The Future of Real Estate Transactions – Engineering Inspections
According to Realtor.com, the average amount of time to close on a house is 50 days after listing. By contrast, houses sold by auction are instantaneous. In both cases, several weeks of preparation are required, but the closing process itself is drastically simplified by an Engineering Pre-listing Inspection (EPLI).
What if we could adapt the speed, fairness, and predictability of the Real Estate auction process to the scale and security of the conventional Real Estate market? This article will discuss how an EPLI can significantly increase the liquidity of 140 million of Americans’ most valuable asset while saving billion of dollars in wasted time and unnecessary labor.
We all know the drill.
First, the homeowner decides to sell their property. After a bit of paint and a power wash, the property still has some deficiencies. But everyone wants a quick sale. After all, a stale listing can lose appeal, and agents need to turn the property as quickly as possible – not only for their commissions, but also for their reputation. In addition, the owners may need to transition between homes as quickly as possible without incurring double mortgage payments. There is a lot on the line when timing a property sale.
With fingers crossed, the property goes on the market staged for a quick sale. The first offer comes quickly and is accepted – pending inspection. After a few days the inspector arrives and spots some rotten wood under a window or a few cracks in the foundation. This scares the first buyer away, and sometimes the home must be pulled off the market until repairs can be assessed and corrected.
When the second offer comes in, the last inspection report belongs to the last buyer, not the owner – so a new inspection report is ordered. This time a different inspector finds a few more cracks and recommends that that a professional engineer is consulted. Any engineering deficiencies must now be acknowledged per real estate disclosure laws.
Days pass as everyone now scrambles to meet the new timeline, negotiate concessions, develop scope of work, get contractor ROMs, etc. Few things are more expensive than trying to save money.
The Cost of eliminating “Seller Bias”.
The reason that the buyer must purchase the inspection report is to eliminate the possibility of seller bias. That means that there may be some nuanced physical deficiency that the seller is not aware of, or does not think is worth mentioning, or may try to intentionally hide in order to defraud the market into paying more than the property is actually worth. Obviously, it is important to catch the bad guys, but what is the true cost of “seller bias” and is there some way we can assure the physical integrity of a real estate asset in a more efficient manner than buyer driven inspections?
How do people buy property at auctions?
Thousands of properties are sold every day at auctions. All the buyers have their financing set up, they have their insurance set up, titles have been searched, permits have been sealed. Everything is prepared beforehand so that everyone has the exact same information as everyone else about the transaction – the good, the bad, and the ugly – because when the gavel falls, the deal is done.
The most critical component of the property auction is an unbiased professional engineering inspection of critical systems. The engineer is concerned with the age, materials, and condition of the entire piping system, not so much wether a particular sink drains quickly as a home inspector would note. The engineer evaluates the structural integrity, plumbing, mold and rot progression, electrical safety, occupant hazards and expected useful life of building components. The engineering report may include system definitions, estimated maintenance costs, calculations of useful life, and feasibility of alternate use cases for the property. The EPLI can also determine limitation of use including easements, critical slopes, roof and floor loading limits, etc. These are what the banks and insurance company care about the most, as should the owner.
The engineer can also credibly tout excellent maintenance, expensive upgrades, and additional safety features, and measurable amenities in a credible and unbiased opinion. Many such communications are currently constrained by professional laws and ethics, except where validated by a Professional Engineer.
The Institution of Professional Engineers:
Only 5% of all engineering graduates in the US are able to attain the Professional Engineering designation. A Professional Engineer must pass board exams and pursue continuing education not unlike the bar exam for lawyers. Professional engineers also need to be nominated by other several other PEs would must validate 4-8 years of qualified working experience. After that, Professional engineers are regulated by the PE act where they are held accountable by law for their integrity, competence, and ethical behaviors. A PE can lose their license for committing negligence, incompetence, fraud, or breach of contract.
Due to the strength of the engineering profession, the rules of the auction can be made very clear. Everyone is in consensus that the Licensed Professional Engineering is worthy of public trust, competence, and unbiased assessment of fact. These attributes rank far beyond a simple home inspection.
Items that can be provided in an EPLI document may include:
- Review of critical systems
- Cost of ownership
- Fire, flood, tree hazards
- Validation of improvements
- Energy calculation
- Scope of Work
- Feasibility studies: solar, additions, conversions
- Impact of easements
- Structural evaluation
- Mold, wind, waterproofing, seismic review
- Permit review
- Land use regulations
- Critical slope
These are by no means the only facts that an engineer can validate, but we can be assured that there is always an engineer who can adapt their expertise to any imaginable condition that may present itself in the Real Estate market.
How much will an EPLI it cost?
An EPLI will be more expensive than a home inspection report because engineers command higher compensation and carry greater liabilities than a home inspector. The professional engineering report is also more useful and can be used in many different situations by legal definition. It can be used as a basis for contractor selection, insurance coverage, or mortgage financing.
The truth is that many different engineering reports may be generated from the same information collected in a single visit by a qualified engineer. The only difference is in the write up, calculations, and validation by peer review.
How much will an EPLI save?
Instead, we should look at the cost of not conducting an EPLI. Nobody knows the true value of a home – today’s pricing is based on what the people down the road paid regardless of how well that home was maintained or improved. Mortgage holders and insurance companies absorb the valuation risk at significant cost to the homeowner. Increasingly, homeowners associations emerge to enforce community standards on private property to which each homeowner is levied at tax. Still, at the end of the day, there is little or no objective information included in the sale of a 3 trillion dollar per year US RE market.
The 2008 Financial Crisis;
In 2008, the real estate bubble popped. The result was that the theoretical paper value of all properties far exceeded the theoretical market value of all properties. This turned banking balance sheets upside down as they were forced to mark-to-market.
What few people realized that in the absence of true value for physical property – as assessed by a licensed engineer – there is are only theoretical values to work with in the enormous and complicated financial markets. If only a small percentage of properties had a valid EPLI, this data could be extrapolated onto all properties to establish a nominal true value for real estate. Banks could then “mark-to-value” rather than mark to market. True value must be disclosed to everyone equally; only from there, we can be confident that market forces can do their magic.
The current real estate delivery system is inefficient. Every regulation adds litigation, which increases time, complexity, risk, and cost to the transaction. The Institution of professional engineering is underutilized for the ability to eliminate bias, distrust, fraud, and other conditions that can diminish the value of a property. The Institution of professional engineering is also greatly under utilized for validating information that could increase the utility, value, and re-sale of a property.
Taken together the Engineering Pre-Listing Inspection suite is a simple and inexpensive way to increase the speed, security, and efficiency of 140 million American’s most important transaction.