Reducing Risk When Buying Real Estate

Twenty-first century Canada is a regulated society. Health care, insurance providers and the sale of shares on stock exchanges are all regulated by government legislation to protect the public.

Even buying ordinary items like a kitchen stove is regulated. The Consumer Protection Act includes statutory warranties, such as ensuring the stove is of acceptable quality. These statutory warranties are in addition to any warranties the manufacturer and seller may give.

Surprisingly, since a home is one of the most expensive purchases in a person’s life, there is little regulation of real estate sales. Except when buying a brand new house, a home buyer is in the position of caveat emptor (buyer beware). There are no regulations that state, for example, that a used home must be of acceptable quality for it to be sold.

This situation is rooted in 18th century English views on real estate. A “home is one’s castle” and the ownership, purchase and sale of real estate was seen as unique and separate from other types of property. This uniqueness of real estate transactions has survived, despite real estate being increasingly treated as a commodity in modern society.

The lack of regulation places most risks on the purchaser. It can be an unpleasant surprise and expense when one finds problems with a home after purchase. Having to spend a few thousand dollars to fix a leaky roof is never welcome, especially just after spending a few hundred thousand dollars to purchase the house in the first place. Adding to the problem is that if the purchaser tries to seek compensation from the seller for the leak, the purchaser is often met with “buyer beware”.

While there is no way to make any real estate purchase 100% free of problems, there are ways to reduce the risk. One option is a Property Disclosure Statement (“PDS”). This is a document that can form part of the contract to purchase a home. In the PDS the seller certifies the condition of certain aspects of the house (that there are no water leaks, there are no structural issues, and so on). This can be useful to a purchaser, as it may alert him or her to past problems. A PDS is not a complete solution, however. The seller is usually only required to disclose problems that he or she knows of.

Here is an example of the limits of a PDS. Take a seller who has lived in a house for a couple of years, having purchased it from the original owner. During the seller’s occupancy, there were no water leaks. Maybe they were a couple of dry years. In the PDS, the seller states that to the best of his or her knowledge there were no water leaks. The purchaser buys the house, takes possession and later suffers water leaks.

On investigating further, it turns out that the original owner did have water leaks, but they were never disclosed, and they did not occur during the seller’s occupancy. Thus, even though there was in fact a water leak problem, the seller did not know of it. Their representation in the PDS was truthful. As a result, the purchaser cannot seek compensation from the seller. Since there was no contract with the original owner, no compensation can be found there either.

It is unlikely that a purchaser of real estate is going to find protection from defects in real estate through the contract for sale. Instead, the purchaser has to protect him or herself through due diligence before actually completing the purchase. The best way of doing this is by personally inspecting the property, asking questions and retaining professionals, such as a home inspector, to find defects. Every possible issue should be followed up and included in the contract if required. This applies whether the real estate is a home, or business property.

None of these measures are magic bullets. Even with inspections, things can be missed. Nevertheless, by taking these steps, the purchaser will have a better idea of what is being bought and will lessen the risk of unwelcome, expensive surprises. In situations of “buyer beware”, such as the purchase of real estate, no one is going to protect you but yourself.