A key member of the House Financial Services Committee has asked the General Accounting Office for a report on the costs and benefits of mandatory pre-closing home inspections on properties purchased with government-insured financing.

The study, Rep. Doug Bereuter, R-Neb., said in his request to Comptroller General David Walker, should provide policy options for lawmakers to consider to promote and protect the interest of both home buyers who use loans backed by the Federal Housing Administration (FHA) and taxpayers who must bail them out if they get into trouble.

Independent home inspections have become the norm in recent years, according to a recent study by the National Association of Realtors and the American Society of Home Inspectors which found that 77 percent of all recent home buyers hired a third- party inspector to examine their homes prior to completing the purchase.

Of those, moreover, 81 percent had a contingency placed in the contract for the inspection and 79 percent attended and participated in the exam.

But the NAR-ASHI survey did not breakout the differences among buyers who use conventional funding and those who resort to FHA financing. And that is huge, says ASHI President John Ghent, an inspector from Trumbull, Conn.

FHA buyers "typically" don't hire an inspector because they can't afford or don't want to spend the extra $200-$400, Ghent explains. "They're getting the bottom-line loan they can get," so they usually are stretched pretty thin.

But in addition to cost, many confuse the mandatory appraisal with a home inspection, a mistake that has been compounded by the Department of Housing and Urban Development's insistence that appraisers report defects they spot when they make their valuations.

But an appraisal is not nearly as complete as an inspection. And the inability to cover the high cost of repairing unforseen or unknown problems is a major reason buyers default on their mortgages.

Ghent recently inspected a foreclosure that was being purchased by a relative. While the appraiser said he didn't see any problems, Ghent found just the opposite. "The place should have been torn down," he says. "The difference between what they do and what we do is night and day."

ASHI, which has been urging Congress to examine the risks uninformed home buying decision pose for consumers and federal housing programs, also believes such a requirement would go a long way toward preventing such fraudulent acts as property flipping in which a rundown house is purchased at a low-ball price and resold at a much higher figure after a few cosmetic repairs are made to mask major problems.

"In many of these cases, there has been no home inspection," says ASHI Executive Director Rob Paterkiewicz. "Our feeling is that an appraiser won't catch it when a guy spray paints a distressed property (to hide defects) but a good home inspector will."

Rep. Bereuter asked the GAO, the investigative arm of Congress, to examine several key issues:

* The extent to which inspections could protect buyers by identifying defects that would affect the value of their homes.

• The extent to which the cost of inspections would influence buying decisions, and how cost issues could be mitigated through FHA financing charges.

• The extent to which mandatory inspections could protect the elderly, parents with young children, undereducated buyers and other populations considered particularly vulnerable.

• The extent to which the lack of inspections place the FHA loan programs at increased financial risk, and the correlation between foreclosure and inspections conducted prior to closing.

Rep. Bereuter also has asked the GAO to look into the extent to which a buyer's choice of a particular inspector may be unduly influenced by real estate agents who might steer them to someone who isn't as thorough or may pay a referral fee for sending business their way.

According to the NAR-ASHI study, nearly seven out of ever 10 buyers chose their home inspectors based upon the recommendations of a real estate agent.

For more articles by Lew Sichelman, please press here.

Published: November 7, 2001

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