Your home – the house you purchase and live in – is a big investment! For most of us, it is also the best investment we will ever make, growing in value year after year. But things can go wrong with your dream home, too. The roof could leak, the plumbing might fail, the air conditioner could die, the property could flood. Protecting your real estate investment begins even before you own your home. That’s why, in a typical home purchase, there are a number of mechanisms in the process designed to protect the investment the new home owner (and the lender) are making. In property purchases where a mortgage is obtained, some safeguards may be required by the lender.
The Survey clearly defines property lines and reveals any encroachments. It should be completed during the due diligence period. It ensures that nothing belonging to the property being purchased is crossing the line into a neighbor’s property. The most common example of this kind of encroachment is the fence that is actually a foot into the neighbor’s yard. Survey issues are rare and when they do occur they are usually solved easily. However, I did hear of a situation where a neighbor’s room addition was actually a foot and a half over the line and into the subject property. That sale fell through and the seller and the neighbor had to negotiate a solution to the problem, but it was the Survey that protected the purchaser and the lender from making a bad decision.
The Appraisal creates a comfort level for the lender – and the purchaser – that the property is actually worth what the buyer is willing to pay. The Appraisal should be completed before the end of the due diligence period, and if you are using lender financing, will be ordered by your lender. Appraisals can be wrong, but usually not by much. There is an appeal process for appraisals that are too low and there have been times when we have gone back to the appraiser with our own set of comparable properties to make a case for an appraisal adjustment. Because most purchase agreements with financing are ultimately contingent on the buyer being able to obtain a mortgage, when the property doesn’t appraise – and the lender therefore refuses to lend – the buyer has an ‘out’ so long as the due diligence period has not expired. Often, however, what ensues is a negotiation between the buyer and seller through their agents about how to adjust the price and salvage the sale.
The Flood Certification attests to whether the property is located within a FEMA designated flood zone. Here, the lender is trying to do the same thing he did with the Survey and Appraisal: minimize risk. If the property is located within a flood zone, the lender may require a special flood insurance policy or may refuse to lend all together.
Termite reports are almost always required by the lender, once again, to ensure that there is no significant damage to the property. When termites or significant damage are discovered, it usually becomes a seller’s responsibility to correct the issue to the satisfaction of the lender.
Lenders usually require a Title Insurance policy as well. This insures the lender’s investment should a claim against the title be made. Again, these situations are so rare today, but when a party comes forth with proof that they actually own the property you just purchased, Title Insurance can be the only safeguard.
Home Inspections are not required, but we always recommend them. Even if you are knowledgeable about construction, home systems and the like, you are always wise to pay an expert to go through the home you are about to purchase and report on any defects. It is important to understand that there has never been a perfectly clean home inspection. Every home has a few minor issues. It can be as simple as missing or broken switch plates, a door that doesn’t close properly or something larger like a leaky roof. I like to go through inspection reports with my clients line-by-line, evaluating each item to determine whether it is something easily corrected or a larger problem that must be addressed before the transaction continues.
When purchasing a condo or a home in a neighborhood with a homeowner’s association, you have the right to examine the documents of the association prior to completing purchase. This is very important. You want to know that the association is financially viable and able to cope with unforeseen large expenses that may arise. The worst example might be the condo development that suddenly needs a new roof two months after your purchase. You also want to know what kinds of issues the association has been working with in recent months. I find that reading the association’s meeting minutes is very helpful here as controversies and areas of contention are often reported. Finally, every association has rules and by-laws. When you purchase in this kind of neighborhood, you are agreeing to abide by those rules. It is important that you know what they are before you buy.
Home Warranties are an option we often recommend for purchasers of resale properties. These policies cover major systems in the house in the event they fail during the term of coverage – usually a year or two. Often there is a small deductible, but if the air conditioner or water heater fail during that time, they can be replaced with little out of pocket for the new owner. I like Warranties because things do break. When they break a few months after purchase it can make an otherwise joyful time turn sour. Home Warranties ensure not just systems, but also your peace of mind and happiness with your new home purchase.
When you are buying it is important to protect yourself against possible problems with the property. Fortunately, most standard purchase agreements and lender policies offer ample protection. At Help-U-Sell Honolulu Properties, we work with our buyer clients to help them determine what additional protections are appropriate for each home purchase.