When Something Smells Fishy... [Due Diligence, Phase I]

--- by Osman Parvez

Here's how it went down.  

My buyers were interested in a property, and after a close look, they decided it was time to write an offer. 

We were told that there was a pre-inspection and it took months to get work done to prepare the home for sale. Yet visiting the property, the only obvious work was carpet replacement and maybe some paint. 

I asked for the pre-inspection report. The listing agent said she didn’t have permission. 

I asked if she’d ask for permission. "Once we're under contract," she replied. 

That was an odd response; a little fishy, you might say. My buyers wanted the property, and we figured we'd get the report per the Due Diligence requirements of the contract. So, we submitted an offer anyway
It was a strong offer; a clean, cash offer. If I were the listing agent, I would have been thrilled to have received that offer. It was rock solid.  

Then, the seller blew our response deadline - a deadline had been previously discussed with the listing agent and agreed upon. We were also told they needed to have the contract reviewed by legal counsel. 

Now, lawyers are seldom involved in residential real estate contracts here in Colorado. They are always an option, but we tend to only get them roped-in when things go wrong, or when there is some other complication that needs legal expertise to resolve. I've been involved with hundreds of real estate transactions, the vast majority which successfully closed, and I can count on one hand the number of times an attorney had been consulted.   

So, class... why would a seller seek legal advice when the buyer was giving up protective contingencies in a cash deal?  Why wouldn't they trust their agent, who is supposed to be an expert on the contract and sale process, to advise them?  

The fish odor became more pungent. 

After a period of uncomfortable silence, during which suspicion continued to grow, my buyers were getting ready to terminate. Around the same time that we were mulling what to do, I received an email from the listing agent. It turns out (drumroll...) the property has a mold issue. The seller knew about it, tried to mitigate it, and failed. And now they were trying to unload it, hoping the buyer was so in love they would look the other way. 

No, thanks. Game over.   

Look, mold happens. Any surface with a moisture source is likely to grow it. Had the issue been disclosed, moisture source addressed, professional mitigation undertaken, and test results provided  - this wouldn’t have been an issue. That's the right way to handle a mold issue. 

Instead of transparency, we got excuses. 

Instead of straight talk, we were given the name of their attorney.  

Hiding problems, failing to disclose, and lawyering up even before a property is under contract creates distrust. It also has a price.  

We killed the deal. The seller pulled the property off the market. As of this writing, it remains unsold. 

My buyers contacted me a few days later to ask if they made a mistake. 

"No," I told them. "It was a smart move. You can’t trust a counter party that fails to disclose defects and is full of excuses." 

I'm glad we bailed before depositing any earnest money.

Take Home Lessons

1. Trust is a key ingredient to successful real estate transactions. Transparency and straight forward dealing creates trust. Ethics and integrity matter. Not only is it important for buyers and sellers, it should also be an important consideration for the agent you choose. Track record matters, especially in a small market like Boulder, where the vast majority of transactions are handled by a small number of agents.   

2. It's critical for sellers (and their agents) to proactively disclose past environmental or maintenance issues and corrective actions undertaken. Wrap it up with a pretty bow and present it to a potential buyer before they write their offer. They'll most likely reward you with a strong price, an easy inspection process, and a smooth closing. 

3. There’s always another property. Always. Buyers and sellers face competition. You need to be able to recognize a bad deal when you see one. In negotiation terms, you should know your Best Alternative to Negotiated Agreement (BATNA). Or if you're Kenny Rogers, you can write a song about it and retire. 

4.  If your agent is pushing you to ignore warning signs, find a better Realtor. Real estate transactions are the largest single investment you're likely to make. Choose a Realtor who understands that their fiduciary responsibility is to look after your interests, not their own. 

5. When something smells fishy, expect fish.

Note:  Phase I due diligence generally occurs before writing the offer.  Phase II occurs once the property is under contract. This particular situation is between the two. For more articles on due diligence in Boulder real estate, click HERE

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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate.   Image: David Clode


Please Note

This document contains forward-looking statements. You are strongly cautioned that investment results are subject to business, economic and other uncertainties. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time. Always consult your financial advisor before making an investment decision.