Underrated Risks of Buying a Home

By Alex Beal
September 20, 2020

None of this should be construed as expert advice. I do not have expertise in law, construction, real estate, or engineering. This represents my anecdotal opinion of what I believe are underrated risks when it comes to buying a home. All buyers should do their own research.

This article discusses three risks that I believe are underrated by homebuyers. The first is expansive soil, which can damage a home’s foundation and structural integrity. The second and third are asbestos and flooding, which are much more common that most people realize.

Everything I Know about Foundations and Soil

What is expansive soil and what does it have to do with my foundation?

Expansive soil is soil that expands when wet and contracts when dry. If a house is built on expansive soil, and the soil underneath the house expands or contracts unevenly, it can cause the foundation to crack. When the foundation cracks, it can damage the structure above. The damage can range from cosmetic cracks in the drywall to doors that won’t close to damage so severe it makes the house structurally unsafe.

Both vertical and horizontal foundation cracks are possible. Vertical cracks result when the soil is pushing up on the foundation unevenly. Horizontal cracks result when the soil pushes the walls inward and causes them to buckle.

In parts of Colorado, it’s possible to have the opposite problem: collapsible soil. I know less about this, but you can imagine that if the soil underneath the foundation settles or collapses unevenly, this could also cause problems.

Why is this risk underrated?

A 1973 report commissioned by the National Science Foundation estimates that expansive soils cause as much property damage as hurricanes. An analysis of home warranty claims estimates that “25% of all U.S. homes will experience some structural distress during their lifetime, and 5% will experience major structural difficulties.” This second claim is made by a home warranty company, so I suspect it may be inflated, but I wouldn’t be surprised if the actual figure was as high as 10% or 15%, especially if “structural distress” includes minor damages such as drywall cracks.

Either way, this risk strikes me as underrated for a few reasons:

• Although expansive soils and hurricanes cause around the same amount of damage, hurricanes get much more media coverage. Because of this, I think many are surprised to hear about the amount of damage expansive soils cause. Granted, hurricanes also kill people, but I suspect this is only part of the reason they get more attention. Expansive soils cause damage slowly and silently, which makes for worse TV than the quick and dramatic destruction of hurricanes.
• While other disasters like fires and hurricanes are covered by homeowners insurance, foundation issues usually are not.
• Foundation issues stick with the house. Even if the issue is repaired, you will be forever required to disclose the issue to potential buyers, which could lower the value of the home. This is not true of all disasters. For example, a flood caused by a burst pipe is less likely to damage a home’s value because it’s seen as a random occurence and not indicative of something intrinsic to the house.

How much does it cost to repair a damaged foundation?

This spans a wide range. Because expansive soil expands in response to moisture, the repair may be as simple as patching drywall cracks, keeping the gutters clear, and ensuring the downspouts are discharging water at least 5 feet from the house. In more severe cases, piers may need to be installed under the house, which can run into the tens of thousands of dollars. Home Advisor reports that the average cost is in the $2,000 to$7,000 range, but since the range is so wide, the average might be deceptive.

Which areas are susceptible to expansive soil?

Given the damage that expansive soils can cause, it’s reasonable to want to avoid areas that have expansive soil. Unfortunately, on a macro level, most of Colorado’s urban areas have some risk of expansive soil.1

This doesn’t mean that all Colorado houses are built on expansive soil. Soil conditions are very heterogeneous on a mirco level and they can vary from neighborhood to neighborhood and even lot to lot.

How can I know if the property I’m interested in has expansive soil?

If you’re purchasing a new home, the builder should have done a soils analysis. I recommend asking for this report up front. If you don’t ask for it, it will probably be provided to you in a stack of documents at signing, and you won’t have time to review it properly. It’s usually called the “soils report” or “geotechnical report.” This will describe the risks revealed by the soil analysis and give a professional opinion on what can be done to mitigate the risks. It’s then up to you to determine if you trust the builder to follow those recommendations without cutting corners. Concrete things you can do are:

• Hire your own structural engineer to go over the report with you.
• Contact the engineer who wrote the report.
• Try to talk to the architectural engineer who’s working on your build.

Just because the soil report reveals expansive soil doesn’t mean the house will develop foundation issues. If the builder is taking the recommended precautions, it might not be any more risky than other options available to you. On the other hand, if the builder is cutting corners, you might be in for an expensive repair.

Another thing to consider is that a new build will often come with a structural warranty that may last as long as 10 years. In theory this should cover the house against major defects, but it’s important to read the fine print. Minor defects, like drywall cracks, are probably not covered. And often these warranties will contain binding arbitration agreements.

If you’re purchasing a used home, any adverse soil conditions should be part of the seller’s disclosure. That said, I have doubts about the reliability of these disclosures. The first issue is that the seller might simply be oblivious to any problems, and they can’t disclose what they don’t know. The second is that even if the seller does know about the issue, the law gives the seller lots of opportunities for plausible deniability. It’s my understanding that unless the seller had their house evaluated by an expert, they can claim that they didn’t understand the extent of the problem.

So if you can’t trust the disclosure, what can you do? Of course you’ll want to get the property inspected by a professional inspector, but I’d recommend also doing some basic inspection yourself. Foundation issues often manifest in ways that are obvious if you know what to look for:

• Cracks in the foundation are the clearest sign.
• Uneven or sloping floors.
• Cracks in the drywall. Often a seller will repair these before trying to sell the place, so new paint that looks like it’s covering a crack is another thing to look for.
• Doors that won’t close.
• A chimney that has detached or is leaning away from the house.

There are many other signs you can look for, and Appendix C of SP-43 A Guide to Swelling Soil for Colorado Homebuyers and Homeowners (PDF) does a good job of describing them. If you find any of these signs, you’re now in a tough position. Getting the opinion of a structural engineer is a reasonable next step, but in my experience, there is little they can say with certainty. It’s hard to make predictions about how bad the damage might get without a thorough history of the house. Are the cracks 20 years old, or have they just appeared? If the cracks have not worsened in 20 years, perhaps there’s no cause for concern. If they just appeared, the range of possible outcomes is much wider. Ultimately it will be up to you to decide if you want to take on the risk of a potentially expensive foundation repair.

Are old houses or new houses riskier?

Unfortunately I don’t have data on this, but there are two factors that make me suspect old houses are considerably more risky:

• Expansive soil wasn’t well understood in the past: My main source for this information is conversations with structural engineers, but one interesting data point is a 1968 report from the Building Research Advisory Board that states: “residential construction was, and largely continues to be, an inexact science […] The result frequently has been failure to recognize, or an inability to cope with, the often vast differences in soil, climate, construction, and other variables as one moves from building site to building site.” 2 That hardly inspires confidence.
• Most of Colorado is susceptible to expansive soil: See the map above.

The upshot is that many older homes were probably built on poor soil without the builder being aware.

Today, builders perform a soil analysis to inform the design of the foundation. It stands to reason that this reduces the risk, but there are still other sources of uncertainty. Will the builder cut corners? Will the foundation system be constructed to the engineer’s specifications? Will the foundation system fail despite being built to spec? Another theory I’ve heard is that as more land is developed, builders have started building in areas that were considered too risky in the past. Finally, whereas an old home might have a track record of no foundation issues, a brand new home can’t have a track record.

So this is a hard statement to make in general. An old home that has stood for 50 years without issue might be a safe bet. But if you were to pick homes at random, I suspect that older homes would be more risky.

Everything I Know about Asbestos

What is asbestos?

Asbestos is a mineral that was commonly used in construction materials as recently as the 1980s. It can show up in a surprising number of things from drywall texture, to pipe insulation, to tile, to glue, and even concrete. The substance is dangerous because if it becomes airborne and is inhaled it can plant itself deep in the lungs and cause asbestos related diseases such as asbestosis and mesothelioma. How does it become airborne? If an asbestos containing material is disturbed it can release particles into the air. For example, if there are asbestos tiles in your home and you try to remove them, the dust stirred up by breaking the tiles may contain asbestos.

How expensive is it to remove asbestos?

It can be very expensive. In Colorado, removing anything more than a tiny amount of asbestos must be done by a licensed professional. This process involves tenting the affected area, putting it under negative pressure, and even installing a shower and airlock system to ensure no asbestos escapes the work area. Home Advisor estimates that the average asbestos removal cost is $1,000 to$3,000.

How can I know if the property I’m interested in has asbestos?

If you’re purchasing a new home, I believe that the risk is minimal. Although the US has not banned the use of asbestos, it’s no longer commonly used in building materials. My understanding is that it was phased out in the 70s and 80s. This means that there’s no hard cutoff point, so if you want to be extra safe, you might want to limit your home search to houses built after 1990 or 2000.

If you’re purchasing a used home, it’s my opinion that you should basically assume any house built between 1920 and 1980 contains asbestos. Even if the house was built before 1920, I would wonder if any remodeling done since then could have introduced asbestos to the property. The Wikipedia article on asbestos states “Despite the severity of asbestos-related diseases, the material has been widely used all over the world, and most buildings constructed before the 1980s are thought to contain asbestos.”3 One proxy measure of the ubiquity of asbestos is a 2006 study on plumbers which showed that around 60% of plumbers are exposed to asbestos in a single week. To me this suggests that many homes contain asbestos and homeowners either don’t know or don’t care.

The presence of asbestos is something that should appear on the seller’s disclosure if they’re aware of the problem, but many homeowners aren’t aware of the risk and won’t bother to get their home tested. Older homes that have been flipped or completely remodeled may have already had the asbestos removed, but I wouldn’t assume it. Whoever remodeled the house will have tried to save as much material as possible. This might leave you in a situation where some walls or floors contain asbestos and some don’t, and it might not be obvious which is which. If the asbestos was professionally mitigated, you can try and find the work permit which might have more information. If the previous owner was not aware of the problem or wanted to take a gamble with their health, there may be no good records of the work that was done.

Is asbestos okay if I don’t plan on remodeling?

Since asbestos is safe at rest, and only becomes a hazard if the material is disturbed, you might think that it’s not a problem so long as you don’t plan on remodeling. While it’s true that it won’t become airborne on its own, my experience is that routine maintenance may require you to disturb it. If a pipe in the wall starts leaking, and you need to cut into the wall to fix it, the act of cutting the wall might release asbestos. If your house is flooded, and you need to remove and replace the tile, removing that tile might release asbestos. The list goes on and on. It turns out that covering the inside of your house in a dangerous material can be inconvenient.

How harmful is asbestos?

This is something I had a hard time finding data on. Most organizations state that there is no safe level of asbestos exposure (see the American Cancer Societies write up here). I imagine that in reality there is a dose-response relationship, where a higher dose increases the chance of becoming ill, but my guess is that there aren’t good ways of studying this.

Why is the risk of asbestos underrated?

The main reason I think asbestos is underrated is that it’s not appreciated how common asbestos is. Most people are surprised to hear that nearly all old homes are at risk of containing asbestos. They’re also usually surprised by the range of materials it can show up in. Most people know insulation can contain asbestos4, but they’re surprised to hear that tiles, concrete, and drywall texture (including popcorn ceilings) can contain it. I think it’s also easy to under appreciate the consequences of living in a house with asbestos. It has to be disturbed to be dangerous, but being forced to disturb it is more common than you might think.

Everything I Know About Flooding

What’s a flood?

Everyone knows what a flood is, but one thing to distinguish between is floods caused by water outside the house getting in, and water inside the house getting where it shouldn’t (ie a pipe bursting). This section is about water outside the house getting in.

How do I know if a house I’m interested in is at risk of flooding?

FEMA publishes floodplain maps that predict if an area is in a 100 year floodplain, a 200 year floodplain, or not in a floodplain. 100 year floodplains flood once every 100 years on average. 200 year floodplains flood once every 200 years on average. I assume that areas not in a floodplain can still flood, but, in theory, it should occur less than once every 200 years on average.

When buying a home, new or old, it’s prudent to check these maps. If the house you like is in a 100 year floodplain, you’re likely to find out whether you want to or not because federally backed mortgages (ie most mortgages) require that homes in 100 year floodplains carry flood insurance, and this insurance is often quite expensive. Premiums can be hundreds of dollars per month or more. If you’re in a 200 year floodplain, your bank won’t require insurance, but that doesn’t mean your property won’t flood.

Where can you check these maps? I’m not aware of a single source, but often your local government will post them on their website. For example, Longmont publishes their maps here.

Why is the risk of flooding underrated?

The first reason is that homebuyers believe floods are more rare than they truly are. In this case, the probabilities involved can be counter intuitive. Consider the following: what is the probability that a house in a 100 year floodplain will be flooded over the life of a 30 year mortgage? 26%. What about a 200 year floodplain? 14%. Most people are surprised to hear how high these probabilities are. You might think that since it only happens once every 100 years, then it should happen less than once every 30 years. This is true on average but these are only averages. It will occur more than average some of the time and less than average other times.

The second reason flooding is an underrated risk is that floods caused by outside water getting in aren’t covered by homeowners insurance. The damage caused by flooding can be truly catastrophic and repairs can easily rise into the tens of thousands of dollars. If you’re in a 100 year floodplain, you’ll have the option (or be required by your bank) of buying federally backed flood insurance, but my understanding is that the coverage isn’t very good. Federal insurance isn’t even offered in 200 year floodplains. Private insurance might be available, but it can be quite expensive, and the coverage might not be great.

The third reason flooding is an underrated risk is that if you do get flooded you’ll be forever required to disclose it to future buyers. This could reduce the value of the home. Being in a floodplain is bad enough. Being in a floodplain and having a history of flooding is worse.

Finally, climate change is causing extreme weather. We’re already seeing the effects when it comes to wildfires and hurricanes. I suspect that 100 year floodplains might soon become 90 year floodplains or worse.

Correlated risks

Another reason these risks are underrated is that they are correlated. Consider the following scenario: Suppose heavy rains flood your house. This might cause damage to your floors and walls. Once wall insulation gets wet, it’s nearly impossible to dry, meaning it will need to be removed and replaced. This requires tearing down the drywall, which will force you to face the fact that your walls contain asbestos. Further suppose that the flood is just one event in what turns out to be a high rainfall year. This could mean that the soil around and under the house has absorbed an especially large amount of moisture, which may exacerbate or cause foundations issues. In other words, when it rains, it pours. I think that even those who are aware of these risks often don’t consider the fat tail of correlated risks. You might feel prepared for a single disaster, but a chain reaction could put you under water.

The Seller’s Disclosure

One thing I’ve mentioned throughout this article is how the seller’s disclosure can be unreliable. The main issue is that many home owners simply don’t know what’s going on with their homes, and they can’t report what they don’t know. Another issue is that the seller can claim ignorance even if they weren’t ignorant, and the law gives lots of leeway for plausible deniability. My understanding is that, in practice, an issue isn’t really an issue until an expert has inspected it and declared it an issue. This leads to the third problem that homeowners are actually disincentivized from figuring out what’s wrong with their home. Perhaps they suspect their home contains asbestos, but they aren’t going to go out of their way to get it tested, because if it comes back positive, they’ll need to reveal it on the disclosure. All this is to say that a clean disclosure should be treated with a bit of suspicion.

Should I just be a renter for life?

Maybe 🤷‍♂️

I actually do think renting is underrated. If you’re fine with living in an apartment, I think there’s something to be said for avoiding real estate and investing in stocks instead (or maybe a REIT if you want exposure to the real estate market). Even setting the financial aspect aside, I think there’s something to the idea that the more you own, the more it owns you. But I’ll have to save that for another post.

1. This graphic comes from: Noe, David C., Candace L. Jochim, and William P. Rogers. SP-43 A Guide to Swelling Soil for Colorado Homebuyers and Homeowners. 2nd ed. Special Publications, SP-43. Denver, CO: Colorado Geological Survey, Division of Minerals and Geology, Department of Natural Resources, 2007.↩︎

2. Criteria for selection and design of residential slabs on ground. (1968). Page 3. Building Res. Advisory Board, Nat. Academy of Sci., Washington, D.C.↩︎

3. Wikipedia contributors. “Asbestos.” Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 23 Aug. 2020. Web. 3 Sep. 2020. Archived source↩︎

4. One common misconception is that it’s common in wall insulation. I don’t think this is true. It shows up more often in wrapped pipe insulation.↩︎