Buying A Home: Inspections and Insurance

Understanding Inspection

A home's physical condition greatly affects its value. You'd feel horrible if you paid top dollar for a home that you thought was in tip-top shape and then discovered after you bought it that the house was riddled with expensive defects. And yet, unless you're a professional property inspector, you probably won't have the faintest idea how much corrective work a house needs simply by looking at it.

Most states (but certainly not all) now require that sellers and real estate agents make full, immediate disclosure to prospective buyers of all known mechanical, structural, and legal problems associated with owner-occupied residential property.

Patent and latent defects

Property defects come in two general categories -- patent and latent:

Patent defects are right out in the open for all the world to see. You don't need a professional property inspector to point out glaringly obvious stuff (like water stains on the ceiling, cracks in the wall, or a flooded basement.) You do, however, need a trained professional to tell you whether these defects are signs of major problems or merely inconsequential blemishes.

Latent defects can be even more financially devastating than patent defects because they're hidden and out of sight -- behind walls or concealed in inaccessible areas. Faulty wiring, termite damage, a cracked heat-exchanger in the furnace, and health and safety-code problems (such as lead in the water pipes and asbestos insulation) are some examples of latent physical flaws. Legal blemishes, such as zoning violations and fraudulent title claims, illustrate another kind of invisible latent defect that only experts can detect.

Why Properties Should be Inspected
Suppose that you spend $250 to have the home you want to buy completely inspected by a qualified inspector, and you find out that nothing is wrong with it. Now you can sleep soundly, knowing that your home doesn't need any corrective work. If you skip the inspection to save $250 and later discover that your house needs $25,000 worth of repairs, you'll end up spending $100 in repairs for every dollar that you "saved."

Here are reasons why every property should be inspected prior to purchase:

All properties should be inspected. Period. Inspect detached residences, attached residences, single-family dwellings, multifamily dwellings, condos, co-ops, townhouses, and anything else that has a foundation and a roof. If you're spending big bucks for a property, protect your investment by having it inspected.

Types of Inspections

What inspections should you get to protect your investment? That depends on what area of the country you live in, how the building in question is constructed, and what you plan to do to the property after buying it. Here are the three most common inspections -- which we recommend be done after you have an accepted offer to purchase but before removing your inspection contingencies:

Prepurchase interior and exterior components inspection
No matter whether you're buying a wood-frame cottage in the country or an urban condo in a 20-story, steel-and-concrete building, you need a complete inspection of the property's interior and exterior. The inspection should cover such areas as the roof and gutters, plumbing, electrical work, heating and cooling systems, insulation, smoke detectors, kitchen, bathroom, and foundation. This type of inspection usually takes several hours to complete and costs from $200 to $500, depending upon the size of the property.

Don't be surprised if the property inspector recommends additional inspections. Good property inspectors refer their clients to specialists, such as roofers, structural engineers, and pest-control inspectors, if they discover a problem beyond their scope of expertise.

Pest-control inspection
Temperate climates, such as in the South and West, are a mixed blessing. You're not the only one who loves warm, balmy weather. So do termites, carpenter ants, powder-post beetles, dry rot, fungus, and other wood-munching infestations or infections. If these are a problem in your area, you'll also need a pest-control inspection. These inspections generally cost from $75 to $225.

Pest-control inspections are very limited in scope - the inspectors check for propertydamage caused only by wood-destroying insects (infestations) and organisms (infections, such as dry rot and fungus). Although homes made of wood or wood-and-stucco are the wood-destroyers' primary targets, even brick homes aren't safe.

Architect or general contractor's inspection
You need an architect or a general contractor on your team if you're buying a fixer-upper, intending to do corrective work, or planning a major property renovation, such as adding rooms or installing a new bathroom. The architect or general contractor can tell you whether what you want to do is structurally possible and meets local planning codes for such things as height restrictions and lot coverage. This inspector can also give you time and cost estimates for the project.

Architects and general contractors usually don't charge for their initial property inspection because they are hoping to get your business. Don't expect them to give you a completely objective assessment as to whether you should buy the property, because they'd probably love to do the work for you.

Optimizing Inspections

Here are guidelines for getting the biggest bang out of the bucks that you invest in a prepurchase property inspection:

Always make your offer to purchase a house subject to your review and approval of the inspection reports. Doing so gives you the opportunity to either negotiate a credit or price reduction for corrective work that is discovered during the inspections or, if you wish, get out of the deal.

Have your agent order a permit search on the property to find out whether electrical, plumbing, or other repairs have been performed. But always pay for your own inspection by an inspector of your own choosing.

Read your property inspector's report carefully. If you don't see some defects listed in the report that your inspector specifically mentioned during the inspection, call the inspector to find out why. Don't be the least bit shy about calling your inspector to get a detailed explanation of anything you don't completely understand.

To minimize the cost of corrective repairs, get bids on the job from several reputable, licensed contractors. Never try to save money by using unlicensed contractors to do the work without permits. Many states require that housesellers disclose to prospective purchasers the fact that work on the house was done without permits.

Use your property inspector during the contractor bidding process. If the contractors have questions regarding items discussed in the inspection report, refer them to the report's author for clarification. For an additional fee, some property inspectors will help you evaluate bids you receive to do the corrective work.

Prepurchase property inspections are intended to give you a factual basis for negotiating the correction of big-ticket defects -- not to nickel-and-dime sellers over credits for stained carpets and worn curtains. Let your offering price reflect the home's reduced value due to normal wear-and-tear cosmetic defects.

If your agent or the seller offers to pay for a home warranty plan or home protection plan (that is, a service contract that covers some of your home's major systems and appliances), it wouldn't be gracious of you to turn down a freebie. Never accept such a plan in lieu of an inspection.

Homeowner's Insurance

When you buy a home, most lenders require that you purchase homeowners insurance. Nobody likes to spend money for insurance. But if something could cause you a financial catastrophe, you should spend a relatively small amount of money to protect against losing a great deal of money.

In addition, if someone were injured or killed in your home, your home can lead to a lawsuit. The following sections tell how to get the homeowners coverage that you need.

The cost of rebuilding
If your home is destroyed, which most frequently happens from fires, your insurance policy should pay for the cost of rebuilding your home. The portion of your policy that takes care of this loss is the dwelling coverage section of the policy.

The amount of this coverage should be equal to the cost of rebuilding the home that you own. The cost to rebuild should be based on the square footage of your home.

Your policy's dwelling coverage amount should not be based on what you paid for the home or the amount of your mortgage.

If you're buying a condominium or cooperative apartment, examine the coverage that your building's homeowners association carries
Guaranteed replacement cost

Get a policy that includes a guaranteed replacement cost provision. This provision ensures that the insurance company will rebuild the home, even if the cost of construction is more than the policy coverage. Find out how your insurance company defines guaranteed replacement cost coverage -- each insurer defines it differently.

The most generous policies, for example, pay for the full replacement cost of the home, no matter how much the replacement ends up costing.

Other insurers set limits -- for example, they agree to pay up to 120 percent of your policy's total dwelling coverage.

Lawsuit protection
Liability insurance protects you against lawsuits arising from bad things that happen to others while they are on your property. For example, suppose a litigious passerby happens to slip on something that was left on your driveway. Carry enough liability insurance to protect at least two times the value of your assets.

Personal property protection
The amount of personal property coverage is usually set at about 50 to 75 percent of the amount of dwelling coverage. If you are a condominium or cooperative apartment owner, however, you'll generally need to choose a specific dollar amount for the personal property coverage that you want.

Some policies come with personal property replacement guarantees that pay you for the replacement cost of an item rather than for the actual value of a used item at the time that it's damaged or stolen. If this feature is not part of the standard policy sold by your insurer, you may want to purchase it as a rider (add-on provision), if such a rider is available.

If you ever need to file a claim, having documentation as to what personal property you had helps. The simplest and fastest way to document your personal effects is to make a videotape of your belongings. But be sure to place any documentation somewhere outside your home in case of a fire.

Title Insurance

Title insurance assures homeowners and mortgage lenders that a property has a marketable (valid) title. If, for example, someone makes a claim that threatens your ownership of the home, the title insurance company protects you and the lender against loss or damage, according to the terms and provisions of your respective title insurance policies.

Most of your title insurance premium, which is based on the sale price of the home, is spent on research to determine who legally owns the property that you want to buy and to find out whether there are any unpaid liens or judgments recorded against it. Because title companies do a good job of eliminating title risks before folks buy property, only about 10 percent of the premium goes toward indemnifying homeowners against title claims after the closing. You pay this premium only once at closing to insure yourself as the owner for as long as you own the property.

If you refinance your mortgage, your new lender will require a title insurance policy for themselves insuring that their mortgage lien is in first place on the property. The premium due at the refinance closing will be based on the new loan amount and will protect the lender from title risks (such as income tax liens or property tax liens, for example) that may have been recorded against your property between the time your previous policy was issued and the date of the refinance.

Two kinds of title insurance
As a homeowner, you have a choice of two different kinds of title insurance. Depending on the extent of the coverage that you desire, you can either get a standard-coverage policy or an extended-coverage policy.

Paying for title insurance
Title insurance costs vary somewhat, depending upon the geographic area in which your home is located, the home's purchase price, and the type of coverage that you get. In addition to the owners policy that we recommend you purchase to protect your investment, you'll also need to buy a policy to protect the mortgage lender against loss on the loan amount.

Local custom and practice determine who usually pays for title insurance. The payment for title insurance is a negotiable item. Regardless of local custom, if you're in a strong buyer's market, the sellers may offer (or you could ask them) to pay your title insurance costs in order to put the deal together. If, conversely, you're bidding against several other buyers for a particularly desirable house, you'd be smart to sweeten your offer by paying for title insurance, even though local custom prescribes that sellers pay for it.

Title Risks
All sorts of irregularities in the history of the various people who have owned the property since it was originally constructed can affect a property's title. Learn about some causes of these hidden risks to titles:

Secret spouses: Sometimes a present or former spouse no one knew about will show up out of the blue and file a claim against the property. This explains why title-company representatives are so curious about your marital status. They must know whether you're single, married, divorced, or widowed in order to keep ownership records accurate.

Undisclosed heirs: When property owners die without wills, probate courts must decide whom their rightful heirs are. Court decisions may not be binding on heirs who weren't notified of the proceeding. Even when there's a will, probate courts must sometimes settle questions concerning the will's interpretation.

Questionable competency: Minors and people adjudged to be mentally incompetent can't enter into binding contracts unless the transaction is handled by their court-appointed guardians or conservators.

Human errors: This category covers everything from clerks who overlook liens recorded against property and other important documents while doing title searches, to surveyors who incorrectly establish property boundaries.

Forgery and fraud: Sellers are sometimes fraudulently impersonated. By the same token, signatures can be forged on documents.

Name confusion: A lot of title problems are caused by people who have names similar (or identical) to the buyer's name or seller's name. If you have a fairly common last name, you'll probably have to fill out a Statement of Information to help the title company distinguish you from other people with names like yours. If you have an ordinary name like Brown, Chen, Garcia, Gonzalez, Johnson, Jones, Lee, Miller, Nguyen, Williams or Smith, expect to be asked to complete a Statement of Information.

What type of information is requested in a Statement of Information? You (and your spouse if you're married) will have to provide your full name, Social Security number, date and year of birth, birthplace, date and place of marriage (if applicable), residence and employment information, previous marriages, and the like. This information will be used to differentiate others with names similar to yours.

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