Akron Cleveland Association of Realtors 2022

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BUILDING COMMUNITIES How REALTORS® Champion the American Dream

SPECIAL PROMOTIONAL SECTION

CASE in POINT

The Akron Cleveland Association of REALTORS® explores how point-of-sale inspections can hinder transactions and what progressive cities are doing to alleviate burdens on sellers and buyers.

By Kristen Hampshire

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have to be taken care of, but I assumed they would be little things — not crazy.”

Anyone who’s been in a real estate transaction with a hope for “no surprises” would understand why Boera’s situation unraveled into a frustrating chain of events.

The inspector visited his home, doled out a ticker list of violations and an estimated price tag for each. Boera was obligated to put that money into an escrow account, then complete repairs before he could get the funds back. That basically meant earmarking double the cost of repairs.

But when the inspector returned to review repairs and confirm that all violations were addressed, he cited the fence. Yet another violation for Boera to manage and finance before his home could close for the buyer. “All of a sudden, we are trying to close, and I have to spend another $5,000 to put a fence up,” he says.

Another pain point is that many of the initial violations could have been rectified with less-expensive repairs vs. replacements. For example, some windows were missing screens, and the city mandated that

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hen Zack Boera listed his rental property for sale in Newburgh Heights, he knew about filing an application with the city’s building department for a point-of-sale inspection, but he wasn’t sure what “damage” would result from the interior/exterior examination of a property he had maintained for his tenants over the years.

“It was an older house, and I had done a lot of work on it over the years,” Boera relates. “It was in good shape, and I knew there would be some things that would

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Boera replace the entire window. A kitchen door had some gouges and scratches on the corners, and a replacement was required rather than a fix.

“It held up the sale of the property, and then it also cut into my profit on the house because there were unexpected costs we didn’t plan for,” Boera says.

Lack of consistency is Boera’s problem with the system. Inspectors interpret violations differently. Municipal inspectors are not required to be licensed or accredited like independent, general home inspectors.

Not all cities require a point-of-sale inspection, and requirements vary depending on where you live.

And to be clear, a point-of-sale inspection is not a general home inspection.

“Point-of-sale inspections are city mandated and must occur before a property can transfer, and they are conducted by cities,” explains Jamie McMillen, vice president of government affairs for the Akron Cleveland Association of REALTORS® (ACAR). “The cities are doing them under the guise of health and safety for the public, but what we see is that they can become a barrier to home ownership.”

There were so many great homes in my price range, but I knew I could not consider homes in cities with a pointof-sale escrow. Student loans made it very challenging for me to save money for a down payment and other expenses like paying for an appraisal, private inspection, etc. I would have had to wait years longer before having enough savings to cover escrow in addition to everything else. I like my home in Akron, but my options were limited to cities in my price range without that policy.

— JL , Akron A HOMEOWNERSHIP OBSTACLE As a real estate investor, Kevin Stewart has purchased single and multifamily homes in several states, mostly California — and now in the Cleveland market. Point of sale inspections exist in small pockets across the United States. However, some of the most onerous exist in Northeast Ohio.

“I wasn’t expecting it,” he says.

Stewart works with Realtor Seth Task of The Task Team, Berkshire Hathaway HomeServices Professional Reality, who is also a member of the Board of Directors of the National Associations of REALTORS®.

“I’ve never seen this before,” Stewart says, relating that he chose the Cleveland area because there were opportunities to invest in more properties to expand his portfolio.

But there were some barriers because of point-of-sale inspections.

“The cities think they are doing residents a favor because they are making sure the outsides of buildings are taken care of, but we don’t have that problem here [in the San Francisco Bay Area],” he says. “We saw some violations on listings that added up to $25,000 or $30,000, and we didn’t even look at those. “And each city is different, so you never know which inspector you are going to get.”

Stewart says, “We had to do some maneuvering, trying to find properties without the extra cost from the inspections, and that became tricky.”

Task points out that communities’ intention to protect housing stock quality by implementing the point-of-sale inspections just doesn’t play out in real life. “If you ask the municipality, they will say it’s a way of maintaining a vibrant housing stock in good condition without blight,” he says. “That was disproven during the mortgage meltdown because a point-of-sale inspection is no way to prevent blight if you are not maintaining the integrity of the entire community and only those that are selling. What about the person living next door who has owned the house for 30 years and does not maintain it and rarely does their landscaping?”

Again, not all municipalities have these inspections in place, and they are largely implemented in communities in the inner-ring and eastern suburbs of Cleveland, with some into Summit County. “Mayfield Heights, Akron Cleveland Association of REALTORS ACAR3

I have several FHA clients with a budget of $130,000 or less who want to live in Euclid. Out of the few properties available in this city, most sellers are unwilling or unable to complete the extensive violations, which prohibits my customer from qualifying to purchase the home. It creates a sense of defeat in many buyers.

— CK, Euclid

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ANOTHER EXPENSE Cost is a big factor impeding home closings if a point-of-sale inspection produces multiple, expensive violations. A seller can write in the real estate contract that the buyer will assume violations, which can mean responsibility for posting escrow and paying for repairs. Consider a buyer who has saved enough for a minimal down payment and closing costs. Discovering that another $5,000 or more is required to complete the deal could kill it.

When someone is buying or selling a home, they could be going through a major life experience — a death, birth, divorce, new job or job loss,” McMillen says. “You don’t know what is going on in a person’s life, and if you are forced to sell or buy, a point-of-sale inspection only adds to the

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Shaker Heights, Cleveland Heights — most of the ‘Heights’ have them, and some include escrow or are just exterior,” Task explains.

Task thinks a positive, effective model is that of communities like Lakewood and Beachwood. “They have a defined process for regular inspections of the exterior of homes as they appear from the street,” he says.

This way, inspections truly maintain the beauty of a community and its housing stock as opposed to reserving the review of violations to sellers alone. As Task points out, if only sellers are required to get the inspections, how does that help the community at large if longtime homeowners are not held to the same standards?

Lakewood, Task says, divides the city into four quadrants and each is inspected every four years. There are no point of sale inspections on owner-occupied properties.

If the home was a rental, there is a required inspection policy before transfer. “That way, their inspectors are not bogged down,” he explains. “Because what can happen is when the market is hotter, you don’t have enough inspectors, and it can take many weeks to get an inspection. And then if there are violations, they have to be repaired, and the inspector has to go back. That delays closing, and people have lives and jobs, and they have to arrange movers. How is a real estate market supposed to work effectively?”

What can happen when a municipality loosens its point-of-sale inspection policy?

“Garfield Heights removed escrow several years ago and does exterior inspections only and you can see, when they did that, within two to three years compared to a neighboring community, what happened in terms of the returns in the housing market,” Task says. “There was a legitimate return of values.”

complexity in an already substantial activity in a person’s life.”

Jeannet Wright is the legislative committee chair for ACAR and an agent with FASS Real Estate Services in Shaker Heights, which has a point-of-sale inspection requirement. “Point-of-sale inspections can deter or hinder FHA buyers from being eligible to purchase a home,” she says, pointing to FHA buyers.

These government-insured FHA loans are easier to qualify for, require a lower down payment and credit score and usually have lower closing costs. The goal is to give responsible potential homeowners an opportunity to live the American Dream. Specifically, down payments can be as low as 3.5%, and credit scores can skim the 620 level.

“Depending on the municipality, if there is a point-of-sale escrow requirement the buyers must assume, those monies are needed upfront, and repairs have to be finished before you can get that money back,” Wright says. “So, you actually need double.”

This amounts to more out-of-pocket cash for buyers who are pinching pennies to save for the minimal down payment and closing.

Task says, “[The inspections] are a barrier to homeownership. If a seller will not bring

a house to a violation-free status prior to the transfer, then the buyer — depending on the community — must unequivocally assume the violations and make the repairs within a certain period of time, which is usually 90 days.”

“You can’t change the law of economics,” Task says. “If you have a law that limits the pool of buyers, whether they are investors or owner-occupants, you are reducing the value of your community. I have buyers who love a house in a community and can’t buy it because they can’t place escrow or they do not want to deal with the violations. They want to handle the work in their own time.”

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REIMAGINING REGULATIONS Euclid is a case study in how a community can elevate values and make homeownership more accessible to buyers.

It removed its escrow requirement and financial verification process. And now, sellers can choose an exterior or interior/ exterior inspection.

Previously, sellers complete the pointof-sale application, which is valid for one year. Within 30 days of the expiration, they can request an extension if they are close to a sale. “They could fix the home and sell it violation-free or sell it and have the buyers assume the violations,” explains Kristal Grida, assistant to the mayor in Euclid.

I just had a point of sale inspection on my dad’s house, everything they found was expensive: Driveway Apron, Central A/C had corrosion, so that had to be replaced. I wrote to the commissioner and asked him to look at the apron and offer some options. There were no uneven areas, no trip hazards, it was just old. I further explained that I’m a disabled senior in a wheelchair, and I can’t afford a new apron. He never answered. The buyer has already backed out, and I’m out $6000.

— DH, Garlfield Heights Escrow was required, as was proof of finances, which as Grida says, “Are good for that day because things change.”

The city met with McMillen and ACAR and learned more about how changes to the point-of-sale requirements might increase home ownership and values. During the past number of years, some of the housing stock that might have gone to investors who potentially had more resources to take on the cost of repairs than first-time home buyers.

“We found through working with ACAR that we were trying to attract people who want to move into a home, live there, improve it and make it their home for a long time, but the escrow requirement was a barrier,” says Mayor Kirsten Holzheimer Gail.

Gail relates her own experience when she and her husband moved to Euclid. “We bought our house and didn’t have extra money to put into escrow,” she says. “We were thrilled to be able to buy a home, and we bought an older one that needed repairs. If we had to put that money in

escrow, we wouldn’t have been able to make the improvements to the home.

“In essence, the people who had money to buy were maybe the LLCs or people flipping homes, and that was not our intended buyer,” Gail says. “The city would like to do what it can to encourage home purchasing by those who want to occupy their home and enjoy the City of Euclid.

The city was sensitive to some residents’ perspectives that the existing process protected values. And a council meeting open to the public allowed an opportunity to explain what ACAR showed through home values studies and anecdotal feedback. “There were a lot of longtime Euclid residents that felt comforted that we were doing escrow because they felt like buyers would have the money to fix violations,” Grida says. “But we know that financial security and escrow don’t ensure the work will get done, so we shared this information so everyone would understand.”

Since lifting escrow, proof of finances and giving sellers the choice of exterior Akron Cleveland Association of REALTORS ACAR5

inspections or inside/outside, home values have increased, Gail reports. The updates may have contributed to the increased home values., as well. The last triannual appraisal from Cuyahoga County showed an 18% increase, above the county average.

“We have also seen a change from some properties that were previously rentals and are now owner-occupied,” she says.

Gail adds, “We have been working on a number of initiatives to increase attraction to Euclid as a community, and we have seen increased interest in houses. Sales have gone up, we’ve seen a lot of investment in homes, a record number of housing permits — even from existing owners wanting to improve their homes. We are certainly happy about that.”

A LEVEL PLAYING FIELD Are point-of-sale inspections fair? It depends how they are conducted. A federal court class action suit against the City of Bedford ruled that enforced point of sales and presale programs that require citizens to pass arbitrary, warrantless inspections (interior) before selling a home is a violation of Fourth Amendment rights. For instance, in Bedford, the city claimed it could block home sales because of architectural style and detail, color and lack of orderly appearance.

Bedford enacted a freeze on its inspections. Now, they are voluntary and performed upon written request.

“Our call to action is that we want consumers to share their stories — it can

Our point-of-sale inspection was requested, and rehab work began. The city was in and out for months. Once completed, we called for a reinspection. The city said we would then need a new POS inspection to be completed! The new report indicated many more items that had to be repaired. We were supposed to close in mid-April, but the actual close date was not until two months later! The office help was uneducated as to the rules and never returned calls or emails unless we added a supervisor to the email.

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Tell us your story.

Has a city inspection derailed or delayed achieving your dream of becoming a homeowner?

We want to hear from you!

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— MW, Cleveland Heights

hurt local real estate markets if you have lower home sale prices, lower property tax values…and likely that could be because of escrow,” McMillen says.

She applauds Euclid and others that are rolling back policies. “They’re making homeownership more achievable,” McMillen says.

As Task says, there’s value in periodic home inspections — the mailman’s perspective from the street, exterior only—on a regular basis, and not just for sellers.

And, buyers should get a general home inspection to assure their purchase is a good investment.

Wright encourages, “Work with your municipality to look at their point-of-sale requirements and come up with another way to ensure that the housing stock is safe, sanitary, running well — but not in such a way that it penalizes buyers and sellers at the time of transfer.”

Inside the Sale

In 2019, the Ohio REALTORS® commissioned the University of Cincinnati to study the potential impact that Point of Sale Inspection policies have on the local real estate market. This study compared cities with a POS inspection policy to similar cities without a point-of-sale policy. The results are in. While perhaps well-intentioned, point-of-sale inspections may have a negative impact on a community.

Municipalities with POS inspections have higher vacancy rates than municipalities without inspections. > Municipalities with POS inspections were found to have an average vacancy rate of 12.1% compared to 9.7% for municipalities without inspections in 2017.

Municipalities with POS inspections have slower rates of housing transactions per 1,000 households, on average, over the years 2010-2017. > The overall average for POS municipalities was a rate of approximately 34 transactions or sales per 1,000 households.

Conversely, non-POS municipalities had a rate of approximately 47 sales per 1,000 households.

POS inspections are correlated to decreased sales prices. > For the years 2000 to 2018, POS inspections are correlated with decreased sales prices. Point-of-sale Ordinances are associated with an 18% decrease in transaction price. > The impact of POS ordinances on sales price was found to be more than four times the impact of a recession.

Municipalities with POS inspections had fewer transactions per 1,000 households in 2017, compared to municipalities without inspection requirements.

The age of the property and sale year impacted the selling price.

> Regression analysis on the rate of transactions per 1,000 households in 2017 revealed that areas with POS inspections had 19 fewer transactions per 1,000 households than in areas without POS inspections. Transactions occurring with sales prices below the 2017 median price had a negative relationship with transaction rate and resulted in 11 fewer transactions.

> Properties sold during recessions had a negative relationship to sales price. If the sale took place during a recession, the price was approximately 4.3% lower than a nonrecession year.

Municipalities with POS inspections have lower median and average sales prices. > The average sale price for transactions occurring under a POS inspection was $162,559, while the average sale price for all transactions without inspections was $186,456. > The median sale price for areas with POS inspections was lower than the median price for homes in areas without inspection ordinances — at $135,000 for POS and $149,706 for non-POS.

> Regression results found that as the age of the house increases by 10 years, the sales price declines by 0.1 percent.

Municipalities with POS inspections have lower percentages of individuals with a bachelor’s degree or higher, as well as higher unemployment rates, than those without POS inspections. > Approximately 34% of the population age 25 years and older in municipalities with POS inspections have obtained a bachelor’s degree or higher, compared to 35.3% of municipalities without inspections in 2017.

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Promoting Diversity in Housing and Homeownership in Northeast Ohio ACAR’s #HomeForAll movement: • Advocates to remove the barriers of homeownership • Supports local efforts that support and promote homeownership including education programs, homebuyer incentives, homeowner incentive programs and more!

For More Info Contact ACAR at (216) 901-0130

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