Episode 15 | Hot! Hot! Hot! Don't get Burned by the Perils of Buying and Selling Residential Real Estate - The residential real estate market in Cleveland continues to boom, with home price values increasing by more than 10-20% in northeast Ohio over the past few years. So Shoveling Smoke thought this would be a good time to review the nuts and bolts of the residential real estate transaction and to identify the possible pitfalls that come with buying in a hot market. To cover those topices, we invited Frantz Ward partner Mark Rodio to give us some commentary on how the COVID pandemic is impacting how residential real estate deals are getting done.
Podcast First Aired: September 28, 2021
Guest & Host
Mike Smith: Welcome to another episode of Frantz Ward Podcast series, Shoveling Smoke. I'm Mike Smith, your host for today's podcast. As you know, earlier this year, we presented several podcasts regarding the impact of COVID-19, quarantines, and labor and material shortages on various aspects of our daily lives. Another area that has been impacted is the residential real estate market, buying or selling a home has always been fraught with peril for the unwary, but even more so now.
Here with me to discuss some perspectives on these potential pitfalls and how to avoid them, is my partner, Mark Rodio. Mark is a member of Frantz Ward real estate, litigation, and construction practice groups, and spearheads the firm's representation of residential real estate buyers, sellers, and brokers. Mark is a continuing education course provider for the Ohio Division of Real Estate and Professional Licensing, and regularly presents courses on legal, ethics, and fair housing issues.
Since 2002, Mark has been the treasurer for Delta Tau Delta Cleveland Corporation, which owns, operates, and maintains a hundred plus year old mansion house at Case Western Reserve University for undergraduate student housing. In nearly 20 years, Mark has seen the good, the bad, and the ugly, and is constantly teaching his undergraduates about the responsibilities for home ownership and maintenance. In his spare time, Mark enjoys working out, running, biking, washing cars, and performing landscaping, including at his old house he sold four years ago. Not many home buyers get that park. Hey, Mark. Thanks for being with us today.
Mark Rodio: Thanks for having me, Mike.
Mike Smith: Before we get going, can you tell me a little bit about this strange deal you have, where you're still doing landscaping on the house you sold four years ago?
Mark Rodio: Yeah. So I sold a house in the city with a fairly small yard, it basically has a tree lawn in the front and a tree lawn on the side, and a 10 foot yard in the back. And I was doing yard work for my neighbor when I lived there, an elderly lady. So when I sold the house, I moved to a condo and didn't need the yard tools. So I made a deal with the new owner to say, "I'll leave all the yard tools, if when you mow the lawn you'll do both your tree lawn and her tree lawn." And he's not really a yard guy, and he basically told me, "Well, I don't mind if you want to borrow the tools and use them anytime you want." So pretty much I've been mowing the lawn at my old house for the last four years.
Mike Smith: Very nice. Well, there's plenty of work to do at my house as well, Mark. So I'll have to figure out what to trade you.
Mark Rodio: I'll add you to the Saturday list.
Mike Smith: All right. Well, let's get going here. When we start, I always like to start with little background. So let's talk about the basics for residential real estate in Ohio. Can you just give us a quick outline?
Mark Rodio: Sure. So in Ohio, the main role for buyers to know is that buying residential real estate is buyer beware. And without getting into what lawyers typically call the caveat emptor, the legalese, buyer beware basically means that it's the buyer's duty to inspect a house before they purchase it. And you also have sellers of residential real estate, have a duty to disclose what they know about the house regarding its physical condition. And there's actually a form in Ohio that was implemented in 1993 called the residential property disclosure form. And that's a form on which the sellers are supposed to disclose all the facts they know regarding the physical condition of the property, the roof, the basement, the structural issues, assessments, things of that nature.
Mike Smith: And I assume you see the lot of litigation goes on right there, right at the beginning about what the seller should or shouldn't have known, or should have, shouldn't have disclosed. Is that right?
Mark Rodio: Yeah. Obviously the most common claims that we see are disgruntled buyers who buy a house. And there's an allegation that the seller didn't disclose something that they knew regarding the leaky basement, or the leaky roof, or structural issues, or surface water issues, things of that nature, mold, things like that.
Mike Smith: So we got buyer beware, we have this residential property disclosure form. What are some of the other basic components that go into a residential deal?
Mark Rodio: Well, so most buyers and sellers are represented by real estate brokers and sales people when they're buying and selling. So the brokerages typically provide the form contracts that are used in most transactions. And so if you're buying existing housing or selling existing housing, typically your broker is going to have the purchase contract as a form for you to complete. If you're buying new construction, most builders have their own form of contract, and where the real estate broker contracts because they're designed for use by both buyers and sellers, they tend to be a little more balanced, builder contracts tend to be very one sided. Each builder has a different version, and they're definitely can be some very onerous and one sided provisions in those. So if you're building a house brand new, I highly recommend that you have somebody review the contract before you sign it. Because, again, you see all ranges that there's some contracts that are pretty good and some that are pretty terrible.
Mike Smith: So obviously you deal with contracts, the devil's always in the details. What do you typically see that's in these contracts? And what do you typically see that's not in there that maybe should be or you should be aware that's not in there?
Mark Rodio: So when you're going to sell your house, you'll typically sign what's called a listing agreement with the real estate broker, and usually it's called an exclusive right to sell agreement. And that's where the owner's granting the brokerage, the exclusive right to market and sell their property or market their property for sale. So that's the first agreement that you'll be signing when you're selling a house. Then if you're buying a house, not too frequently used, but there are written by your agency agreements where you will sign up with an agent, and they will say, "I'll be your exclusive agent for attempting to locate a property." And then of course, as we discuss, there's the purchase contracts, and the written listing agreement, when you go to sell your house, that's very common. It's typically exclusive, it has to have certain things in it so that you know what you're doing, namely, it has to have the address of the property, the commission that you're going to be offering to the broker, and the expiration date of that agreement, that's required by Ohio law.
The buyer agency agreements are a little less common, and sometimes they'll provide that your agency, your exclusive agent. It will also set forth whether you're going to owe them any compensation for buying the house or whether they will be solely compensated from whatever the seller's agent is offering as a cooperating compensation. And most of the times when you're using the broker contracts, as I said, they're fairly balanced. Some of them in some markets in Ohio are actually co-written with the local bar association. So for example, Columbus has an area form that was reviewed and approved by both the association of realtors and the Columbus Bar Association. So it's the best of both worlds in the sense that it's got the practical what you need from the residential real estate side and it's got some legal protections. And again, it's a pretty fair and balanced approach to the contract.
Mike Smith: Well, one thing I can tell you from experience, that's always given me a little bit of heartburn is, the dates that are in all these contracts. So can you just comment on how strictly these dates are enforced?
Mark Rodio: Sure. So Ohio is a little different than even our sister states. So for example, in Western Pennsylvania, it is typical for those contracts to have a time is of the essence provision. And what that means is, if something's supposed to happen by September 2nd, it needs to happen by September 2nd, and if you don't perform it until September 3rd, you're in breach, that is when time is of the essence. That is typical in Ohio in commercial transactions, but in residential transactions it's horseshoe, and hand grenades, and closest close enough.
And a lot of buyers and sellers don't realize that when they're entering into these contracts. So if you have a date that really means something to you, you need to have it be a time as of the essence provision, you need to use those magic words, that time is of the essence. So for example, if you're going to buy a house and you have a rate lock, and your rate lock expires on October 1st, and therefore you need the deal to close by October 1st. Then you should tell your agent that you want October 1st to be time is of the essence, because otherwise you will lose your mortgage rate and incur additional costs.
So that's something that either you or your agent can easily add into a contract, even if it's not as to all dates as to certain specific dates, you can specify that time is of the essence. So for example, as to the closing times of the essence, but there's seven days for the inspection, that doesn't have to be time of the essence, because whether you do the inspection within seven days or eight days, probably isn't going to affect the transaction.
Mike Smith: Another component that always made me hold my breath and buying a house relates to property inspections, and then also related to that home warranties. Can you give us some thoughts about those documents and how they interact with the transaction?
Mark Rodio: So all the form purchase contracts, certainly in Northeast Ohio and all the ones I've seen anywhere in Ohio, offer the buyers the right to have the property inspected before they purchase it. And most of them have the option for either the buyer or the seller to procure a home warranty, I recommend that buyers do both. And there's a variety of inspections besides a general inspection. If you've got septic or well water, if you want to test for radon, or mold, or wood destroying insects, those are all inspections that are typically inspections that a buyer can request. And we certainly recommend that the buyer have the property inspected before a purchase.
And then the option of the limited home warranties, home warranties aren't insurance they are limited home warranties. So just like they sound, they will cover certain things, if they're working and functional on the date of the sale and then break typically within the first year, it'll be covered by the limited home warranty. So for example, if your furnace is working on the data sale and then breaks within the first year, there will typically be coverage for it. Now, if it's a 50 year old furnace and it breaks in that first year, some home warranties will only offer prorated or limited coverage. Because they'll say, "Look, you bought a house with a functional but a 50 year old furnace, we're only going to provide very little coverage versus something that it's a five year old furnace." There may be greater coverage for something like that.
Mike Smith: Okay. So we have the basics, the contracts, and the players, and those types of things. So now let's talk about the dangers of the perils associated with walk, going through one of these transactions. So, can you give us some ideas of some of those things that we should really should be looking out for as we go through the process?
Mark Rodio: So the first mistake that I see buyers and sellers making is that they believe their real estate agents and brokers are the jack of all trades or the one-stop shop, and that they can do everything. And in fact, Ohio law prohibits real estate agents from doing anything beyond real estate. So for example, they're not allowed to practice law or do anything that the division of real estate considers the practice of law. So agents are allowed to provide form contracts, they're allowed to fill in blanks on contracts, but they are not allowed to draft contractual provisions.
So it's anything too complicated, you don't want your real estate agent drafting it, you want your lawyer drafting it or another professional. And it's very similar with whether it's home inspections, if you need a structural engineer, if you need an accountant to look at some financial numbers, you want the person with that expertise looking at that stuff. Don't assume just because your realtor buys and sells real estate all the time, that they're the expert on everything. And that's a common mistake that we see from buyers and sellers, is that they assume the real estate agents and brokerages can and know how to do more than they actually do.
Mike Smith: So another parallel, I think that we all talk about from time to time is what those home inspections show, and how you go about doing one of those. Can you talk about some of the dangers or associated with, or the risks of a home inspection?
Mark Rodio: So in Ohio home inspectors actually just became a licensed profession on July 1st of 2021, and that was supposed to have been implemented shortly before the pandemic. And obviously got delayed because of the pandemic, because the rule-making process got delayed, but the division of real estate now or overseas licensed home inspectors, and they have to be licensed. But the problems that we see are, it's difficult for a home inspector on what's typically your three or four hour home inspection to discover what somebody who may have owned the house for 20 or 30 years would know. And also it's difficult for a home inspector when he's doing a home inspection in the middle of a dry July, to tell you what the basement's going to look like in the middle of a wet spring. And on top of that, the home inspectors themselves, most often, they're doing an inspection for somewhere in the $300, to $400, to $500 range.
So they all are members of either... or most of them are members of the American Society of Home Inspectors, also known as ASHI, there's an international society of home inspectors. And those trade organizations I think have trained the inspectors, so that almost every inspection contract I've seen in the last 10 years has a limited liability clause. Where if the inspector misses something, their liability is limited to the cost you paid them for the inspection. So if you paid them 500 bucks and they missed the leaky basement, they'll give you back your 500 bucks, but they're not going to pay the 5,000 it takes to fix the leaky basement. So that's one of the biggest problems is that while we recommend home inspections, what they can discover on a three or four hour inspection is limited. And if they get it wrong, almost all of them have a limited liability.
And in fact, this is one of those rare areas where the worse, the home inspection contract sometimes the better it is for the buyer, if there becomes a problem because if the contract's bad enough. So if it not only has a limit liability clause for the $500, but also says, "You have to bring any claim within 60 days and you have to go to arbitration." And the arbitration's going to cost you $800 to file it. Courts will generally hold those contracts totally unenforceable because in order to pursue your $500 remedy, you'd have to file an $800 arbitration. And so there are instances where some of the home inspectors, the more aggressive they are with their contracts, the worse it is for them and the better it is for a potential buyer.
Mike Smith: So the home inspection only provides so much protection, which means you're dealing with the dangers associated in directly dealing with the seller as well. What risk do the buyers face there?
Mark Rodio: Well, the problem that I tend to see and over 20 years is that's a lot of sellers are reluctant to disclose everything that they know on the property disclosure form. Some of them may fear what effect that'll have on the price or that the property won't sell, or they may have rationalized what the issue is. For example, if they've never seen actual water in their basement, but they've seen a little fluorescence on the wall, they'll look at that and they won't disclose anything because they'll say, "Well, I've never actually had water intrusion. I've only had fluorescence, or I think there might be water coming in, but I've never seen it, so I'm not going to disclose anything on it." And the difficulty with that is that a seller, if they don't disclose what they should on a property disclosure form, obviously it makes it a lot more likely that they get sued.
But for a buyer it's difficult because in Ohio you have, as we said, it's buyer beware, you have to show that the seller had actual knowledge of the problem. And you have to remember that everything has a useful life and will wear out eventually. So a roof doesn't last forever, basement drain tile doesn't last forever, plumbing doesn't last, fixtures don't last forever. But just because something is leaking now, and you hire a contractor who says, "Oh yeah, there's basement leak must have been happening over the last five or 10 years." That doesn't prove that the seller knew it was leaking.
So while the problem may have happened gradually, that's not the proof that a buyer has to have. The buyer actually needs somebody, and either a neighbor or maybe if the seller called the same plumber before selling the house. And they said, "Oh, yeah, you have a problem with a clog drain." And the seller didn't disclose it. Then you have actual knowledge that you can prove that the seller actually knew about a problem that they didn't disclose on the property disclosure form.
Mike Smith: So let's flip to the other side and talk about risk the seller has. What do you see there in dealing with buyers?
Mark Rodio: Well, so the risks with buyers is that they're often reluctant to disclose, if they've got adverse financial or credit issues that might impact their ability to get a loan on a property. And so if you're selling property, these terms get used interchangeably a lot, but whether there's a preapproval or a pre-qualification, there is a difference between those. So a pre-qualification is typically less stringent, it involves just a general look at the buyer by their lender saying, "Do we think that we can lend to these people in order to buy a house?"
A preapproval will be much more specific, and it will actually set forth an amount of loan for which the buyer has been preapproved. So if you've got a buyer looking to buy your $250,000 house, you want to see a preapproval letter from their lender saying that they've been approved for a loan up to $250,000. So that'll give you, as a seller, much more confidence in that buyer's ability to perform the transaction ultimately. Because if you sign a contract with a buyer and they can't get the loan, you're going to lose market time, you're going to have the uncertainty. And where time is not of the essence in Ohio on most financing and closing dates, it adds a lot of uncertainty into the transaction.
Mike Smith: And I assume if the deal blows up that both sides are facing risk at that point.
Mark Rodio: Yeah. And litigation is the worst case scenario obviously, because it's very expensive and it's hard for a buyer. Even if they buy a house and the seller didn't disclose termites, right? You might have 10 grand worth of carpentry that needs done, but it'll cost you more than 10 grand to hire a lawyer to handle the claim. And the same thing, if you're selling a house, if the buyer breaches and they can't buy it, just because it sells for less to the next buyer doesn't necessarily mean that you have damages. So if a seller just called up a lawyer who doesn't typically do real estate, a lawyer would say, "Well, your typical measure of damages for breach of contract has put you in the same position you would've been in, and if the buyer had performed." That's what lawyers learn in law school. Well, that's not the measure of damages.
And for real estate in Ohio measure of damages is the difference between the buyer's contracted price and the fair market value at that time. So if you have a buyer who offers to buy your $250,000 house for $250,000, and they breach, you don't have any damages because you still own the property that you can resell for $250,000. Now, if you have that buyer under contracted $260,000, now you've got damages because they were paying you above fair market value. And that difference that $10,000 is something that you as a seller, would be able to pursue against that buyer.
Mike Smith: So again, with all things in today's society, we have to deal with issues relating to COVID. So how do you see COVID-19 impacting buying and selling residential real estate?
Mark Rodio: Well, so what we've seen is that the quarantine that came along with COVID has increased the demand from buyers and reduced the supply from sellers. Sellers were less willing to put their homes up for sale, they were less willing to have their homes open for buyers, whether it is an open house or to have potential buyers coming through the property in order to purchase it. And buyers obviously living, working, educating from home, doing everything from home or their apartment. There was a lot more buyers looking for more space and maybe more for designated space, as opposed to just the great room in the open areas. And so you've got really a seller's market right now where there's not a lot of supply and there's a whole lot of demand, and that puts pressure on the buyers. And so we're seeing a lot of buyers that are waving home inspections and just buying the house as is with no home inspection.
And then of course, even on the new home construction side, there's been labor and material shortages there, there's been increased demand for more buyers. And frankly, the building just hasn't kept up. So if you're trying to buy in this market, it's tough. And even if you're selling in this market, it's great because you'll probably sell your house quickly and get above or at your asking price. But then the problem is where do you go next? Because now you've sold the house you need to buy one, and you have to figure out where you're going to go.
Mike Smith: It's a vicious cycle, Mark, having been a homeowner three times over now. Well, I appreciate you being here today. One of the things we do at the end of our podcast is we ask our guests to offer some takeaways for our listeners to hone in on as they walk away from the podcast. So with that in mind, can you share with our listeners some takeaways you see for home buyers and home sellers?
Mark Rodio: Sure. So for home buyers, I think the three takeaways I would recommend are, number one, to have a professional home inspection, number two, to obtain the limited home warranty, whether the seller pays for it or you pay for it. And number three is to remember when you're buying a house that you need to have funds available to make repairs for items that you don't necessarily know how long they're going to last. So don't spend your last nickel buying the house and not have any money left to fix the furnace.
For sellers, the three takeaways would be that they should disclose all defects of which they have actual knowledge on the residential property disclosure form. It's their get out of jail free card, it makes it a lot less likely that they get sued. Secondly, if I'm a seller, I would demand a preapproval letter along with any purchase offer, so that you know that your buyer actually can buy the house. And the third thing is a seller would be to plan on what happens if your new house or wherever you're going to next gets delayed before the time you have to give up your old house, because you don't want to have to move twice or move into a hotel, if you can help it.
Mike Smith: Those are all great thoughts, Mark. Really appreciate it. So to sum up Mark's takeaways, I would sum it up as follows, protect yourself, be open on disclosures, and plan very carefully as you proceed through this process. Mark, thanks again for being here, we appreciate your time. And that wraps up another episode of Shoveling Smoke. Thanks for checking in with us and we hope you listen in next time. Shoveling Smoke is a production of Evergreen Podcasts. Our producer and audio engineer is Sean Rule-Hoffman. Thanks for listening.