How to Become a Satisfied Homeowner
You’re about to enjoy the wealth-building and personally enriching experience of home ownership. But before you buy, check these issues. Are you confident this is the home for you? Or are you being pushed into it by others? Do your advisors understand your priorities and possibilities? Are they influencing you according to their own interests and biases?
Review the property’s condition and the inspection report. Have you protected yourself against after-closing surprises and unanticipated expenses? Have your real estate agent and mortgage loan representative pulled together all agreements, documents, and verifications that are necessary to effect a smooth closing.
In this article we look at some of the common mistakes that home-buyers make as they move into the final stages of homebuying and the early stages of home ownership. Attend to these details and you can count on a homebuying experience that will reward you for years to come.
Our friends told us we were getting a great deal.
LESSON: Critically evaluate the advice of friends, relatives, realty agents, and lawyers.
After finding the home he wanted, Steve Carver invited several friends to take a look at the house he had selected. “This house is great,” they told him. “You’re really getting a good buy.” These words of encouragement were exactly what Steve wanted to hear. Although Steve had asked his friends what they thought, he didn’t really want their honest opinion. More than anything, he wanted support for the decision he had already made.
Steve had fallen in love with the home’s rear deck and canyon views. He didn’t want to hear about the small size of the home’s bedrooms, its lack of closet and storage space, or the home’s needed repairs, which included an aging and leaky roof. Sensing Steve’s enthusiasm for the house, his friends steered clear of giving him the advice he really needed. Steve then used the opinions they did offer to calm his anxieties about the home’s problems.
Steve bought the house, but the high costs of repairs and cramped living conditions soon dampened his enchantment with his deck and canyon views. Steve admitted that he had made a mistake. Along with being captivated by the home’s desirable features, Steve had misinterpreted and misused the advice he had sought.
Like Steve, when you buy a home you’ll turn to advice from friends, relatives, your realty agent, and maybe a lawyer. But before you interpret and rely on this advice, answer the following questions.
Advice or Approval?
Do you really want critical counsel? Or do you want someone who agrees with you? There’s an old saying among consultants that their clients often want to use advice like a drunk uses a lamppost—for support, not illumination. If support is what you want, your friends will probably oblige. But if that’s the case, make sure you recognize this advice for what it is.
Knowledge or Ignorance?
Do those you ask for advice possess the information, experience, and expertise necessary to advise you intelligently? Unless your friends or relatives have recently been shopping for a home in the same neighborhood where you’ve been looking, they can’t tell you whether you’re getting a good buy. If your lawyer sister hasn’t seen a real estate contract since her Real Property I course in law school, chances are she’s not the one who should review your purchase agreement.
You may work with one of the best real estate agents in the city. But if your home tour takes you into neighborhoods or communities where your agent can’t find her way without studying a map, it’s time to bring in an agent who’s more familiar with the area. Whether friend, relative, lawyer, or sales agent, just because someone offers an opinion, it doesn’t mean he or she actually knows enough to provide the counsel you need.
Your Preferences or Theirs?
Do your advisors understand your needs and goals? Or are they applying their own preferences or standards? Here’s an area where nearly everyone could do better. When we ask for advice, we often don’t explain our needs, goals, or the most important things we’re trying to achieve. Sometimes we don’t even know ourselves. Likewise, when we offer counsel, it’s natural for us to shade our advice toward our own biases. We don’t clearly see the other person’s perspective.
If you ask your brother to tell you what he thinks of that darling three-bedroom ranch in Windsor Heights, he could answer, “No way! I wouldn’t even think about living there.” Has your brother answered according to your needs? Or does he have some personal bias against ranch-style homes or Windsor Heights? What if your agent tells you Troy Woods is not a good area? Should you accept that advice at face value? Or should you question why the agent holds that view? Maybe the agent doesn’t like Troy Woods because he doesn’t think much of its schools. But if you don’t have kids or you’re planning to send your kids to a private school, the reasons for your agent’s objections might even work to your advantage. Maybe with less attractive schools, Troy Woods would provide more house for the money. Rather than being helpful, your agent’s (or brother’s) advice could work against your most important needs.
If people fail to understand what you want, or if they can’t put aside their own biases, their advice will not serve you well.
Conflict of Interest?
Do your advisors’ interests conflict with yours? Whenever you rely on the advice of other people, think how their interests may conflict with yours. Some unethical realty agents may try to talk you into a home or financing that doesn’t meet your needs just so they can gain a commission or a kickback. Your parents may talk against an outlying neighborhood because they’d rather see you live closer to them. Your friends could advise you not to buy a home because they’re jealous, or maybe they think that if you move you will drift apart as friends.
People have their own reasons for the advice they offer. They may want to help you make a better decision. But they may have their own agenda, too. When someone says, “This is what you ought to do,” take a moment to reflect. Look beyond face value. Think through the actual knowledge, facts, experience, and motives that prompt such advice.
The lawyer created more problems than he solved.
LESSON: Keep the lawyer(s) under control.
“Although I wasn’t in the market to buy a house,” says Ramon Williams, “that’s exactly what I did. One day I happened to drive by a for-sale-byowner open house. Just out of curiosity, I went in to look. Sure enough, by the end of the afternoon the owners and I had reached an agreement. But rather than proceed on our own—or bring in a real estate agent—we thought it best to consult a lawyer. Unfortunately, the lawyer we went to created more problems than he solved.”
Lawyer Wins, Clients Lose
“First off, instead of formalizing our agreement as we requested, the lawyer sided with the seller,” Ramon continues. It turned out they had both played football (in different years) at the same Dallas high school. For at least the first hour of our two-hour office conference, the seller and the lawyer talked Texas football.
“After that, the lawyer offered his unsolicited opinion that the seller was not getting a good price for his home, and then tried to rewrite other terms where we had already reached an agreement. By the time the conference ended, the cordial relations the seller and I had originally developed were quickly moving toward hostility. The seller wanted to revise. I wanted to carry through our original intent.
“The point was that we had a written and signed agreement. We didn’t go to the lawyer for advice about what either of us should have done. We only wanted him to make sure the language we used in our agreement actually meant what we had wanted it to mean.
“Eventually, our basic agreement held with just a couple more concessions on my part. Then the seller and I left the meeting by instructing the lawyer to redraft our final agreement in legalese. The contract came back okay, but our surprise came when we got the bill of $1,050. Seven hours of billing at $150 an hour, including the hour wasted on talk of Texas football. At least on this point the seller and I agreed. The bill was outrageous.”
Ramon’s bad experience with the lawyer who handled his home-buying transaction is not unusual. As evidenced by the proliferation of lawyer jokes, record numbers of complaints to bar associations, and increasing attorney malpractice cases, consumer satisfaction with lawyers has reached an all-time low. In fact, the late Chief Justice of the United States, Warren Burger, complained that half the lawyers he saw practicing before the U.S. Supreme Court were incompetent.
If you choose to bring a lawyer into your homebuying transaction, guard against three widespread problems: overbilling, underqualification, and gratuitous advice.
When you discuss fees with a lawyer, look beyond the hourly rate. Get a firm estimate of the total bill. In my dealings with lawyers, I’ve found that some bill eight hours for the same work another lawyer could perform in two. I once hired a lawyer to answer a question. He billed for 12 hours of research and still failed to provide an adequate answer. When I consulted another attorney, I got a sensible answer in less than 30 minutes—no research required.
Verify whether the lawyer routinely handles the type of problems you’re asking about. Divorce lawyers may know next to nothing about real estate contracts, escrow, and title insurance. Verify the lawyer’s successful experience in homebuying transactions.
Beware of gratuitous advice. Most lawyers love to talk and give their opinions regardless of whether they know what they are talking about. I was once in a mortgage closing where in response to a buyer’s question the attorney began to explain the mortgage interest figures on the settlement sheet. But rather than admit he didn’t know how to calculate mortgage interest, the lawyer tried to bluff his way through. On other occasions, I’ve listened to lawyers give (unsolicited and incorrect) advice about sale prices, investment returns, zoning ordinances, neighborhood desirability, and a myriad of other topics.
Lawyers should understand the area of the law where you need help. But they also should know what they do not know. Further, they should not give advice that extends beyond their own experience and expertise. Just as important, don’t ask lawyers for opinions in areas outside their competence and experience. Few lawyers can resist that temptation.1
1In fact, law articles on malpractice prevention repeatedly tell lawyers to hold their tongues when faced with questions about which they are ignorant. Yet, most do not.
Finally, realize that, nationwide, far more trouble-free homebuying transactions take place without lawyers than with them. In fact, in Maryland so many homebuyers were successfully buying homes without a lawyer that the bar association lobbied for a law that would force home-buyers to hire lawyers.
We shouldn’t have taken escrow allowances for repairs.
LESSON: When you buy a home that needs extensive repairs, get a substantial price discount.
When you’re looking at a home that needs work, you can require the sellers to credit you with an escrow allowance, bargain for a price discount, or maybe go for a combination of escrow allowance and price discount. Do not, however, accept an escrow allowance or price discount that merely equals the estimated costs of repairs. Ask for substantially more. The chance that you will underestimate is high.
Repairs Often Exceed Estimates
“We knew the house needed work when we bought it,” says Kay Schall. “So we got an estimate for repairs before we wrote a contract on the home. In total, everything came to around $13,000. To pay for these repairs, we wrote a clause into our offer where the sellers would credit us $13,000 at closing. But, surprise, surprise, this escrow allowance didn’t come close to covering the repairs we had to make. So far we’ve spent $26,136, with the end still not in sight. We now know what it means to own a money pit.”
Kay and her husband made a common mistake. When they accepted an escrow allowance for the estimated cost of repairs, they assumed that the repairs could be completed for the amount of the estimate. For small repairs, the risk of underestimating may not be great. But for more extensive work, no contractor can really tell for sure how much the repairs will cost. Here are five of the unexpected problems the Schalls ran up against:
- Previous owners of the house had remodeled it without building permits or city inspections. As a result, before permits could be issued for the new work, the old work had to be inspected. That meant opening up walls so the inspector could see whether the earlier construction had been performed according to code. It hadn’t. Therefore, the old remodeling had to be redone.
- The fireplace in the living room had to be completely rebuilt because it had wood instead of metal framing. A second fireplace in the dining room had to be sealed up permanently because of problems with the chimney.
- A wood patio deck had to be torn out because it was built without proper termite barriers between it and the ground.
- A tiled exterior entrance to the home had to be jackhammered to oblivion and then rebuilt with poured concrete with steps of a new height and width to comply with the building code.
- Not only did the roof need to be reshingled, much of the wood had to be replaced, and in an area above the old remodeling, the roof had to be raised a foot.
When Katie and Joe Capuano bought their rundown clapboard home in Stony Brook, Long Island, they figured the age of the house at 60 years and believed they could restore it with a modest amount of work—much of which Joe could do himself. But once the Capuanos got into the restoration project, it became clear that far more work would be necessary than they had anticipated. “Once I started pulling things out, I realized the house was at least 100 years old,” says Joe.
By the time they completed their “modest” restoration, Joe and Katie had spent more than $55,000 to gut the interior of their house, replace a crumbling foundation and wall beams, add on an extension, and install new siding. “At least, now,” says Katie, “it’s everything we could have wanted.”
The Capuanos seem to be taking their unexpected expenses with more aplomb than the Schalls. But the experiences of the Schalls and the Capuanos teach the same lesson: Unless you want to accept the risk of repairs and restoration costs that exceed your estimates, don’t accept a dollar-for-dollar escrow allowance or price discount. Instead, build into your figures a reserve for error—or require the sellers to complete your desired repairs and improvements before you close your purchase.
We accepted an escrow allowance of $6,000 for termite damage. Our repairs cost $18,347.
LESSON: All termite inspections are not created equal.
Before you close your loan, most mortgage lenders will require you or the sellers to provide a termite clearance for the house. Generally, a licensed termite inspector comes out, looks around the house with a flashlight, and, at critical points, pokes into the wood with a knife or screwdriver. If no evidence of termites is found, the inspector issues a clearance certificate and sends it to the escrow agent. But if the inspector finds evidence of infestations, he or she will estimate the cost of treatment and repairs.
Typically, when treatment and repairs are necessary, the sellers either pay for the work or give you an escrow allowance. Which is better? Here you face the same kind of situation as with other kinds of repairs. If the sellers remedy the problem, your risk is reduced. On the other hand, if you accept an escrow credit and get the work done competently for a lesser amount, you come out ahead. The question is, do you want to take a chance?
Ian and Marge Cordall took a chance and lost. They accepted a $6,000 escrow allowance for termite damage and ended up paying $18,347 for treatment and repairs. “We had no idea,” says Ian, “that the inspector’s estimates weren’t guaranteed. By the time our work was finished, the contractor had to tear out the den and completely rebuild it.”
This type of unpleasant surprise occurs because all termite inspections are not created equal; and even the best ones can miss serious damage.
Termite Inspectors Only Sample
In performing a pest inspection, an inspector pokes here and there hoping to spot problems that might exist. But there’s always the possibility the inspector won’t hit the right spot, or the damage may be hidden and relatively inaccessible. Either way, actual damage could exceed reported damage. (It’s possible that an infested house can receive a clean bill of health.)
Here are four ways to protect yourself:
- Tag along with the inspector as he tours the house. Did he get under the house and poke around in the crawl space? How about the attic? The foundation? Did he especially check areas where wood (treated or untreated) comes in contact with the ground? How thoroughly has the inspector actually sampled the home for termites?
- Ask the inspector questions. Find out which areas of the house are most vulnerable to infestation. Note whether any other homes in the neighborhood have experienced a termite problem. Discover whether the house has been treated previously. If so, how extensive was the damage? Were there any recurrences?
- If the inspection company offers a warranty, what does it cover? Will it pay for all damages? Or does it only require the company to treat the home with another dose of pesticides?
- If the company locates infestation and estimates repair costs, who bears the risk of cost overruns? Is the company merely issuing a good-faith estimate? In that case—unless the firm has been negligent in its inspection—you must pay the repairs if additional damage is found after work begins. Some exterminators guarantee their estimates. When they miss problems, they bear the costs to correct them.
Never accept a termite inspection, clearance report, or damage estimate without questions. Yes, with some, you can sleep easy knowing you’ve covered (or limited) your exposure to loss. With others, you just have to hope those pesky little critters have satisfied their appetites somewhere else. Because if they haven’t, you’ll be the one who’s picking up their dinner check.
We thought the roof warranty was good for 20 years.
LESSON: Determine exactly what types and amounts of repairs your warranties cover.
“When we bought our house,” says Kip Phillips, “the sellers showed us their receipts for a new roof they’d put on four years ago. Plus, they pulled out this engraved certificate that stated in bold print: 20-Year Warranty. With the receipts and the warranty, we didn’t think we would have to worry about paying for roof repairs for a long time to come.
“But just 18 months later, the roof started leaking. We learned the shingles were cracking and the entire roof would have to be replaced at a cost of $3,400. At that point, we were glad we had that 20-year warranty, which the owner had transferred to us.
“The next thing we did was to contact the shingle manufacturer’s local distributor. ‘No problem,’ he told us, ‘we’ll send someone out right away to process your claim.’ Faithful to his word, several days later a company representative came out to the house. After inspecting the roof, he agreed the shingles needed to be replaced. He then proceeded to write us a check for $600.”
Read the Fine Print
“Six hundred dollars!” we said. “Replacing that roof is going to cost $3,400. How do you expect us to accept a meager $600?”
“Because that’s the amount the warranty provides,” he said.
“What do you mean?” I asked. “We’ve got a 20-year warranty.”
“True,” he said, “but then pointed to the fine print.”
“That’s when I knew he might as well have said ‘Gotcha.’ The fine print stated the company was not liable for the costs of taking off the old roof, installing the new roof, or paying for adhesives, wood repair, or any other labor or materials. The warranty covered only the prorated cost of the shingles over a 20-year expected life. In other words, our 20 year roof warranty amounted to nothing more than reimbursement for 70 percent (14/20) of the price of the shingles. To complete the job, we were still going to be out $2,800.”
From this experience, Kip Phillips learned an expensive lesson: Don’t count on warranties to reimburse you for repairs or replacements unless you’ve first verified exactly what types of repairs and amounts of protection the warranty offers. Real estate broker Carl Steinmetz says his realty firm stopped dealing in home warranties because “we just had too many cases in which the buyers were upset with the policy coverages. They always thought the policy should have paid for something but didn’t.”
Not everyone agrees with Carl. California Department of Insurance spokesman John Fogg reports his agency gets fewer complaints about home warranty policies than any other type of insurance. And the real estate brokerage firm Joan M. Sobeck, Inc., thinks so highly of warranties that some of its agents buy the policies as a service to their sellers and buyers. Another broker says, “First-time buyers often don’t know much about fixing up a home… . Those folks are really drawn to the protection of a warranty.”
How to Inspect a Warranty Agreement
What’s the bottom line on home warranties? Read the fine print and look for answers to these eight questions:
- Does the warranty cover labor, materials, and parts? Or is it limited to certain named items (e.g., roof shingles, furnace combustion chamber, air conditioner compressor)?
- Will you receive full cost of replacement? Or will the warrantor prorate payment or subtract for depreciation?
- Must you pay for service calls? Some warranties charge home- owners anywhere from $50 to $200 each time a repairman is called out to the house.
- If you buy a warranted existing home, what items does the coverage exclude (e.g., roof, foundation, air conditioner, pool equipment, well pump, sprinkler system, plumbing, wiring)?
- How long will the warranty last? Most overall warranties with existing homes end after one year. New home warranties may cover major structural items for 10 years but limit coverage on appliances, furnace, and air conditioner to just 1 year. (In many instances the manufacturers of these items separately warrant their quality and performance. You’ll need to check these separate warranties to determine how you’re protected.)
- Does the warranty cover preexisting conditions? If you buy a home when the pipes are rusty or the furnace is clunking and clanging, the warranty may exempt these items from coverage. Some warranties only guard against unexpected breakdowns or malfunctions—not sure things. Don’t count on a warranty to substitute for a thorough inspection of your home by a professional inspector.
- What is the warranty company’s track record for honoring claims? Does it run you through a maze of paperwork and proofs? Or does it enjoy a reputation for quick and fair settlements?
- Is the warranty company in good financial shape? In the past, some homebuyers have not collected on their claims because the warranty company disappeared or went bankrupt. If you’re buying a new home, check to see who stands behind the warranty. Some builders warrant their own work. Others provide protection through independent warranty companies.
Although you want your builder to stand behind his or her work, in most cases it’s better to receive your home warranty from a financially strong insurer. Many builders run into tough financial trouble when housing markets head toward a down cycle.
Also, don’t be fooled when builders tell you they’ve been in business 25 years. To gauge financial stability, the real question is how long their present company has been in business. Some builders open a company,run it into bankruptcy, and then start another one. Over a period of 20 or 30 years, fly-by-night builders like these may open and close six or eight different firms. Each time they bankrupt a company, they leave their previous homebuyers without a way to collect the claims they may have for defects in their homes.
During the past 10 years, warranty programs have become popular. And in general, homebuyers, sellers, and builders have benefited from this trend. But as with all types of insurance, read the fine print. Some companies pay fully and promptly. Others build loopholes and escape hatches into their warranty contracts.
Our homeowners’ insurance didn’t cover our losses.
LESSON: Don’t take your homeowners’ insurance for granted. Closely check your coverages.
When fire swept through the Oakland-Berkeley, California, hills, Ron and Betty Bugaj lost their $500,000 home and all their personal belongings. The Bugajes were not alone. In one of the worst residential firestorms in U.S. history, more than 3,300 homeowners suffered total losses. As tragic as the fire was, for many of these families their troubles were just beginning. “The damage we really suffered,” says Betty, “was in our negotiations with the insurance company.”
Like more than 1,000 other firestorm victims, the Bugajes learned after the fire that their homeowners’ insurance policy would pay much less than they expected. To get the amounts they thought they were entitled to, the Bugajes wrangled back and forth with their insurance company for over 10 months. Adding to their hassle was the $75,000 in lawyer bills and consulting fees their negotiations with the insurance company cost them.
In the end, the Bugajes and most of the other firestorm victims did settle with their insurers—but only after the California Department of Insurance, various consumer advocacy groups, and widespread unfavorable publicity pressured the insurance companies to give in. Although to some extent several insurers had tried to lowball their policyholders, most of the settlement problems resulted because homeowners had not purchased the insurance coverage they actually needed (or thought they had).
Review Your Specific Coverages
The important lesson of the Oakland-Berkeley firestorm was not that most insurance companies are bad guys. Rather, it’s that far too many homeowners do not know their insurance coverages. They buy a policy and assume (incorrectly) they have the protection they need.
To make sure your policy adequately protects your home and belongings, ask your insurance agent or check your policy and answer the following questions.
What Perils Are Covered?
In insurance language, perils cause losses. Yet, no insurance policy covers every peril. Some policies exclude hurricanes, floods, mudslides, sinkholes, earthquakes, and riots. Sometimes frozen water pipes or roof collapse due to a buildup of snow and ice are not covered. After you learn what perils your basic coverage omits, you can usually buy an endorsement to obtain the extra protection you and your insurance agent believe is wise.
What Property Is Covered?
With tens of millions of Americans now working from home, recognize that business property or sales inventories may not be covered under your homeowners’ policy. Nor are your pets, golf cart, or snowmobile. Similarly, if you own any expensive antiques, jewelry, furs, artwork, or a collection of stamps, coins, or baseball cards, find out whether they’re covered, and, if so, for how much. More than likely, you’ll have to pay extra to secure adequate protection. If you’re a writer, store an extra copy of the manuscript you’re working on in a safety deposit box. (Dozens of writers in the Oakland-Berkeley fire lost computer disks and partially completed books and articles.) Your homeowners’ policy won’t pay for the value of your work to date. Even if you’ve finished the manuscript, the insurer will only reimburse you for the paper, not the work product.
If you live in a co-op, condo, or townhouse, distinguish between property covered by the association’s insurance and the property that remains your responsibility. For example, if a water pipe bursts within a wall and causes water and plumbing damages, who pays for what? Check with your board.
How Much Will the Company Pay?
This issue causes the most problems between homeowners and their insurers. That’s because ambiguity reigns.
First, your house. You can choose either replacement cost or actual cash value coverage. With a replacement cost policy, the insurer agrees to pay to repair or rebuild your house at today’s prices. Under actual cash value coverage, the company subtracts a figure for depreciation from the costs of replacement. Buy replacement cost coverage. Otherwise, the older your house and the greater its wear and tear, the less you collect.
Regardless of which type of coverage you select, here are eight areas where misunderstandings frequently occur (as they did in the Oakland-Berkeley fire storm):
- How much will you collect if you choose not to rebuild?
- What happens if government regulations prevent repairs or rebuilding? (For example, some homes now located in coastal areas, floodplains, wetlands, or hillsides cannot be rebuilt because of new safety or environmental regulations.)
- What if new government regulations (safety codes, environmental laws, building regulations) significantly increase the cost to rebuild your home?
- In the Oakland fire, many homes devoured by fire were 30 to 70 years old. Legally, owners couldn’t rebuild without major code upgrades. Extra regulations added $50,000 or more to the cost of construction. Yet, homeowners’ policies often exclude regulatory upgrades. This fact surprised many homeowners when they learned that to rebuild they had to pay large amounts from their own pockets. (A guaranteed replacement cost policy is one way to prevent this problem.)
- How much will your policy reimburse you for your home’s unique architectural or historical value? (Usually nothing unless you’ve requested specific endorsements.)
- If the insurer needlessly delays settling your claim, can you collect interest payments on the proceeds when the company eventually pays?
- How high are your policy limits? No matter how much it costs to replace your home, reimbursement won’t exceed your policy limits. Make sure you periodically increase the limits of your policy to keep up with the rising costs of new construction. Note, too, that most policies apply lower internal policy limits for certain types of property or perils (e.g., cash, jewelry, stamp collections).
- If you choose an actual cash value policy, how will the insurer figure depreciation?
Discuss these questions with your insurance agent. Do not wait until after you suffer a loss to understand your coverage.
Give attention to your household furniture and personal belongings. To collect for the contents of your home, choose a guaranteed replacement cost policy. Keep a list and photographic or video inventory of all property. Policies require proof of loss. Photos or videos stored in a safe place can provide the necessary evidence. Without a detailed inventory of your possessions, you will face a difficult time collecting for all you lost—partly because you won’t remember.
What Liability Protection Is Offered?
In addition to covering a home and its contents, homeowners’ policies protect against liability losses. Liability pays for negligence claims when someone is injured on your property. It may also cover for accidents such as hitting someone with your bicycle or a golf ball.
If you’re a member of a homeowners’ association, see what type of liability coverage the association carries. In some states, you can be held personally liable (along with each of the homeowners) when someone is negligently injured on the common areas of the property (swimming pool, bike trails, tennis courts, clubhouse, hallways).
Benny Kass, a specialist in condominium and homeowners’ association law, warns that too many community associations “are pitifully underinsured and represent a significant risk to association members.”
How Much Are the Premiums?
Before you offer to buy a home, determine the cost of insurance protection. During the past 10 years, property insurers have lost billions of dollars from claims such as Florida hurricanes, Texas mold, and California fires and earthquakes. In response, companies have raised premiums and tightened underwriting in areas with high claims potential.
After Florida’s recent spate of hurricanes, insurance companies canceled tens of thousands of Florida homeowner policies, and several insurers tried to withdraw completely from writing policies in hurricane areas. In California, insurers have tried to eliminate or severely limit the coverage they offer for earthquake losses. For these and other reasons, prior to buying, check coverages and premiums very closely. In higher risk areas, you may not be able to get the coverage you need at a price you’re willing to pay.
After we bought, property taxes jumped $2,200 and we got hit with a $1,600 special assessment for new sidewalks.
LESSON: Before buying, find out how much you must pay for property taxes.
When Stan and Beth Hill bought their home, the information sheet their Realtor gave them listed property taxes for the most recent year at $2,700. Shortly after the Hills bought, their taxes shot up to $4,900. In addition, the city notified Stan and Beth that it planned new sidewalks for the neighborhood. Their share of these costs would total $1,600, to be added to the Hills’ tax bill for the coming year.
Past Taxes Don’t Equal Future Taxes
Stan and Beth assumed their future property taxes would cost about the same amount as the sellers had been paying. But in many cities and counties throughout the United States, you can’t rely on that assumption.
In most states, county assessors periodically estimate a home’s value for the purpose of levying property taxes. This periodic reassessment, though, might occur annually, quadrennially, whenever the assessor’s office gets around to it, or sometimes when a property is sold and a new deed (and sales price) is recorded in the county records. In addition, homeowners may be entitled to exemptions (homestead, mortgage, senior citizen). Even when a home is assessed accurately, property taxes can vary when different owners qualify for different types of tax breaks.
In Stan and Beth’s case, their property tax surprise arose for two reasons. First, their home had not been reassessed for four years. During that period values in the neighborhood had increased about 35 percent. Second, seven years earlier the previous owners had added an 800 square-foot bedroom suite that enhanced the home’s value but had not been noticed by the tax assessor.
As a result, at the courthouse, the home carried a value of only $186,300. But when the Hills’ purchase price of $379,000 came through the records office, it triggered an immediate reassessment based upon the home’s current market value.
Learn How Property Taxes Are Calculated
To prevent surprise, learn the ins and outs of the property tax system in your area. If the home you buy is underassessed, or if the sellers qualify for more exemptions than you are entitled to, you might face a steep rise in your property tax bill.
To your benefit, by learning the ins and outs of property taxes, you also might discover an overassessment. When some homes in the Northeast, California, Florida, Oklahoma, Texas, Arizona, and several other states sold for less than their peak prices of earlier years, savvy owners were able to negotiate their assessments downward. Accordingly, their tax bills fell.
Here are seven property tax questions to ask the tax assessor’s office:
- What is their recorded market value for the home you’re buying?
- What is the current assessed value of the home? (In some tax jurisdictions, the assessed value is stated as a percentage of the home’s market value. Therefore, look at both the tax assessor’s appraised value and the assessed value before you conclude a home is underassessed or overassessed.)
- After you buy, will the assessed value of the home increase, decrease, or remain about the same?
- Are you entitled to any exemptions that will reduce your property tax bill?
- What is the local millage rate? (One mill equals a thousandth of a dollar. A millage rate of say, 17, would mean a property tax of $17 for every $1,000 of assessed value.)
- Will any improvements you make to the home increase its assessed value? (Some types of improvements will add significantly to assessed value—if the tax assessor learns about them. Built-ins, room additions, a swimming pool, or wall-to-wall carpeting, for example, typically increase a home’s assessed value. A new roof, furnace, or hot water heater may not. Every tax assessor’s office has its own way of operating. Check the specifics as they may apply to the home you buy.)
- What amount of taxes can you expect? (To calculate this figure, multiply the millage rate expressed as a decimal by the home’s expected assessed value. Seventeen mills, for example, convert to .017. With an assessed value of $100,000, your property taxes would run $1,700 a year.)
From time to time local governments levy special assessments. These charges pay for new sidewalks, sewers, waste treatment plants, street widenings, or parks. In most cases special assessments will range between $500 and $5,000. On occasion they can go as high as $10,000 to $15,000, or more.
Because special assessments can upset a budget, find out whether any assessements are planned for your neighborhood. Learn of proposed changes before you buy. Better parks may add to your home’s value. But street widening may bring more traffic and diminish the value of your home.
We didn’t know title insurers offered discount policies.
LESSON: Before you set up escrow, ask whether the sellers have a title policy that can be transferred to you and your lender. It could save you money.
Before you and your lender release funds to the sellers, a title company (or lawyer) will verify that they actually own the property and that any outstanding liens or claims against the home will be taken care of prior to closing.
Years ago most title searches were performed by lawyers, who would then offer an opinion as to whether title to the home was marketable (free of defects). Although still common in some areas, most lenders and homebuyers no longer use lawyers to assure title. Instead, they wisely buy a title insurance policy.
Obtain Title Insurance
When a lawyer makes a mistake or otherwise misses a defect in the home’s title, the only way you can make him or her pay for your loss is to hire another lawyer to sue the first one. That’s an expensive, time-consuming, and uncertain challenge. With title insurance, the insurer agrees to pay the expenses necessary to defend your rights in the property against other claims. If unsuccessful in its defense, the company will pay for covered losses.
Like all insurers, title companies write their policies with various exceptions and limitations. If your next-door neighbor’s garage sat a foot onto your side of the property line at the time you bought your home, the insurer may exclude that known problem from its coverage. Also, in some states, a basic title policy covers only the lender. Adding your name to the policy may cost slightly more.
Title insurance has proved to be a wise purchase for most homebuyers. It reduces the possibility that you’ll be drawn into a long legal battle when some ex-husband of a long-ago owner shows up and claims that his ex-wife forged his name to the deed when she sold the house after their divorce.
Secure an Owner’s Endorsement
Title insurers offer two types of coverage: lender’s policies and owner’s policies. To protect your equity in a property, you (or the sellers) may need to pay an additional premium. Plus, inquire whether you can obtain increasing amounts of protection as your home appreciates in value. Title policies last for as long as you own your home, but many policies limit the amount of coverage to your home’s original purchase price.
Determine whether the sellers have a title policy that you can update and transfer to you. If your sellers do have title coverage, by sticking with the same company you might save several hundred dollars. If you can’t save money that way, compare insurance premiums among title companies. Because in some states these premiums are set by law, you won’t find much difference among companies. But other states encourage competition, and shopping around can pay off.
Stay on Schedule
With home mortgages and loan servicing contracts now being traded among lenders like baseball cards, the paper trail for existing liens and previous mortgage satisfactions sometimes can prove cumbersome to follow. Therefore, to avoid a delay in closing, title checks should proceed as soon as escrow is set up.
On occasion, loan processors busy themselves with credit reports, document verifications, and appraisal and leave the title search and property survey until the last minute. When problems crop up, closing has to be put off, which—at a minimum—disrupts moving plans for both buyers and sellers. Although most title defects and boundary disputes eventually get straightened out, the effort can take several weeks to several months. Good planning and timely processing of the paperwork can free you and the sellers from this type of troublesome situation. (Although realty agents aren’t responsible for escrow, top agents monitor progress to keep the closing on schedule.)
Our closing was like showdown at the OK Corral.
LESSON: The best closing is a no-surprise closing.
Most mortgage closings go smoothly. Yet, occasionally failure to prepare or last-minute changes can create turmoil. “We felt it was a bad sign,” says Wendy Kantor, “when the real estate agent telephoned us two days before closing and told us the sellers had decided to take the refrigerator and four window air conditioners with them. These items were included in our purchase price. So the agent said the sellers would give us a credit for their value and we could work out the details at closing.
“But at closing, the sellers only wanted to give us $500. That figure wasn’t acceptable. We thought $1,000, maybe even $1,250, was closer to the mark. Besides, we found a $600 mistake in the closing statement and another $1,300 in garbage fees that we hadn’t expected. By the time that closing finally settled, it was like showdown at the OK Corral.”
Get Everything Settled before Closing
I can empathize with Wendy because I once went through a mortgage closing disaster much like hers—only I was the seller. In my case, several days before closing my agent telephoned and said the buyers had come up short on cash and asked whether I would be willing to carry back $5,000 in seller financing. I said no. I was moving out of town, and I didn’t want to worry about collecting $5,000 from a distance of 1,200 miles. If the buyers didn’t pay, I could end up spending more than $5,000 in lawyer’s bills just to collect.
When we did get into closing, however, the buyers proceeded as if I was going to help them with their financing. As I later learned, “my” agent had set us up. He figured that once we were sitting in closing both of us with loaded moving vans—we would be forced to work out some kind of compromise. And that’s what we did.
But from that experience, I learned the same lesson Wendy Kantor learned: Make sure all details of the transaction are known and agreed to by all parties before closing. To avoid these kinds of last-minute showdowns, many mortgage loans and homebuying transactions are closed through escrow without buyers, sellers, agents, lender, and attorneys all meeting together around a conference table. I’ve been involved in both types of closings and definitely favor the escrow approach.
Check the Figures and Arithmetic
Even with in absentia escrow closings, carefully check the figures on your closing statement to make sure they’re totaled correctly and that the lender hasn’t thrown in garbage fees that were not properly disclosed to you in the lender’s good-faith Real Estate Settlement and Procedures Act (RE-SPA) disclosure statement. Stay alert for last-minute tactics to renegotiate amounts in the sellers’ favor. Unethical sellers (and buyers) or their lawyers use this technique to extract concessions they otherwise couldn’t get. Full preparation and agreement prior to closing helps prevent this gambit.
We couldn’t believe the way the sellers left the house for us.
LESSON: Arrange a final walk-through and inspection of the house just prior to settlement—ideally, after the sellers have moved out.
“We couldn’t believe the mess,” recalls Derek Chapman. “We walked into the house the day after settlement and discovered the sellers had left piled-up boxes of trash throughout the house, the inside of the oven looked like a grease pit, the carpeting and floors were all tracked up with mud (evidently from their movers), and the dining room chandelier was missing. We also learned the den did not have hardwood floors as we had thought.
“When we first looked at the house,” Derek continues, “the sellers had a large area rug in the den so all we saw was the hardwood floors around the edge of the room. Naturally, we assumed the floor under the rug was also finished hardwood. But it wasn’t. That part of the floor was unfinished pine. I guess we should have pulled back the rug just to make sure. But it really wasn’t anything I had seen before—or would have imagined.”
Verify You Receive What You Expect
First, when you inspect a house, get nosy. Pull back rugs and open the cabinets, drawers, and the oven door. Look behind pictures or other wall hangings. Look under the furniture. It’s better to discover flaws, stains, cracks, or unfinished floors before you make your offer rather than after.
Second, schedule settlement after the sellers have moved out. Then, before closing, do your final walk-through and inspection. Learn whether the sellers have left the home clean and confirm that they have not taken any personal property, appliances, or fixtures that were supposed to stay with the house. Inspecting a vacant house also gives you another chance to discover any defects that were previously hidden by the sellers’ selective placement of furniture, area rugs, or wall hangings.
It’s easier to work out problems before the sellers have received their money. This is especially true when the sellers move out of town. Once the sellers are gone with your money, you lose leverage. You might sue, but that might cost you more in time, money, and misery than you could hope to collect. (For some types of claims against the sellers, you might proceed inexpensively in small claims court, but even if your claim wins, you still lose time and effort and you still face collection. Avoid the hassle; inspect closely.)
No Walk-Through? Here’s What to Do
If you can’t do a final walk-through before the settlement and after the sellers’ vacate, put a clause in your purchase offer whereby 10 percent (or so) of the sellers’ sales proceeds are escrowed until you’ve had time to check out the house.
As another tactic, consider putting a compulsory arbitration clause into your purchase agreement. With this kind of clause, you and the sellers use an arbitrator instead of a lawsuit to settle disputes. Lawyers often advise against compulsory arbitration because it cuts down on their fees. For most buyers, though, saving on lawyer’s bills and court costs stands as an advantage, not a disadvantage. Through arbitration, you also can settle your disputes much more quickly than with a lawsuit and avoid costly and time-consuming pretrial maneuvers. Arbitration may not be right for everyone, but it’s a method of resolving disagreements to consider.
New Homes: Get What You Think You’re Paying For
Paul Tate was conducting a preclosing walk-through of his newly built $285,000 split-level ranch home when he discovered that, unlike the model homes he was shown, his home lacked skylights, which were very important to him. “Without skylights,” Paul complained to the builder, “the house is way too dark.”
The builder sympathized with Paul but pointed out that in their contract, skylights were optional and not included in the basic price. Because Paul hadn’t specified he wanted them, the builder didn’t put them in. To do so now that the home was complete would cost twice as much as if they had been installed during the construction process.
If you plan to buy a new home that’s not yet completed, check two things: Do not assume those gold-plated bathroom fixtures and the marble fireplace in the master bedroom are standard features. Read your purchase contract closely. Look for cost-increasing words such as “optional” and “upgrades.” With some houses, the upgrades and options are what transform the frog into Prince Charming.
Keep tabs on the construction as the house is being built. Don’t wait until final walk-through to discover the features you wanted aren’t the features you’re getting. Even when you accurately list your options and upgrades, builders and contractors make mistakes.
If you decide on changes during construction (as you undoubtedly will), make them early and put them in writing. The earlier you initiate change orders, the less it will cost you. Memories are too fragile and building sites too hectic to rely on ad hoc talks with your builder, a sales representative, or a contractor.
The sellers wouldn’t move out of the house.
LESSON: Put a penalty clause in your contract that will force the sellers to either move or pay.
A funny thing happened when first-time buyers Janie Brown and Paul Kelley showed up with a bottle of champagne at their new home in La
Mesa. The sellers refused to move out. But Janie and Paul kept their spirits up, put the champagne back in the refrigerator, and after two weeks of legal process, proceeded to evict the sellers.
Surprising as it may seem, sellers (or tenants) who refuse to move after buyers have closed on a house are not uncommon. Take the case of Chauntann Reid. Chauntann bought a bargain-priced home at a foreclosure sale. After learning the ins and outs of how foreclosure auctions work, Chauntann submitted a successful bid for a two-story brick row house with a garage. This lucky new homeowner, though, soon found out that buying a foreclosed home can be easier than moving into it.
Not only did the prior owner of the home challenge the validity of the foreclosure sale, she filed bankruptcy. Both of these legal actions stalled the eviction proceedings that Chauntann could have used to take possession of the home.
Five months after she became a homeowner, Chauntann and her three children were still living in her sister’s home. With legal fees, property tax bills, and sewer charges that Chauntann had to pay to protect her ownership interest in the foreclosed house, she couldn’t even afford to move out and rent an apartment.
Be Wary of Tenant-Occupied Houses
Getting a tenant out of a house you’ve bought can present even more difficulties than removing reluctant sellers. As a matter of law, a tenant’s lease takes priority over the possession rights of a new owner. If the tenant’s rental agreement with the previous owners still has six months to run, then the tenants have the right to stay in the home for six more months (as long as they pay the rent, of course).
Even when the tenants can’t enforce a lease, they may seek the protection of various pro-tenant ordinances. Some cities require property owners to give tenants 60 or 90 days’ notice, sometimes longer, before they can be forced to move. If a tenant is pregnant or files for bankruptcy, the law may offer special protection against eviction.
To guard against sellers who won’t vacate, put a clause in your purchase contract that obligates the sellers to pay $100 a day (or whatever) for each day they stay beyond the date they’re supposed to move out.
That type of penalty generally encourages sellers to quickly find someplace else to live.
Should you buy a home that’s occupied by tenants, also note the terms of their rental agreement. (It may not make any difference whether the agreement is oral or written.) Then verify the tenants’ intentions and planned moving date. Check with a lawyer or the local landlord-tenant regulatory agency to see if the tenants are protected against eviction by any laws or regulations. Don’t think that just because you own the property, you have a right to live there. That’s not the way the law works.
New Home Completion Deadlines
If you buy a newly built house, you won’t face problems with reluctant tenants. But new homebuyers sometimes experience another kind of problem that keeps them from moving into their home as scheduled. Construction delays. Delays in completing a home can result from bad weather, shortages of building supplies, labor strikes, excessive change orders, or foot dragging by the builder, contractor, or subcontractor.
You want to work cooperatively with your builder. Nevertheless, you still might include a delay penalty in your purchase contract. I know of new homebuyers who have had to wait anywhere from two to six months beyond the completion date they were promised. With a delay that long, require a penalty payment if the builder or his contractors are responsible.
More than likely, though, you’ll have to negotiate to get it. Builders don’t like penalty clauses. Yet, if you’ve set a firm move date, your builder should commit to having the home ready for you to move into. If, after a reasonable grace period, the builder can’t meet that commitment, he or she should pay the price of your inconvenience and alternative housing arrangements.