By M.P. MCQUEEN

As buyers ease back into the battered real-estate market, they’re often hitting a stumbling block: fibbing by home sellers.

Eager to unload their abodes, some sellers exaggerate the size of their lots or their houses. Others minimize their property-tax or utility bills, conveniently forget about pests, or downplay flooding problems or noise.

Real-estate experts say that while such misrepresentations aren’t new, the tough market of the past few years has made buyers more wary, partly because they can’t expect rising home prices to bail them out of costly mistakes. As a result, deals are taking longer, and more of them are falling apart as buyers find properties sometimes aren’t all they’re supposed to be.

More than 30 states have disclosure laws requiring sellers to tell prospective buyers and agents about leaky roofs and other problems, according to the National Association of Realtors. But there’s often a gray area involving the disclosure of problems the seller may not know about, such as a long-ago flood or hidden mold.

States are also increasingly passing laws requiring homeowners to disclose environmental issues, such as the presence of radon gas, a contaminant linked to lung cancer, and underground fuel tanks. In California, the checklist of required disclosures is so long that a cottage industry has sprung up of firms that help sellers prepare the forms.

Given the complexity of disclosure laws, it’s not surprising that potential buyers don’t hear about every problem in a house. Besides the issue of fibbing, sellers may genuinely not know about problems. And even if they do, the laws generally don’t apply to bank-owned homes transferred in foreclosures, which now constitute a larger share of sales.

Buyers need to do their own due diligence and not rely exclusively on what sellers and agents say. They should hire an independent home inspector or home-inspection engineer, one not referred by the seller—and be aware that real-estate agents typically represent the seller.

Here are some of the common misrepresentations and white lies that buyers may hear as they shop for a house, according to real-estate experts and state regulators:

• “This house is on two acres.” Disputes about property dimensions—how many square feet in a house or condo, or its exact boundaries—are common. Sometimes buyers don’t learn the exact dimensions until the lender’s appraisal. 

Listing agents usually accept a seller’s word on property dimensions, says Diane Saatchi, a senior vice president at Saunders & Associates, a real-estate firm in Bridgehampton, N.Y. “We tell everyone to verify,” she says. Smaller dimensions also can cause an appraisal to come in lower than the agreed-upon purchase price. Low appraisals are a leading cause of ruined deals in today’s market. A properly worded appraisal contingency in the purchase contract would allow you to scuttle the deal or find other financing if the appraisal comes in low, says New York real-estate attorney Michael Xylas.

• “We don’t have pests.” A basic home inspection generally doesn’t include a peek inside walls or underground for termites and mold, which are among the top complaints. Inspections for mold and radon gas also generally aren’t included; usually buyers must order these inspections separately. Other inside-the-wall problems include faulty wiring and old plumbing, which also may require specialists.

James Holtzman, a financial adviser at Legend Financial Advisors Inc. in Pittsburgh, says sellers of the 1901 house he bought in August 2006 said its electrical wiring was completely upgraded, yet an electrical inspection revealed only one of three floors had been totally upgraded. The seller then knocked $6,000 off the sales price before they went to contract so Mr. Holtzman, 35 years old, could pay for the necessary work.

• “This place never floods.” Even arid states such as Arizona and New Mexico have occasional flash floods, and water and drainage problems aren’t always obvious. June Walbert, 52, a certified financial planner at USAA, a financial-services company, says her San Antonio house received a clean bill of health from a home inspector before she bought it six years ago. But 10 days after she moved in, the sewer backed up, flooding the house, and she had to fork over $2,800 for repairs. “It was a rude surprise,” says Ms. Walbert, who adds she asked her home inspector and the seller for compensation, but didn’t get it.

Bill Richardson, outgoing president of the American Society of Home Inspectors, says a general home inspection wouldn’t catch that unless the sewer line was visible from the basement or water backed up into sinks and tubs or toilets.

• “Taxes and maintenance costs are low.” Home buyers often gripe about tax and utilities bills that are higher than sellers said they were. Homeowner association and condo dues and assessments are also common complaints. Sometimes sellers simply underestimate the bills, or forget to include recent or expected increases, agents and brokers say. Taxes can also be deceptively low because of unrecorded improvements like decks and finished basements. Ask to see recent bills, and check with the tax assessor’s office for up-to-date information.

• “This is a quiet neighborhood.” Sellers may play down distractions that could drive you crazy, such as barking dogs or idling buses. A charming park by day could be a teen hangout at night. Your best bet is to view a property at different times of the day. “I can’t tell you how many times in my career buyers didn’t go there in the night time, even though I told them to. You spend more time in the house at night than during the day,” says Ms. Saatchi, the New York real-estate agent. Talk to neighbors and peruse the local newspapers and blogs to get a feel for a place, and check with police for crime.

• “There’s going to be a golf course, a pool and a party room.” Builders of many developments that broke ground during the housing boom ran out of money before the project was completed. Many homeowner and condo associations also are strapped because of delinquencies and defaults. Some states require upfront disclosures about this, but you should also ask neighbors, not just sellers, about any promised facilities. Also, check titles to be sure that specific parking spaces, storage units or other facilities are included in a property sale

Should homeowners who are behind in their mortgage be allowed to just walk way from the payments? A University of Arizona law professor suggests that maybe they should.

While not recommending that homeowners forgo their responsibilities, Professor Brent White told CNBC Monday that there is a different set of rules for the business community and homeowners.

“There’s a double standard when it comes to banks and homeowners,” said White. “Businesses often walk away from bad contracts, but homeowners can’t. The banks need to modify bad loans.”

White recently issued an academic paper saying that he’s surprised that more of the 15 million US homeowners who have underwater mortgages—or mortgages that are worth more than the value of the house— are still continuing to pay.

White said he was not advocating what homeowners should do, but raising a key issue—that homeowners need to think what’s best for them.

Somewhat predictably, those within the real estate industry are not endorsing White’s point of view.

“It’s not a responsible thing to do (not pay a mortgage),” National Association of Realtors spokesman Walter Maloney said. “He’s making assumptions about property values that are not correct. Values are starting to stabilize. More important, it’s not ethical to walk away from the mortgage.”

But White, in his paper, is throwing ethics right out of the equation. He says, people are too worried about the feelings of shame and embarrassment of a possible foreclosure and “ignore the powerful financial reasons for doing so.”

White attacks the banks in his thesis for “being slow to modify troubled mortgages and reluctant to reduce principal debts” with falling housing prices. He says homeowners have to think about themselves and what’s do right for them.

And White says the penalties for skipping mortgage payments are “not as bad as people think.” He says that “if you stay current with other creditors, one can have a good credit rating within two years. Most individuals should be able to plan in advance for a few years of limited credit.”

But having a bad credit rating even just for a couple of years, should not be a goal, says Diane Saatchi, vice president of Corcoran Realty, in East Hampton, New York. “I grew up knowing your most valuable asset is your credit rating,” Saatchi says. “It’s foolish to deliberately make credit rating worse. If you can’t or won’t make the payments, get in touch with lender, and work it out.”

In his paper, White laid out his strategy for the non-payment program: homeowners would buy the items they’ll need, like a car or even another house, over a couple of years just before they stop making mortgage payments and are eventually forced out of the home.

But that’s not much of a plan says Greg McBride, senior analyst at Bankrate.com.

“Buying a home is long term investment, it’s not a get rich quick scheme,” says McBride. “If you can make the payments you should, unless there’s a major event, like a job loss or transfer that makes things worse. If that happens, you can negotiate with the bank.”

While White’s ideas are mostly considered extreme within the housing industry, there is an alternative to stopping mortgage payments if you want leave a house that is “underwater’, says Johnny Martinelli Broker owner of Levy Mart Real Estate in Norman, Oklahoma.

“It’s called deed in lieu,” says Martinelli. “Say your house is worth $140,000 and the mortgage is valued at $200,000. You could go to the bank and say here’s the deed. If the bank agrees, they would take over the house. But you would have to claim the difference of the $60,000 on your tax returns. That’s considered income. Of course, you have to find another place to live.”

The tax rules can vary at times, due to recent changes in guidelines. (Details here)

Martinelli says this type of deal is better than a foreclosure and wouldn’t hurt a homeowner’s credit rating as much. Advantages to a lender include a reduction in the time and cost of a repossession, which can take months. Not all banks might accept such an offer, but there are some that do, says Martinelli.

Most analysts agree that if a homeowner can pay the loan, do so even if the value has dropped. If the owner can’t afford the payments, go to the lender to try and work out a lower payment. Not all lenders will, but experts advise trying.

There’s also a short sale if the house must be sold. That’s where the mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the homeowner. The homeowner sells the property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender.

Whatever action a homeowner is contemplating, they should think long and hard before doing something that could be short sited says Diane Saatchi.

“Blaming the bank is a losing proposition and could have long term consequences,” Saatchi says “Don’t think by not paying your mortgage you’re able to get ahead financially. It’s a risky idea and not worth it.”

Source: By: Mark Koba Senior Editor 2009 CNBC.com