With home prices hot, buyers can get burned

In Seattle, where the median sale price of a single-family home has risen $55,000, or 15.7 percent, in the past year to hit $405,000 in May, many buyers are waiving their legal protections in order to secure a home.

When you include condos, the median sales price in May drops to $368,235, a 16.9 percent increase over last May.

That recklessness is understandable, given that Seattle's total number of available properties, both single-family homes and condominiums, has shrunk by 25.6 percent during the same time period.

But as many real estate lawyers will tell you, throwing away your rights can land you in a whole lot of trouble.

"It's amazing how little time people spend in a house before they buy it," said Matt Davis, a partner with Demco Law Firm in Seattle, which specializes in residential real estate law.

"Waiving the inspection really scares me because of how unqualified people are to make assessments of a home they have just walked through."

But making a buyer's contract palatable for the seller seems to be the name of the game these days in Seattle and in King County, where the median sale price of a single-family home has jumped 15.8 percent to $370,500. When you include condos, that median sales price becomes $329,389, a 12.4 percent increase over last May.

People who are fighting for a bit of land in King County are scrapping with others over a rapidly diminishing supply. There were nearly 26 percent fewer single-family homes available this May as the previous year.

For all the hubbub, there were only three more homes sold in Seattle this May, at 789 homes, than during May 2004, according to the Northwest Multiple Listing Service. When you include condos, this May's sales total 1,113, versus 1,109 during May 2004.

To add fuel to the fire, Freddie Mac's weekly nationwide survey of rates found Thursday that the 30-year, fixed-rate loan's latest average was 5.62 percent, the lowest since early February.

In the process, though, these hopeful home buyers are engaging in a dangerous process of rolling back the protections that contracts would afford them, including contingencies about inspections, financing, title inspection and neighborhood review.

It's the first two -- the inspection and the financing -- that people should soul-search before waiving.

But if you are set on sweetening the deal for a seller by waiving the inspection, you may want to bite the bullet and shell out a couple hundred bucks for a pre-inspection.

A pre-inspection is an inspection that you conduct on a home, on your own dime, before making an offer on the property. Some people do pre-inspections while in the process of drawing up the contracts, without including it as a contingency in that contract.

You may lose that money if you don't close on that home, but it's not a good idea to fly by the seat of your pants when investing hundreds of thousands of dollars. And it can give you a good idea of how high you should be willing to go in the event of a bidding war.

"It's better to spend $400 bucks than incur a $50,000 expense in repairs that you were unaware of because, in the emotionalism of bidding on that house, you waived an inspection altogether," said Jada Pettigrew, an agent with VelDyke Realty in Seattle who recommends that her clients get their potential homes inspected, either as part of the contract or as a pre-inspection at the very least.

"In a lot of cases, people who are buying homes are borrowing from mom, dad and grandpa and using all of the money in their savings to get into the market," said Pettigrew. "People are putting themselves in a tough situation by waiving contingencies: sometimes they end up with $60,000 in repairs after already using all the money they had to close on the home."

Some real estate agents suggested that decisions about inspections should be evaluated on a case-by-case basis.

"If it is a condominium, most issues will be covered through the resale certificate and the homeowner's association, which is typically responsible for building and building envelope issues" such as exterior glazing, water issues, stucco siding, roof, decks and maintenance of common areas, said Jim Reppond, an associate broker with Coldwell Banker Bain Associates in Seattle.

"You can inspect for interior things like dishwashers or electrical systems, but if that condo is 3 to 5 years old, is it worth it to have that kind of inspection contingency?" asked Reppond. "But if it is a 1910 craftsman, you are taking a big risk to waive an inspection."

The second important contingency that more and more hopeful homeowners are waiving is financing, which includes an appraisal clause that has often been a sticking point in past home sale closures.

The financing contingency, if enacted in a contract, will protect you if an appraisal of your future home, always conducted by your lender before extending the loan, finds that the selling price of the house is more than its market value.

It breaks down like this. If after waiving the financing contingency, you offer $700,000 for a home, and the appraisal comes in at $600,000, then you are stuck with trying to cover the $100,000 that the bank will not loan you. Or, let's say you are laid off. The financing contingency, if you haven't waived it away, can let you bow out of the major purchase you were about to make.

"Most agents will at least write an "addendum 34," or special instructions if they waive financing, which say that this offer is subject to a satisfactory lending appraisal," said Pettigrew.

"Otherwise, a buyer is stuck between the difference between a low appraisal and contract sales price," and that might mean getting a second loan, bumming the change from the family, or leaving your "earnest money" in the hands of the seller.

The last option spells ouch. That "earnest money" is often to the tune of $10,000 or more.

Now, a neighborhood review basically gives the buyer the option to walk away if they find something, anything, that they don't like about the area -- say, they found out that the house next door belongs to a bongo player, or they figure out that they are in the flight path for big, noisy jets.

So, it isn't surprising that most sellers expect buyers to waive the neighborhood review options. And the title contingency, though it can turn up annoying things (like, you have an RV and the neighborhood association says you can't park it in your front yard) is generally harmless.

If there are financial impediments uncovered in a full title inspection (always conducted by the lender regardless), the bank will usually take care of getting itself, and you, out of that property.

So, think twice if your agent is pressuring you to waive inspections without explaining the costs. And if you decide to incur the risk, have a Plan B, just in case.

"It is clearly possible to have buyer protections and still own a home," said Pettigrew, though you might have to get creative.

P-I reporter Kristen Millares Bolt can be reached at 206-448-8142 or kristenbolt@seattlepi.com

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