Why the Perfect House Wasn't So Perfect

"It's perfect," he said and he wondered why I wasn't celebrating the fact that we'd just found a house that nailed all of his requirements. 

After all, it had everything he wanted: from an outdoor, ground-floor patio for his barbecue to the connected living and dining areas he could use as a large home theater (60" plasma), plus it was within walking distance of his favorite places in the Bay Area and was in his price range even with competitive bidding. 

Sure, he would have preferred a loft-style unit, but this two-story townhouse had relatively high ceilings and that patio --- more than making up for it!  (In Silicon Valley, homes with lofts aren't that common: they're out there but if you're hinging your search on them, you might consider commuting from San Francisco.  I did see a couple in Los Gatos and San Mateo, but that's for another day.)

I joked about being numbed by novacaine from that dentist appointment and he ribbed me with a comment about Asian guys being icemen.  That was a pretty good shot, and I was caught a little (okay, a lot) off-guard, so I only managed a "Touché!" as my witty response.

Actually, I really was happy for him but there was an air of deferred maintenance around the building.  Yes, the roof had recently been replaced and both the unit and complex were dressed in a new coat of paint but I wanted to check it out make sure everything was in order before he got his hopes too high.  

Besides, I try not to get too excited about a place until I read the disclosure packet (is your agent selling or protecting?), and it was time to mine this 212-page tome for gold.  What I found was just as valuable.

Obscurity by Disclosure

As much as I advocate personal responsibility, some things in life need effective warning labels to help educate people of dangers that may not be obvious.  I'm going to pick on cigarettes because they illustrate my point. 

Why Disclosure Packets Are Important

Cigarettes take years and sometimes decades to kill and some people can smoke three packs a day since they were 16 and still not have any obvious health issues.  But that's exactly why they need warning labels: the effects happen at a point well beyond the time of purchase and use.

It's the same deal with homes because of what you can't see.  After your offer is accepted, your property and termite inspection will turn up a lot of things but, at that point, you're out-of-pocket and may feel that because you've invested some money and so much emotional energy, that moving forward is the best thing to do.  (Economists call that investment a sunk cost, and you shouldn't use sunk costs to color your future decisions.)

Before that, you get a disclosure packet which is supposed to detail any material facts that would affect the market value or use of the home in question.  In a way, it's like a warning label that alerts you to areas that require more investigation.

What Disclosure Packets Can Become

Besides being mandatory, disclosure packets help prevent lawsuits (or arbitrations in most cases) since the disclosing party can always say, "Well, I told you about this before you made an offer."

This is technically true, but anyone who's ever seen your credit card terms of service or skipped through the EULA on a software agreement knows that the fine print can last endlessly and usually isn't that much fun to read.  Seriously, when was the last time you curled up in bed with a good CC&R binder?

Some disclosure packets have become so long that they literally create the haystack around the needle. 

Do people do this on purpose?  This isn't a relevant question because it is what it is --- and always caveat emptor--- but the answer is... yes, but because agents want to prevent getting hauled into court (or arbitration, or a license hearing) over not disclosing.  After all, there's a reputation hit that comes as a side dish. 

The Agent Behind the Disclosures

Here's why I don't think they're purposefully obscure.  Before I make a first pass reading the disclosure docs, I always ask the listing agent, "Is there anything I should know about before getting into details with my client about this property?" 

And 6 out of 10 times, I get a usable and straightforward answer. This answer won't have everything, but that's not the reason why I ask.  I really want to see what the agent's working style is.

Sometimes the answer will be, "Have a look at the disclosure packet and let me know if you have any questions."  This often happens when:

1/  This agent is busy at that moment.  They're happy to talk if you call back later.

2/  The agent is signaling (maybe not on purpose) that there is already much stronger interest in the property.  The better agents will just tell me.  If I believe this is the case, I'll let my clients know that we need to act with more strength and urgency should this property be of interest. 

3/  They haven't looked at the packet themselves.  The documents take time to prepare so this isn't unreasonable, but if they're online, there are occasions when I know more about the property than they do.  Yay for our side!

4/  That agent is juggling too many listings to pay detailed attention to that one.  Good for them but not their clients.  I've never understood how you can take on a client for the sake of volume and not because you know you'll do a great job.

5/  An agent is more concerned with the number of people interested than any one.  Even serious buyers kick tires.  I'm asking about disclosures because my clients want the next level of detail.  That's one positive step towards a successful transaction.

Cynics will ask, "Why should they say anything at all?"  Easy.  Because it moves the possibility of a deal forward and it's a really, really small world.

Personally, I don't ask about disclosures because I want to throw rocks at the property or the agent.  It's my job to judge the property relative to the needs and risk profile of my client --- and unlike the countertops in kitchen or stains in the carpet, the items in the disclosure packet can't often be seen for themselves.  Plus, understanding the listing agent will help us tailor our messages in future negotiations, if needed.

How to Read the Disclosure Packet

Reading that much volume --- in this case 212 pages --- takes time, but because I've been thorough about understanding what my client needs and wants, I read the disclosure packets in three different passes.

1/  Scan for showstoppers.  This client wants to barbecue on the porch.  If the HOA doesn't allow grilling, that's a showstopper and we move on to the next property.  Scanning is much easier when the disclosures are provided as text-based PDFs --- not photocopies scanned into PDF, but the actual original electronic documents.  That way, you can search using Acrobat Reader or any other PDF tool.  Ask and you may (may) receive.

2/  Scan for things that may irritate my client.  Having to fix termite damage or not being able to run your in-unit washer-dryer after 9pm may not kill a deal, but you may not want to get into those situations.  After all, buying a home is about improving your quality of life.

3/  Read it, but quickly.  I recommend my clients do the same.  The key is that in the Silicon Valley market, if you've gotten this far, there are probably a number of others who are at or beyond this stage as well.  And good properties in the Bay Area still go quickly and with multiple offers.

I don't try to catch everything on the first pass --- and most properties don't get beyond the second pass --- but the feedback I've gotten is that it's a good balance of the time I spend seriously investigating that property vs. the time I can spend finding them a breadth of homes to choose from.

Truthfully, I'm not sure how buyer agents who juggle a lot of bodies can pay attention to the little things that you need to make a good offer and still be willing to walk away.  It's easy to say there's a pattern that makes up for it, but it's the nuance that connects a property to the client that I'm looking for.

The Hidden Costs Behind This Property

So with the barbecue okay, my client and I talked about the washer-dryer and termite damage, determining that he'd be willing to trade these off for the location.  The washer-dryer issue was sticking under his craw (since it's more energy-conscious to run these appliances later at night, plus it's a freedom of use issue), but we decided to take another step forward.

A Hunch

Going beyond the emotional cost of these irritations, I asked the agent about any water damage, and he seemed a little startled, but to his credit he knew this background information from years back and answered openly and honestly.  There had been some leakage but it was corrected almost half a decade ago.  This information wasn't in the disclosure packet and the issue probably wouldn't have surfaced again, but it was good to know.

HOA Finances

That look of deferred maintenance in the building led me to read the HOA finances very closely.  The HOA dues each month were lower than market and the two didn't add up well.  In fact, individual units were responsible for maintaining portions of the front porch as well as the enclosed patio, which indicated they hadn't contracted a management company (as confirmed in the docs).

There are people who like this arrangement because it gives them more control over their costs and what they can do with the property.  But my concern was two-fold. 

First, there were the number of special assessments that would be (and had been) required if more services were needed or something unexpected happened.  This technically increases the price of the property without adding value.  (Many people dislike paying extra for something that should have been there to begin with.)

Second, my client had a high-stress job and wanted something more plug-and-play.  This property looked like it would need close involvement at the HOA-level by every owner, in addition to the fixes required for termite damage.

Since there was no HOA reserve fund and the reserve study hadn't been completed, it wouldn't be surprising to see special assessments or an increase in the monthly HOA dues significantly raise the total cost of ownership (TCO) for this property.

I emailed the HOA president about this and another issue I knew my client would have.  He's considering moving out of the country in a few years but would like to keep the home he buys as an investment.  The HOA docs mentioned restrictions on this which I won't go into.  But suffice it to say, getting clarification would definitely impact my client's decision.

This Wasn't the Perfect House... For Him

Well, we got our answers and while this may still be the perfect house, it's just not the one for this client.  Sometimes the best choice you make is to pass on what only looks like the perfect house for you.

The fact is, the trade-offs this client wasn't willing to make could have been perfectly acceptable to another.  But my job is to assess the right price my client is willing to pay based on how well it meets his needs, and not just base it on the asking price.  After all, the buyer sets the asking price and there are five reasons why many owners overprice their homes.

We literally had this conversation.  He said, "If I make an offer on this house, we should make it to win."  To which I said, "Just because 50 other people [ed. I didn't use that word] could be willing to pay $100,000 over asking price doesn't mean you should feel obligated to beat them.  This isn't about them." 

There would be properties justifiably in high demand and we would go out and make aggressive offers, but because this one didn't meet his intrinsic requirements, there was no reason to overpay.