buying, while the seller has more information. In contract theory and economics, Information asymmetry deals with the study of decisions in transactions in which one party to a transaction is in possession of more information than the other. Usually, that imbalance means that the side with the most information enjoys an advantage over the other side.
2) Defects in the house may be hidden from the Buyer, and only known to the Seller. Also, Seller may not be aware of all defects. In the Purchase Agreement, this is referred to as “NTMK” (Not that I know of). Also known as “Ignorance is bliss”. The burden falls on the Buyer to “hunt” the defects.
3) There is a information imbalance initially, but the Housing Inspectorate discovers the defects and tries to ‘level the playing field’.
4) After closing, Seller will normally not be responsible for problems that the Buyer does not discover.
Is there a better process?
A Seller-initiated Home Inspection will increase Buyer confidence, reduce time on the market, and decrease unknown risks facing Buyer.
A good analogy is the game of poker against chess. In poker, the cards are hidden from both sides to allow “bluffing” and “guessing” as part of the game. In Chess, all the chess pieces of both parties are on the chessboard and there is complete transparency of information. A vendor inspection is like playing chess instead of the current process, which is similar to playing poker.
Unlike chess, poker has hidden information (your opponent’s hole cards). Game theorists call chess a game of perfect information and poker a game of imperfect information.
Why play Chess (Seller’s Inspection) instead of Poker (Buyer’s Inspection)?
1) Allows Seller to seek reasonable costs to repair defects to justify a higher price. This is part of the “Flip” a house strategy.
2) Allows Seller to replace frequently broken items at a cost less than Seller’s negotiated credits.
3) Avoid “last minute” surprise negotiations with the Buyer that can kill the deal. The Buyer will have the Seller’s Inspection Report as well as the Buyer’s Inspection Report. These Reports will have a high probability of all visible defects of the property. This is a strategic way to supplement the SRPDS (Sellers Real Estate Disclosure Statement) and mitigates the “NTMK” position.
4) The purpose is to strike a balance where both parties have access to complete knowledge of the property. This minimizes the problem of “information asymmetry”.
What percentage of home inspections are seller inspections?
Based on informal conversations between home inspectors, it is 5-10% of home inspections. Also, more experienced real estate agents would recommend seller inspections, probably because they have seen the advantages of this unconventional process.
Do you still need a Buyer Inspection if the Seller paid for a Seller Inspection?
Yes, Buyer should always select their own Home Inspector to avoid a conflict of interest with Seller’s Inspector.
Is life more like chess or poker?
From Annie Duke, professional poker player, “Decisions in life are more like poker, where a player makes decisions affected by limited information, active competitors, and the whim of luck.
If you have any questions on this topic, please call Oscar Libed at Inspect Hawaii at 808-728-5707 or email [email protected]