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What every client should know about home inspections and warranties
Most homeowners understand the importance of getting a thorough home inspection prior to purchase; with the median price of a single-family home in California having surpassed $400,000, buyers don’t want any unexpected surprises after the close of escrow. Likewise, most agree that it’s common sense to purchase a home warranty to protect themselves from exorbitant costs associated with repairs or replacement due to unexpected mechanical failure of major systems or appliances.
Despite these facts, there remains a lot of confusion over what is involved with a home inspection and what home warranties actually cover. Use this article as a primer to educate your clients about what’s covered, what’s not, and which party typically is responsible for covering repair costs.
The Inspection Process
According to estimates from the California Real Estate Inspection Association (CREIA), about 70 percent of California home sales involve a general home inspection, although it isn’t mandatory. However, it is mandatory that home sellers disclose anything that’s wrong with the home prior to selling.
“There’s no affirmative obligation for the seller to sell a ‘perfect’ house; there’s only an obligation to give the buyer what is being represented,” says June Barlow, general counsel for C.A.R. “The home is sold in its present physical condition, warts and all, but a seller can’t conceal the warts and the home has to be maintained so it’s in the same condition as it was on the date of acceptance.
“Our model is really that of
‘disclose and negotiate,’” Barlow continues. “There’s a 17-day inspection period
and the buyer is supposed to investigate. If there are problems, buyers
negotiate that with sellers or they exercise the right to get out of the
A standard home inspection involves a visual, noninvasive examination of the home from top to bottom. The inspector evaluates and reports the condition of the structure, roof, foundation, drainage, plumbing, heating system, central cooling system, visible insulation, electrical systems, fireplaces and chimneys, walls, windows, doors, and so forth. Only those items that are visible and accessible by normal means are included in the report. An average home inspection in California typically takes two to three hours and costs about $300 to $350.
Notes Joe Nernberg, a home inspector for AmeriSpec Home Inspection Service in Simi Valley, “The cost to hire a plumber, a heating contractor, a roofing person, an electrician, a structural engineer, etc.—they’d spend about $30,000 to do that type of inspection. A general inspection is one that flags things that are obvious and visual and then refers a client to get other inspections afterward if advisable.”
Jerry McCarthy, a construction consultant and spokesman for CREIA in Northern California, concurs, adding, “If you go to a general practitioner for a physical, they’ll look at everything and if they find something unusual, they’ll refer you to a specialist. It’s the same thing with home inspections; if the inspector finds something not right, whether it’s electrical, structural, or in the plumbing, he or she is going to recommend further evaluation by a specialist in that area.”
According to McCarthy, most
homeowners should plan on at least one problem that will require further
inspection. He says, “No house is perfect, even a new home.”
Steve Fife, a home inspector with Spyglass Inspections in Ladera Ranch, says many buyers may “think the home inspection is a repair list that the seller is required to fix, which isn’t the case at all. The home is sold ‘as is’ and that’s written in the California residential purchase agreement.”
After inspecting a home that needs repairs, Fife says he advises clients to go out and get a few estimates for repair costs, average them, and then ask for a credit toward the home purchase for that amount. “That’s easier for a seller to stomach. It’s usually not a good idea to have a seller fix something, anyway–it’s much better for the buyer to do it and ensure they get it done properly.”
Because inspections typically are limited to a visual check of the premises, buyers may not realize that some aspects of a home don’t get a review. “Sometimes people think we can see through walls, or see things underground,” explains Nernberg. “I had clients that were unhappy that a gas leak went undetected. It was buried a few feet underground, and they thought a home inspection should have covered that. I explained to them politely that a home inspection is not an exhaustive inspection.”
REALTORS® and their clients should note that home inspectors currently aren’t licensed by the state, which means anyone can claim to be an inspector. With that in mind, it’s wise for buyers, sellers and REALTORS® to interview inspectors they’re considering using. Topics to cover during the interview include the inspector’s qualifications, the training the person has had, how long the person has been inspecting homes and how many homes that person has inspected, whether the person is insured, how long it takes the person to complete an inspection (note: a 2,000-square-foot house should require at least two hours; anything less could mean a lot will be missed), whether you can see a copy of a completed inspection report, and whether the inspector belongs to a professional organization such as CREIA, which requires passing an exam and taking continuing education credits to obtain and maintain membership.
Because a Warranty Isn’t a Guarantee
Nine out of 10 existing home
sales today include a home warranty, according to the Home Warranty Association
of California (HWAC). Basic coverage for a home warranty means the warranty
company will repair or replace an existing home’s covered mechanical systems and
major built-in appliances that break down due to normal wear and tear. The
typical warranty contract lasts for one year (but is renewable) and includes the
home’s heating, plumbing, electrical system, water heater and major appliances.
That said, a home warranty doesn’t act as a catch-all for home-repair costs. “One of the biggest misconceptions about a home warranty is that it covers everything,” says Ray Adams, a board member for HWAC. “But normally, we don’t cover ‘consequential damages’: if a water heater bursts and the carpet or floor gets damaged, the warranty company is not responsible for that–just the water heater itself. We also don’t cover pre-existing conditions, and sprinkler systems outside aren’t covered. Our coverage is limited to the perimeter of the house and the garage.”
The average premium for a standard home warranty policy is $315 a year, according to HWAC, which consists of nine member companies that account for 95 percent of California’s home warranty sales. However, some premiums may be higher if the house is very large and has duplicate systems or extra coverage is selected to cover such things as pools and spas. Also, most policies have a $50 to $100 deductible. Adams says that the number of consumer complaints is few, although they are typically due to homeowners not understanding their policy and coverage.
According to HWAC statistics, warranty companies sell about 800,000 home warranties annually through a combination of renewals and new contracts, and approximately 90 percent of all resold homes in the state carry a home warranty. Betty Carter, regional manager for American Home Shield in Santa Rosa, says, “Home warranties in California are more of a competitive-sell–almost everyone here has one. In the rest of the nation, for instance in states like Montana where the percentage of home warranties is about 20 to 30 percent, it’s more of a concept-sell.”
According to Adams, one of the biggest problems warranty companies have is when a buyer closes escrow and is simply told by the seller or broker that the home has a warranty. However, the new owner usually doesn’t receive the warranty contract until five to 10 days after close, due to paperwork and payment processing. Then, if the homeowner has a problem during that first week–HWAC reports 15 to 20 percent of its claims occur in the first 30 days–the owner will go out and get the problem fixed, mistakenly assuming that reimbursement is due from the warranty company.
“Our policies explain that
homeowners must call us when they need a repair, not their own contractors,”
says Adams. “They often don’t get the best price. Whereas we can put a water
heater in for $300, some contractors will charge $1,000. We recommend that the
REALTOR® gives the buyer a sample of a contract prior to closing so the new owner knows exactly what’s covered and who to call if anything happens.”
The state of California requires that all home warranty companies be licensed by the Department of Insurance. To ensure a company is licensed and to get further information, such as number of complaints filed, consumers can call the California Department of Insurance hotline at (800) 927-HELP (4357).