HOME BUYERS FAIR : Consumer Protection : Buyer Safeguards Can Protect Home Purchases : Home Buying: Title insurance, inspections and warranties are becoming increasingly popular not only as security for the buyer, but for the seller.
The consumerism revolution of the 1970s and 1980s may have changed the rallying cry from “let the buyer beware” to “let the seller beware,” but the savvy home buyer in the 1990s must still be on guard.
Home inspections, home warranties, termite inspections and title insurance are tools that help protect home buyers in the biggest purchase most will make in their lifetimes. They can also be useful marketing tools for a home seller.
Termite inspections and title insurance are required by custom and by lenders; home inspections and home warranties are not required under custom or law, but are highly desirable, according to real estate experts.
Home Inspection
When you’ve found the house you’ve been looking for and submit an offer to purchase, make the offer subject to the house passing an inspection by a professional home inspector. If the seller or his agent refuses, resume your search.
By custom, the buyer commissions--and pays for--the inspection.
A new coat of paint can hide a lot of defects from the average home shopper, but a professional inspector knows where to look for leaky roofs, crumbling foundations, substandard plumbing and the multitude of problems a house is heir to.
Obtain a professional home inspection even if you have a copy of the Real Estate Transfer Disclosure Statement (required under California law since 1987 and available from the listing broker or the seller).
Besides the fairly obvious home inspection areas of foundations, drainage, roofs, exterior siding, interior walls, plumbing, wiring, heating and air conditioning, an inspector should deal with such topics as asbestos in acoustic ceiling and pipe insulation and leaded copper pipe joints in houses 2 to 5 years old.
From almost no home inspections two decades ago, home inspection has become a significant sector of the shelter industry, with 165,000 of the 550,000 existing homes sold in California in 1988 inspected by a professional.
Here are some pointers for choosing a home inspector, along with suggestions on how to interpret and use the inspection report:
* Ask if the inspector is a member of the California Real Estate Inspection Assn. (CREIA) or the American Society of Home Inspectors (ASHI), or is a candidate--a person in the process of becoming a full member--of either organization.
* Check to see how long the inspector has been in business, as a home inspector.
* Ask if the inspector is experienced in residential construction, through education and experience or the possession of a contractors license. There is no license for a home inspector, but most authorities say a licensed contractor makes the best inspector.
* Find out if the inspector runs a repair business on the side or has a close tie-in with a realty firm. These are considered conflicts of interest by ASHI and CREIA and are banned by both organizations.
* Ask to see sample inspection reports. Some inspectors use a checklist, while others supplement the checklist with a narrative report. The latter is easier to interpret.
* The typical inspection should take 1 1/2 to 2 1/2 hours to complete and cost $150 to $300 or more, depending on the size of the house, according to John Heyn of ASHI. Many inspectors allow--even encourage--the client to accompany him or her on the inspection.
* Once you have chosen the inspector, you must make arrangements with the seller or the seller’s agent to conduct the inspection.
According to Robert J. Bruss, a syndicated real estate columnist, lawyer and real estate broker, make sure that your offer to purchase includes a clause specifying a professional inspection, with the seller to pay for certain repairs. The seller probably will add a clause limiting the dollar amount of the repairs, Bruss says.
* Depending on physical aspects related to the house, such as soil conditions or hillside site, you may decide to have a professional engineer or a geologist inspect the property. In many cases, your home inspector can tell you if additional inspections are required.
* When you get the completed report, don’t panic if the inspector lists many minor items that need fixing: This is to be expected in just about any house--existing or new. The idea of an inspection is not to uncover every minor flaw and problem with a house, according to Peter G. Miller and Douglas M. Bregman, authors of “The Common-Sense Guide to Successful Real Estate Negotiation” (Harper & Row, 1987).
“What a buyer really wants to know is: What needs to be repaired or replaced? How much will it cost? What steps can be taken to make the house run more efficiently? What repair bills can be expected in the next few years? . . . Should I make an offer requiring the seller to make certain repairs, or should I make a smaller offer or no offer?” according to Miller and Bregman.
Home Warranties
Home warranties are one-year service contracts that cost $220 to $300 and go into effect when you close escrow. They cover all major mechanical systems of a house: heating, plumbing, electrical and built-in appliances for the period of the contract, according to Phil Branson, president of the Home Warranty Assn. of California. Optional coverage is usually available for central air condition, evaporative (swamp) coolers and swimming pool and spa equipment.
Home warranty firms are regulated by the state Department of Insurance.
Home warranties are a growth industry. In 1978, only 8% of the existing home transactions in California included a home warranty. Last year, according to the Home Warranty Assn. of California (HWAC), 45% of the 550,000 existing home transactions came with a warranty.
Last year’s sales of existing homes dropped more than 4% from 1988 levels, according to the California Assn. of Realtors, but the number of home warranties sold increased by 7.2%, the HWAC reported.
A deductible or service fee--which varies from contract to contract but averages $35--applies to each service call. Companies usually have a toll-free telephone number to make claims and obtain repairs or replacements, Branson said.
The warranty can be renewed at the end of the year; 20% to 25% of the buyers renew at the expiration of the original contract, he said. Home warranties can be purchased through a real estate broker or from the warranty firm.
In the past, home sellers and real estate brokers bought warranties as marketing tools, to give the house an edge on the competition, Branson said. Today, however, more than half the warranties sold are in response to a demand by the prospective buyer as a condition of buying, with the seller paying for the contract.
Current members of the HWAC are American Home Shield Corp., Santa Rosa, Calif.; Buyers Home Warranty Co., Burbank; Continental Home Services, Walnut Creek, Calif.; Electronic Realty Associates Inc., Shawnee Mission, Kan.; First American Home Buyers Protection, Woodland Hills, and Hisco Home Protection Plan, Dublin, Calif.
The National Home Warranty Assn. represents seven companies--two of which are members of the HWAC--according to Donald J. Sleezer, association president and president of the Hollywood (Fla.)-based Homeowners Marketing Services Inc. The other six members of NHWA are American Home Shield Corp., Consumer Protection Inc., Electronic Realty Associates Inc., Guaranteed Homes Inc. and United One Home Protection Corp.
Termite Inspections
According to Harvey L. Logan, executive vice president of the Pest Control Operators of California (PCOC), a consumer ordering a termite inspection should expect that he or she will have a “full and complete investigation of and a report on any termites or other wood destroying organisms” in the house.
His group is a trade association with about 1,100 members, representing 75% of the state’s pest control industry.
Logan suggests the following when choosing a termite inspection firm:
* Ask friends or neighbors if they have used pest control services and if so, were they satisfied with the firm they hired.
* Call PCOC for a list of pest control operators in your area, (916) 372-4353.
Once you’ve chosen a pest control firm, Logan says, use the following guidelines to ensure a good working relationship:
* Follow all recommended preparation procedures before the treatment begins. Pay special attention to instructions regarding food preparation areas, pets and children.
* Always ask for a written estimate before any work begins and discuss the specific terms of any guarantee provided.
* Discuss the method of payment before the job begins. Is payment due at the time of application or will you be billed?
* Discuss your expectations with the pest control professional before treatment begins. Do you want pest control or a pest-free environment. Different expectations may require different treatments.
Logan also suggests that you check to make sure that alternative methods--freezing methods, heat, nematodes, electro-guns, for instance--are acceptable to lenders. An article in the spring, 1989, issue of Voice of PCOC, the organization’s magazine, “A Look at New Technology for Pest Identification and Treatment” discusses the effectiveness of non-chemical treatments.
Remember, in most cases “the lender requires the seller to furnish a current termite report, by a state-licensed pest control operator, showing on the property no visible signs of infestation, fungi or dry rot in any accessible area,” according to “California Real Estate Practice” by Robert J. Bond (3rd edition, Scott, Foresman and Co., 1988).
Title Insurance
A title insurance policy insures the buyer and lender--that’s why lenders require it--against loss, except for noted defects in the chain of title, such as liens, mortgages or other known encumbrances.
Issuance of a title policy means that a thorough examination has been made of all public records affecting the property in question and that the owner has acquired ownership free from title defects of public record.
Title insurance policies typically cost less than 1% of the sale price of the house: On a house selling for $314,950, the charge for title insurance from Southern California Title Co., Van Nuys, was $966.52, with the buyer paying $293.12 and the seller paying $673.40.
There is no uniform method of determining who pays what, according to the California Land Title Assn.: In some counties, the seller pays for the lender’s policy and the buyer pays for the owner’s policy; in other counties the seller pays the entire title insurance premium; in others, the buyer pays.
Southern California practice typically has a standard or owner’s coverage (CLTA, short for California Land Title Assn.) paid by the seller and extended or lender’s coverage (ALTA, short for American Land Title Assn.), required by the lender and paid for by the borrower, according to Chuck Riggs of Southern California Title Co.
CLTA policies cover most matters disclosed by public records, certain off-record risks, such as forgery, or incompetence of parties. It doesn’t cover matters not disclosed by public records, certain mining and water claims, zoning and other governmental ordinances concerning the use of the property and defects known to the insured before the property was purchased and not disclosed to the title company before the sale.
ALTA title policies include everything covered under CLTA, plus unperfected mechanic’s liens, unrecorded physical easements, facts a correct survey would show, certain water claims and rights of parties in possession, including tenants and owners under unrecorded instruments.
There are 13 title insurers licensed by the state Department of Insurance, along with 110 underwritten title insurance companies that act as agents of the licensed insurers. In most cases, the broker in a transaction picks the title insurance company.
RESOURCES
American Society of Home Inspectors, 3299 K St., N.W., Washington, D.C. 20007, (202) 842-3096.
California Real Estate Inspection Assn., 1100 N. St., Suite 5D, Sacramento, Calif. 95814, (916) 443-1422.
Home Warranty Assn. of California, P.O. Box 4020, Woodland Hills, Calif. 91365; (800) 992-3400.
National Home Warranty Assn., 6365 Taft St., Suite 2000, P.O. Box 9200, Hollywood, Fla. 33084; (800) 327-9787.
Pest Control Operators of California, 3031 Beacon Blvd., West Sacramento, Calif. 95691; (916) 372-4363.
Structural Pest Control Board, licensing department, Sacramento, (916) 924-2294.
California Land Title Assn., P.O. Box 13968, Sacramento, Calif. 95853; (916) 444-2647.
