When it comes to buying an old property, homeowners must prepare for unexpected repairs, potential structural problems, non-working appliances and other issues associated with poor construction. And while many states have seller disclosure laws to ensure buyers don't end up with unpleasant surprises after the closing, prospective homeowners shouldn't count on them to alert them to all potential damage and necessary replacements.
Patricia Kantor, a member of the legal firm Mintz in New York City, says sellers in her state can opt out of the seller disclosure form by paying $500. Even in states with rigorous seller disclosure laws, like California, it's easy for sellers to feign ignorance about problems discovered after a sale. "The seller thinks, 'Who's going to find out?'" says Alisa Cunningham, an agent with the real estate firm Douglas Elliman in Los Angeles.
If you discover problems after a sale or think a seller withheld information on a disclosure form, you have recourse through the court system, but it can be expensive to hire an attorney and build a legal case. Instead, see if options such as mediation or arbitration can reduce costs.
Better yet, follow the pro tips below to avoid buying a lemon in the first place.
Look for new construction protections. Buying a house from a builder isn't the same as buying an existing home. "They are totally different beasts," explains Vincent Averaimo, a managing partner of Milford Law in Milford, Connecticut.
Builders often include a one-year warranty with their work, and some states even require them by law. New York, for example, requires builders to guarantee that a new home will be free of material defects for six years. Plumbing, electrical and heating systems are covered for two years. Other states, like Georgia, require builders to provide a warranty, but don't spell out its specific terms.
In states with builder warranty statutes, there may be a process by which a complaint is handled. They may go through a state department, arbitration or the court system.
Remember: There are limited options for existing homes. It's a different situation with existing homes. If you believe the seller lied on their disclosure form, you can take legal action against them. However, these can be difficult cases since there may be no physical evidence that defects were deliberately concealed. "You have to be able to prove it," Cunningham says. "And that's the challenge."
Since a lawsuit can sometimes be more expensive than the needed repairs, Kantor says it's not advisable in many situations. Instead, buyers can try to work with sellers to reach a settlement outside of the court system. "Sometimes, a good broker can help mediate," Kantor says.
Other times, litigation is not allowed if the real estate contract includes an arbitration clause. These may require buyers to go through a binding arbitration process to settle disputes.
Krista Mashore, a realtor in Brentwood, California, says buyers in some states can offset the costs of mediation and arbitration by buying real estate risk management services. Offered through qualified brokers and agents in California, Nevada, Arizona and Hawaii, this protection can cover the cost of arbitration and mediation and potentially reduce litigation fees.
Getting your home inspected is a must. In addition to the cost, another drawback of litigation is that it may be difficult to locate a seller after the closing. Considering these two obstacles, it may be easier for homebuyers to identify potential problems prior to a sale rather than litigate them later on.
The best way to identify a potential issue is to use an experienced inspector to review the property. "You don't need them to turn the faucets on and off," Kantor says. "You can do that yourself." Instead, an inspector will complete a thorough review of the interior and exterior of a home to pinpoint potential problems such as water damage, foundation cracks and improper wiring.
A general home inspection can cost $200 to $500, depending on the size of the property. Cunningham also recommends having separate inspections of common problem areas such as sewer lines and chimneys. These may run $250 each.
"It's easy to spend $1,200 on inspections and that seems huge," Cunningham says. "But it's such a small amount of money for peace of mind." She says homebuyers will never regret inspecting a home.
Uncover problems with other resources. While professional inspections are essential, homebuyers have other tools at their disposal. "The buyers should also request a CLUE report," Mashore says. A Comprehensive Loss Underwriting Exchange report shows whether there have been any insurance claims on the property. A CLUE report can be a valuable tool for buyers, but only a homeowner can request a copy from the data company LexisNexis. As a result, buyers can obtain it only through the seller.
Buyers should also educate themselves on where potential issues are likely to be found in a house. Sewer lines, plumbing and chimneys are all areas associated with expensive repairs.
What's more, "the basement is a breeding ground for problems," Averaimo says. Asbestos tiles, mold and water damage are all common issues found there. Averaimo adds that buyers should be on the lookout for underground oil tanks. If a capped-off pipe is coming into the basement, there's a good chance a tank is on the property somewhere. If it hasn't been properly abandoned or removed, it could turn into a costly problem for a new homeowner.
Keep in mind, home warranties are not a cure-all. In many parts of the country, such as California and Connecticut, existing home sales may come with a warranty. Cunningham says it's standard practice to build a home warranty into a real estate contract in California. The cost is typically covered by sellers and can run from $400 to $800, depending on the level of coverage. The most common warranty used by Cunningham for her clients costs $515 for one year of protection that covers appliances as well as heating, air conditioning and other major systems.
However, don't expect a home warranty to replace broken systems. In most cases, warranties will include repairs; often, there is a service charge of $65 to $100 for these to be completed. If a replacement is needed, expect to get a base model. For more expensive problems, such as an irreparable furnace, you may get a credit that will only partially pay for a new system. Plans vary, so make sure to check the fine print.
Cunningham, who has personal experience with warranty claims, says that while they are imperfect, home warranties can be beneficial. This is especially true for those who have moved to a new area and don't yet have trusted service providers nearby. "It's great to call the home warranty company and have them handle it," Cunningham says.
"I don't think it's a bad idea for the cost that's involved and what you can get out of them," Averaimo says. Homebuyers should remain aware, though, that buying a warranty is not a replacement for having proper inspections and due diligence done prior to a purchase.
Know the lingo.
It’s spring and the start of the home-selling and buying season, and you're probably already starting to see the “For Sale” signs posted in yards as well as online advertisements beckoning prospective homebuyers. But before you allow yourself to be beckoned, it would behoove you to familiarize yourself with the following 10 terms – especially if this is your first time making one of the biggest purchases of your life.Fixed-rate mortgage
This means the interest rate you pay on your home loan won't change. Over the years, your mortgage payment will likely change some – property taxes will likely rise, your homeowners insurance might climb or fall, or you might shed your PMI (a term we’ll come back to). But generally, if you have a fixed-rate mortgage, your monthly mortgage payment won't change much over the years.Adjustable-rate mortgage
Also known as an ARM, this is essentially the opposite of a fixed-rate mortgage. You'll have a fixed rate for several years, maybe five or 10, and then the interest rate adjusts according to the fully indexed interest rate, often the prime rate, which is what banks charge their most creditworthy customers. So while your interest rate and payments will likely be lower in the beginning than those of the homeowner with the fixed-rate mortgage, hope that interest rates remain low throughout the life of your loan. As interest rates climb, so too will your own interest rate and monthly payments.Prequalified
This can be a confusing term, mostly because homebuyers tend to mix it up with preapproved, says Rick Hogle, chief strategic officer at Supreme Lending, a mortgage company in Dallas. If your lender tells you that you're prequalified for a house, that's a good start – but you're still a long way from being a homeowner. "Prequalification requires less documentation," Hogle says. "It provides a general idea of the loan amount in which a homebuyer might qualify." This way, you can start looking for a home and have a sense of what type of house you can afford. Preapprovals require the submission of many more documents, such as pay stubs, bank statements and tax returns.Conventional loans
These are the typical loans that many people, but not all, apply for when they want a mortgage. "Those with low credit scores usually won't qualify for conventional loans," says Passard Dean, professor of accounting at Saint Leo University in Saint Leo, Florida. "In the past, you were also required to put a down payment of at least 5 percent. However, with the new guidelines from Fannie Mae and Freddie Mac, you can now put a down payment as low as 3 percent. These loans generally require a credit score of above 650.Federal Housing Administration loan
Federal Housing Administration loan
Have poor credit? You'll probably get one of these, also known as FHA loans. “These are excellent for first-time homebuyers with subprime credit scores," Dean says. "In addition to more relaxed credit scores and lower upfront costs, the down payment can be as low as 3 percent."Appraisal
This is an estimate that determines what your property is worth. Banks need homes to be appraised, in part, so they don't lend you, say, $300,000 for a house that's only worth $175,000. After all, if you can't pay the loan, the bank will send you packing and will sell the home. But most people won't buy a $175,000 home for $300,000, and knowing that, the bank doesn't want to lend you more than your house is worth.Private mortgage insurance
Private mortgage insurance
This is a monthly insurance payment you'll have to pay if the down payment on your house is less than 20 percent of the appraised value or sale price. If you don't want to pay the PMI fee – which often ranges from .03 to 1.15 percent of the original loan, divided into 12 monthly payments – you'll have to fork over a bigger down payment or buy a cheaper house. Usually, PMI insurance isn't something you pay forever (it just seems like it, if you have a small down payment). Typically, after your payments reach 20 percent of the value of your home, you stop paying PMI.Closing costs
These are fees related to buying a house that your lender charges you, or you rack up from various third parties, such as a home inspector. According to the online real estate database Zillow, expect your closing costs to be 2 to 5 percent of the purchase price of your home. That may sound like a lot, but there are many costs involved in closing the deal, from buying title insurance to paying for points and attorney and surveyor fees.Points
One point is a charge equal to 1 percent of the loan amount. So if you're buying a $200,000 house, and a lender is charging you 2 points, that's $4,000. Three points, $6,000. Points are prepaid interest. The more points you pay, the lower your interest rate will be. If you're planning to live in your house a few years, you could make a good argument for not paying points, but if you believe you'll go the distance with a 30-year mortgage, it generally makes financial sense to pay as many points as you can to snag that lower interest rate, which, in the long run, could save you money.Escrow
This word can be used in a few different ways, but when you think escrow, think of a third, neutral party. For instance, a deposit you make after your offer on a home is accepted would then be put in escrow. Usually you can’t recoup these deposits if you back out of the contract, but if the seller decides to sell the home to somebody else, you’d most certainly get your deposit back. The escrow account keeps your deposit safe so the homeowners don't inadvertently spend your money. You might also hear your lender talking about an escrow account where your property taxes and homeowners insurance go until they're paid.Read More
With more than a decade of reporting experience, Ms. LaPonsie’s work has been featured on MSN, CBS MoneyWatch, Yahoo Finance, NerdWallet and numerous other sites on the web. She has been a guest of Consumer Talk with Michael Finney and The Steve Pomeranz Show.
A native of Michigan, Ms. LaPonsie received her bachelor’s degree from Western Michigan University. You can follow her on Twitter or connect with her on LinkedIn.
Devon Thorsby | June 5, 2019
Homeowners should not fret, as long as they're prepared for the possibility of a downturn.