Home Inspections Insurance & Warranties Flashcards
The purpose of a home inspection is to locate any physical faults that may affect the safety or value of a home. This is information most buyers will want to know. And if they’re financing the purchase, their lender will want to know as well.
The home inspection is a vital part of the home-buying process because it can reveal important defects and issues. A home inspection can make or break an entire transaction. And in case you were wondering – the buyer typically pays for inspections, though this (like many things in real estate deals) is negotiable.
Always Recommend Inspections
Every buyer should be strongly advised by their agent to get a general home inspection, along with any other inspections the general home inspector might suggest. This holds true if they’re purchasing an older home or brand new construction. It’s important your buyer understands that a seller’s disclosure statement does not serve as a substitute for a proper home inspection.
Inspections help homebuyers feel confident that their new property will not only be safe, but will also be a sound investment.
Inspection Contingencies
Remember contingencies? A purchase contract can have one that lets the buyer arrange for certain inspections. It should include the date on which those contingencies expire. Once these inspection reports are produced in a manner satisfactory to the buyer, the transaction can proceed.
What If the Buyer Doesn’t Want an Inspection?
In the event that a prospective buyer chooses NOT to have a property inspected, the licensee should secure a signed written statement from the prospective buyer stating that they made this choice despite the licensee’s recommendation to have the property inspected.
The Purpose of Home Inspections
As an agent, you need to know when to ask questions about a property’s condition because the client doesn’t. You can figure out what to ask by performing a due diligence property inspection. This is a walk-through inspection that you, as an agent, can perform in order to discover material facts within the property.
If there are signs of defects (red flags, if you will) in the home, you’re expected to uncover those in your due diligence inspection. This is important when you recall that, as an agent, you can be held liable for failing to disclose material facts or defects that you should have been aware of.
It’s worth noting that your liability as an agent extends only to known material facts, not those which are unknown.
Obviously, the seller and agent can’t disclose a condition that they know nothing about. For example, you can live in a home for years and not be aware that it has aluminum wiring. Agents certainly do not remove light switches or look in circuit breaker boxes to determine what type of wiring the home received when it was built.
Verify Material Facts
As part of your due diligence property inspection, it’s also important for licensees to verify information from the SPDS, listing, and public records. You have an obligation to confirm data supplied by the seller (or the seller’s agent).
For example, if the seller claims the roof has never experienced a leak, but you see visible water damage in a closet, it’s worth asking follow-up questions to confirm that information. (Maybe it wasn’t a roof leak – maybe a pipe in the wall burst. Always keep an eye out and always ask!)
You can also verify claims made by the seller or the seller’s agent by consulting the information available in the public record. Deed restrictions, easements, zoning, tax assessment data, utility costs, etc. are information available to the public. You can also discover measurements such as lot size and dimensions in the public record.
Due Diligence Property Inspections
As an agent, it will be your responsibility to inquire about the “red flag” issues. Some common examples of red flags include:
Old plumbing – When you turn on the faucet, is the water pressure low? The piping could need an update.
Sewer problems – Is there standing water in the yard? Are there signs of flooding in the basement? This could point to a break in the underground sewer line.
Worn roofing – Are there water stains on the ceiling? This could be a sign of a leaky roof. Has the ceiling been freshly painted? This could indicate that the seller is attempting to conceal water stains. Consider it a red flag!
Old electrical wiring – If the home is much older, it may have hazardous aluminum wiring, creating a potential fire risk.
Pest damage – Are there small piles of wood dust visible on the floor? That’s a red flag that there may be carpenter ant damage. When you knock on a wooden beam, does it sound hollow inside? That could be a sign of termite damage.
Foundation issues – The big one. Are there cracks in the foundation or basement floor larger than a quarter-inch? Bumps on the basement floor? Misaligned door frames or windows? All could spell trouble for the foundation.
Infographic of home inspection red flags covered above.
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These are just a few examples of MANY potential red flags to be on the lookout for. Of course, you can’t be expected to be able to see through walls or ceilings. That’s why it’s important to be super observant when it comes to the things you can see.
Cosmetic Defects
That said, small cosmetic defects are not likely to be red flags. Take, for example, a broken door handle. Sure, it will need to be replaced, but that’s a very low-cost repair that wouldn’t likely be indicative of a larger underlying issue.
Red Flags 🚩
If you are representing the buyer in a transaction, you can also be of service to your client by negotiating with the seller concerning the results of the home inspection items. Will the seller make repairs of certain defects or hire someone to make the repairs for them? Is the seller willing to decrease the sales price in light of defects or conditions affecting the value of the home?
After the Inspection
Once the home inspection is completed, the buyer then has to determine the following, based on the inspection results:
What needs to be repaired?
Who will make the repairs?
What things should be credited and how much should the credits be?
What issues can, or should, be ignored?
Which problems are deal-breakers that may prevent the buyer from purchasing?
If the appraisal and/or home inspection reports reveal new issues or conditions, an agent is there to discuss them, and offer helpful information, advice, and opinions based on experience.
Additionally, if necessary, the buyer’s agent can be a buffer when dealing with the seller and the seller’s agent if conflicts arise concerning the condition of the home.
Buyer’s Inspection Notice and Seller’s Response
If it sounds like the parties’ responses to the inspection should be somehow formalized in writing, it’s because they should be. (Good instinct, Anthony!)
You will most likely use a form called the Residential Buyer’s Inspection Notice and Seller’s Response (BINSR for short). The Arizona Association of Realtors provides a standardized version to its members.
Essentially, a BINSR will contain the following info:
The buyer will acknowledge that they have been advised to order any inspections and verify any info that is important to them.
The buyer will check a box to indicate how they plan to move forward with the transaction after the inspection(s). They must decide to do one of the following:
Accept the property as it is
Reject the property and cancel the purchase contract
Provide a list of requested repairs
If the buyer instead chose to waive inspections entirely, they can indicate that on the BINSR form instead.
If the buyer requests repairs, the seller will need to complete the seller’s response section of the form. They’re free to refuse or agree to the repair requests.
If the seller refuses to make the repairs, the BINSR then goes back to the buyer. The buyer must choose whether to accept the home as-is or cancel the contract.
New Discoveries = New Disclosures
If a seller refuses to do the repairs discovered during the inspection and the buyer terminates the contract, the seller must be aware that the SPDS will need to be updated with the new information for any future potential buyers.
If you’re representing a seller in this situation, you might want to advise your client that it could be in their favor to negotiate or make the repair (as long as the buyer’s request is reasonable). The buyer who finds an issue may just be asking for a small concession.
If the seller decides to take that property back to the market instead, the agent is now obligated to disclose the now-known property defect to all potential buyers. This can make the whole process much more difficult.
Pre-Closing Walk-Through
If the initial inspection reveals defects in the property and the appropriate repairs are made, the prospective buyer should be encouraged to review the property a second time to ensure that the defects have been addressed to their satisfaction. This pre-closing walk-through should take place shortly before closing to verify that the property’s condition complies with the terms set forth in the sales contract.
With this walk-through, the buyer can also confirm that no damage has occurred to the property since the offer was made and that none of the fixtures have been removed or altered.
After the Inspection
If all goes according to plan, a buyer’s new home will be in acceptable condition on closing day. But what about after that? Home warranties and insurance policies can help protect a homeowner in situations where parts of the property get damaged or stop functioning.
Home Warranties
A home warranty is a product offered by a company that maintains, repairs, or replaces any applicable component of a home for a specified period of time. This usually applies to major home appliances, electrical and plumbing systems, and the heating and air conditioning systems of a residence. Coverage differs from warranty to warranty. The typical term of coverage is one year.
The home’s appliances and systems should be in good working condition before the home warranty is purchased. A single, annual fee is paid. Then, for as long as the warranty is in effect, covered repairs and replacements will be taken care of by licensed professionals. As long as the problem is covered by the warranty, the homeowner can get it fixed by paying a comparatively small service fee rather than shelling out for full-price parts and labor. 🛠
In the event of a home’s resale, an unexpired warranty is transferred to the new buyer. If the policy has expired, a new home warranty policy can be purchased. The seller can buy a policy prior to the sale and transfer it to the buyer, or the buyer can purchase it for themselves. This is all negotiable.
Hazard Insurance
While home warranties are nice to have, home insurance is more of a necessity than a luxury. It protects homeowners in the event of serious damages. Replacing a hot water heater is one thing; replacing a house that burned down in a fire is quite another.
Hazard insurance is insurance against loss or damage to real property improvements. It’s generally limited to necessary replacements and repairs resulting from damages. Some natural disasters and accidents will be covered, but general wear and tear won’t be. Policies vary, so encourage buyers to shop around and make sure they can secure adequate insurance for the property they’re buying.
Insurance is a wise investment for nearly all homeowners, but it will be required by the lender if the homeowner has a mortgage. (The lender’s gotta protect that collateral!)
Flood Insurance
Standard homeowners insurance doesn’t cover flooding. That means that a homeowner with this kind of policy has no protection from floods associated with hurricanes, tropical storms, and heavy rains. They could lose their home and almost everything in it if a flood affects them.
Inform your buyer clients that, as part of good due diligence, they are responsible for:
Obtaining a flood certification or mortgage lender determination of whether the property is located in one or more special flood hazard areas
Reviewing maps depicting special flood hazard areas
Determining whether flood insurance is required
If a property is located in a flood zone, inform your buyer that it would be a good idea to purchase flood insurance. You can provide them with information about the National Flood Insurance Program, but ultimately, the responsibility lies with the buyer to make decisions regarding flood insurance (as well as any other insurance) for the property. Note that if they are buying the home with a mortgage, the lender will probably require it.
A new property in a flood zone may need an elevation certificate in order to get flood insurance. This certificate serves as proof that a new building or improvement is elevated in a way that will minimize flood damage.
Insurance and Warranties
Now you know how property inspections work, as well as what’s expected of you as a licensee regarding property inspections.
Before you go, let’s review some of the important terms, concepts, and principles you’ve learned along the way.
Key Terms
Here are the key terms you learned in this chapter:
hazard insurance
insurance against loss or damage to real property improvements; often required by lenders
property inspection
an inspection conducted to discover material facts or defects that exist within a property
utility
the measure of the degree to which something performs a desired function
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter.
The Purpose of Home Inspections
The purpose of a home inspection is to locate any physical faults that may affect the safety or value of a home. This is information most buyers will want to know. And if they’re financing the purchase, their lender will want to know as well.
The home inspection is a vital part of the home-buying process because it can reveal important defects and issues. The buyer typically pays for inspections, though this (like many things in real estate deals) is negotiable.
Inspection Reports
Inspection reports will list issues related to things like:
Construction
Design
Mechanical components
Electrical wiring and systems
Plumbing
Just remember that a home inspection is a limited visual survey. It’s not a comprehensive investigation. As such, home inspectors reveal readily seen things like foundation cracks and wood deterioration. What they cannot do, however, is inspect inaccessible areas of the home.
After the Inspection
The buyer has options after they see the results of the home inspection. Using a form like the Residential Buyer’s Inspection Notice and Seller’s Response (BINSR), the buyer will either accept the condition of the property, reject it and cancel the contract, or request repairs from the seller. The seller is not required to make any repairs, so the parties must negotiate a solution or terminate the purchase contract.
Home Warranties and Insurance
A home warranty is a product offered by a company that maintains, repairs, or replaces any applicable component of a home for a specified period of time. This usually applies to major home appliances, electrical and plumbing systems, and the heating and air conditioning systems of a residence. Coverage differs from warranty to warranty.
Hazard insurance, which is more likely to be required, is insurance against loss or damage to real property improvements. It’s generally limited to necessary replacements and repairs resulting from damages. Some natural disasters and accidents will be covered, but general wear and tear won’t be. Policies vary, so encourage buyers to shop around and make sure they can secure adequate insurance for the property they’re buying.
Chapter Summary
