The Guide to Home Buying Due Diligence
A home purchase is likely one of the biggest purchases you will make in your lifetime, so we believe homebuyers should take the time to learn about the details of the journey and make sure to perform their home buying due diligence before the big move. To demystify the process, we have provided a rundown of what we think you should consider when buying and what you can expect from the buying process itself, plus tips to make life easier.
What is Due Diligence?
Think about due diligence as a list of things to consider before making the investment. In this article, we are going to provide you with our list of things to consider that will hopefully guide you in the right direction, and prompt you to take the time to analyze your purchase in an objective fashion.
Factors to consider as part of your due diligence checklist may be:
- How Do I Find a Home with good resale value?
- Are the Home’s Systems In Good Shape?
- Are You Covered by New Home Warranty? The benefits of buying new.
- Should I Get A Home Inspection?
- What are the Future Plans for the community and local area
How To Find a Home With Good Resale Value
Generally speaking, we think you should consider a house’s resale ability before you buy. This significant element is often overlooked among potential homebuyers. For example, individuals who do not plan on having children, or who have grown children, may not consider school zones when searching for a home to buy. However, this can be an important element to many homebuyers, and may influence a buyer’s ability to sell the home during a future down-market.
Some buyers may upgrade their home with unique lighting fixtures, and finishes that can increase the price of the home, but may not impact the value of the home in the resale market. Price per square foot in the community gives you a good idea of what you buyers would expect to pay for your home in the area and also gives you a sense of whether or not a particular home is a good deal. For instance, if a home has a higher-than-average price per square foot for homes of a similar size, you should look into why – and will the value be maintained when it comes time to place it back on the market.
Are the Home’s Systems In Good Shape?
Generally speaking, there are two types of defects that you might find with a resale home: patent and latent defects. Both can be troublesome, but it’s the latter that you usually have to watch out for.
Patent Defects
Think about patent defects as the ones you can easily see. These are things the average person might be able to pick up on during the initial walkthrough of the home. They’re obvious. Maybe a hole in the wall, a missing window, or a leaky pipe under the bathroom sink. As you consider whether or not to buy the home, you’re mentally adding up the cost of these repairs to determine whether the home is worth it or not.
Sellers are not required to disclose patent defects because they’re supposed to be visible. However, you have to remember they might still be somewhat hidden. For instance, there could be mould at the back of the closet or the windows might not open properly. If you didn’t take the time to inspect the condition of the closet or open and close all of the windows, that’s on you. Fortunately, a good home inspector will catch all of these patent defects and let you know about them.
Latent Defects
Latent defects are the ones you don’t see because they’re hidden. This includes things like a crack in the foundation, mould inside the walls, or a leaky pipe behind the drywall. Sellers are required to tell you about any latent defects that they know about, but since they’re hidden, the seller may not know there’s a problem. This is where doing your due diligence becomes extremely important because these types of problems are usually more expensive to repair.
Are You Covered by New Home Warranty? The Benefits of Buying New…
If you’re worried about the potential defects that could arise after you purchase a home, each and every new home buyer in Alberta is provided a new home warranty. Mandatory home warranty was put into place in February of 2014 in order to protect buyers from home related defects when purchasing a new home. This means, everyone who buys a new home can look forward to sound building practices and are protected from any unlikely surprises in their new home.
Should I Get a Home Inspection?
When you make an offer on the home, you can include a contingency. This means the offer on the home stands as long as the home inspection doesn’t turn up major defects. When the seller accepts this offer, you’re able to schedule inspections of the property. The inspector you choose should be a licensed home inspector, and you want to take care to read online reviews or get personal recommendations.
Is the inspector charging a fair price? Are people complaining that they later found problems that the inspector missed? Is the inspector trustworthy? You’re going to be making a major purchase based on this person’s advice, so you need to choose someone qualified.
Additionally, you need to make sure you understand what the home inspection covers. In most cases, a basic home inspection is going to primarily cover a visual inspection of the property, and it will not include drilling into the walls or floors. They’ll point out problems you may have missed, but the inspection can still miss latent defects. Some of the things that the inspector might point out are:
- The approximate age of major appliances
- Preliminary notes about the electrical system
- Recognizable repairs or cover-ups
- Visible foundation cracks
- Signs of bigger problems
And while the inspector may be able to point out signs of bigger problems, they may not provide confirmation it’s a current problem. For instance, the inspector might note there’s a water stain on the ceiling, which is a sign of a leak. However, the inspector may not be able to tell you whether or not the stain comes from a current leak that needs to be repaired or whether it was from a previous leak that’s been repaired. You may have to ask the homeowner about this.
Should I Hire Other Specialists?
Smart home buyers know due diligence goes beyond paying for a basic home inspection. There are certain aspects of the home – especially older homes – that warrant an additional inspection.
Sometimes, general home inspectors perform these services for an additional cost, but you may need to hire a separate specialist.
Additional types of inspections to consider include:
- Chimney inspection (if the home has a fireplace)
- Pest/termite/rodent inspection (looks for possible points of entry and signs of infestation)
- Radon inspection (tests for high levels of dangerous gas)
- Mould inspection (can find hidden mould and let you know how dangerous any mould is)
- Electrical inspection (particularly useful in older homes that may have outdated systems)
- Oil or septic tank inspection (if these are on the property)
Each home is different, so it’s unlikely that you’ll need to hire someone to check all of these things. The older the home, though, the more thoroughly you may want to check the home.
Check Out the HOA or Restrictive Covenant Rules
When you buy a home, you’re usually thinking about all of the ways you can make it your own. You’ll have full control over the interior, but, depending on the community, there are sometimes rules about what you can do to the exterior.
The Homeowners’ Association or other governing body may have restrictions about things like the use of the front yard, decorations you can have, or the colour of the exterior of the home. There may also be rules preventing you from doing some of the things you’ve been planning, such as adding an income suite in the basement or putting a pool in the backyard.
If there’s anything in particular you’ve been thinking about doing with your new home, it’s a good idea to check whether or not that’s a possibility before you make the purchase.
What are the Future Plans for the Community?
Sometimes the house is perfect, but the area it’s in isn’t. Part of doing your due diligence is checking out the area around the home for things that might make you regret your purchase. This is tricky to research because some things are so hyper-specific you wouldn’t think about checking it out.
Some of the things you should consider researching are:
- Flood zones: If the home is in a flood zone, check the home carefully for any safety features it may have to prevent flooding. It can be hard to find affordable homeowners insurance for homes in flood zones as well.
- Future plans: Are there any plans for development nearby? If so, are these plans going to increase or decrease your enjoyment of the home? For instance, a new shopping centre nearby can make it easier for you to stop and pick up essentials, but it could also increase traffic and noise in the area.
- Seasonal annoyances: Look for things that might not be obvious when you purchase the home but could be a big problem in a different season. These could be things like grading in the winter or how many hours it’ll take you to rake all the leaves from those big, beautiful trees in the fall.
- 10 Minute Fire Response Map: How quickly can the fire company reach you if there’s a fire? Look at the city’s 10-minute fire response map, which is an area where the firefighters could reasonably reach the home within 10 minutes of getting a call. If your home is outside of that area, what fire safety features do you have?
Additionally, pay attention to how many other homes in the neighbourhood are being sold. It’s normal to see a lot of homes for sale in the spring and summer, but if there seems to be a high concentration of homes for sale in a small area, that could be a sign of trouble.
Related article: Excellent Edmonton Communities to Explore
Legal Concerns
There are a few legal issues you want to check into as well. Typically, these things are done prior to getting a mortgage, but you should make it part of the contingency if you decide to make an offer on the home.
The first is checking whether there are any liens on the home. This happens when the homeowner doesn’t pay off their debts. The person they owe money to puts a lien on the home, essentially saying the money they’re owed should come out of the house. If the home has a lien, it shouldn’t stop you from buying it, but you need to make sure that there’s a plan for paying that off – one that doesn’t involve you as the buyer. Understand that this could slow down the purchase process.
Some buyers also check the property boundaries. Fences and other types of barriers that neighbours understand as the property line aren’t necessarily the legal boundaries. You want to make sure you’re getting everything you’re paying for and you won’t have any trouble with neighbours after moving in.
What Do I Do If I Find an Issue?
In any resale home purchase, you’re bound to find a few issues with the house throughout the various inspections you perform. You then need to decide what you’re going to do about it.
Minor Problems
A good home inspection will point out all of the home’s flaws, and many of these flaws are going to be minor. For instance, the inspector might tell you that the handrail for the stairs is wiggly or that the appliances need to be replaced within five years.
These things, and others like them, are quick fixes and they shouldn’t stop you from purchasing the home. You can easily make the repairs once you move in.
Major Problems
On the other hand, if the inspection turns up some major problems, it’s time to think carefully about your purchase.
Most of the time, the purchase offer includes a contingency plan, so if the inspector finds these problems, you can go back to the negotiating table. For instance, if the roof is leaking and needs to be replaced, you can ask the seller to replace the roof before going through with the purchase, or you might ask to reduce the price to reflect how much you’ll have to pay to have the roof repaired yourself. Motivated sellers will agree to these terms, but some may simply back out of the deal.
Additionally, you have the option of backing out of the deal on your own, particularly if the inspection uncovered several major flaws. This would naturally make you worry there are even more headaches you don’t yet know about.
What Happens if an Issue Arises After I Take Possession?
Once you take possession of the home, it’s your responsibility to fix the problems. That’s why it’s so important for you to do your due diligence during the sales period. Everyone knows owning a home means you’ll eventually have to make some repairs, but no one wants to take on major repairs soon after moving in.
The one exception to this is if the seller acted unlawfully. For instance, if the seller knew about a latent defect in the home like mould in the walls and didn’t disclose that information, you may be able to sue them for the damages. This can be difficult to prove, though, and your results may vary.
Additionally, the legal costs associated with suing the previous owner might not be worth your time and money.
How Can I Avoid These Problems?
If you’ve done your due diligence before purchasing a home, you should be happy with the home you receive. As you can see, it’s a lot of work, and there are plenty of opportunities for things to fall through the cracks.
One of the best ways to avoid all of these headaches is by purchasing a brand-new home. When you do this, you know that all of the materials used are new, so you won’t need repairs anytime soon.
With a new home, the home is being inspected at every phase of the build and is being built to current building standards. You also get a pre-occupation walk-through to address any concerns – but don’t worry if something gets missed, your home is covered for 1 year with the builder as well as through the Alberta New Home Warranty Program on a 1-2-5-10 year warranty.
New homes are sometimes a bit more expensive upfront, but when you factor in the cost of repairs, you’ll find that it’s the better financial decision. You may even be surprised by how affordable a new home is.
Free Resource: A New Home vs. a Resale Home: the Pros and Cons
Due diligence is an essential part of the home buying process, especially when buying an older resale home. While it may seem like a lot of extra work, especially during the already-stressful time of buying a home, it’s well worth making sure you do all your homework at this stage to be sure you don’t run into even bigger problems later on. Consider looking into buying a newly-built home to avoid these issues, or speak to a new home expert who can set you on the right track.
Related article: Moving to Alberta: The Checklist to Buying a Home in Alberta
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