Home defects face greater scrutiny in 2022’s cooling market

Simmering down

A cooling real estate market signals less competition among buyers — and a greater ability for buyers to negotiate price by pressing sellers on home defects.

California home sales volume, which typically peaks mid-year, has been falling back month after month during the 2022 spring sales cycle. As of June 2022, the number of homes sold in California was 24% below a year earlier, translating into 13,000 fewer sales.

The Federal Reserve (the Fed) has been aggressively raising their benchmark interest rate in 2022 as a method of wrangling inflation back into their target range. The Consumer Price Index (CPI) increased 9.1% over the last year as of June 2022, according to the Bureau of Labor Statistics. Meanwhile, the Fed strives for annual inflation of around 2%. Hence, their recent rate hikes are some of the largest increases in decades.

The result of these rising interest rates has been less mortgage money available for consumers. Measured as buyer purchasing power, this index has dropped a whopping 26.6% over the past year as of June 2022. This means homebuyers qualify for 26.6% less mortgage money than they did a year ago.

As the housing market shifts away from sellers and toward a buyer’s market, buyers will be scrutinizing home defects to negotiate a lower asking price — especially since they qualify for significantly less mortgage money than they did just a few short months ago.

Today’s sobered homebuyers have greater liberty to leverage home defects, malfunctions and lack of upgrades to justify a price cut than they did the last two years. In 2020 and 2021, most sellers received multiple offers and bidding wars ensued. This pushed prices further up through competition and a scarce number of available properties thanks to depleted inventory levels.

Now in 2022, multiple offers are no longer the norm — and buyers are taking notice.

How “significant” is this defect, anyway?

As part of a seller’s effort to market their property, along with their agent, the seller needs to prepare, fill out and deliver a statutory Transfer Disclosure Statement (TDS) as soon as practicable, before negotiations begin. [See RPI Form 304]

The seller’s TDS alerts prospective buyers to known or suspected property defects affecting the value or desirability of a property. All sellers and their agents owe to prospective buyers the general duty of disclosing these conditions, known as material facts. [Calif. Civil Code §1102]

As the seller goes through the TDS, they will be asked about their awareness of any “significant” defects/malfunctions in any:

walls;
windows;
ceilings;
doors;
floor;
foundation;
insulation;
driveways;
roof;
sidewalks;
walls/fences;
electrical systems; and
plumbing/sewer/septic systems. [See RPI Form 304 §B]

Here, the term “significant” might be taken subjectively. What a buyer deems significant might differ from what the seller considers significant. Regardless of the severity, all known factors affecting value need to be disclosed.

Disclosure of material facts is especially pertinent in a cooling market like the one agents see today, where buyers may scrutinize these defects differently than they did in 2021.

As part of an agent’s risk avoidance procedures, the seller’s agent recommends the seller obtain third-party inspections of the property’s condition and its components, which includes a home inspection report (HIR) to be completed on the seller’s behalf. [See RPI e-book Real Estate Practice, Chapter 22]

These third-party inspections reduce the exposure to claims by a buyer who might discover deficiencies in the property not known to the seller or the seller’s agent. The HIR is also used to prepare the seller’s TDS. Both are presented to prospective buyers before the seller accepts an offer. Together, these forms provide maximum mitigation of risks of claims made by the buyer on the seller and the seller’s agent.

Hiring a competent home inspector, conducting a visual inspection and assisting the seller with filling out the TDS are key areas where the seller’s agent is involved. Any defects that are highlighted in this process are to be disclosed to buyers.

Rest assured, buyers in 2022-2023 will be on guard for defects and malfunctions. The seller is always obligated to disclose known or suspected defects or malfunctions. Though sellers might fumble over how significant that defect really is, the best advice is: when in doubt, disclose.

Related article: