You found a home... Now on to Due Diligence
Now you’re almost there. There are two more essential stops on the road to the closing table: the purchase of Homeowner’s Insurance and the hiring of a real estate inspector. Below is some information to help you put your best foot forward when making your final decisions.
Insurance—a true necessity!
First things first, get a Home Owner’s Insurance Policy. It’s for your own benefit, and usually, you cannot get a mortgage without one. Unfortunately, it is easier to acquire one for a newer home than for an older one. Most insurance companies now require upgrades, renovations, and retrofitting in order to even qualify for approval. The goal is to have a policy in hand by Closing Day. This is a policy of PROTECTION:
- Insures against loss or damage to the property from fire, water (not from flooding—that’s why we have Federal Flood Insurance), vandalism, theft, etc.
- Protects against personal liability in case someone is injured while on your property, i.e. Slipping on ice or tripping on a crack in the sidewalk
Therefore, you have to act fast, INSPECT, and negotiate with the seller to get everything UP-TO-DATE and REPAIRED before qualification.
Word of Advice: Choosing a policy can be confusing, so be sure to ask for referrals, acquire insurance quotes, and compare policies and premiums. A premium is a physical amount paid for insurance coverage. The unearned premium is the portion that must be returned to the insured when the policy is canceled.
Word of Advice: You can customize a policy by adding or amending its basic elements. The higher the deductible rate the lower the premium.
Things to Consider When Choosing a Policy:
- The Amount of Necessary Insurance - The home’s purchase price covers the land beneath it. You can subtract that from the cost when buying insurance.
- Replacement cost vs. Actual Cash Value - Replacement Cost is more costly, but will cover rebuilding no matter what, whereas actual cash value may actually cost you money due to rising construction fees if you experience a loss.
- Named-Peril Policy vs. Unnamed and Unlimited - An unnamed peril policy is more expensive, but is the better choice, covering damage from the most predictable to the very bizarre.
- Personal Property Insurance Option - Most likely, if your home is damaged the personal belongings inside may be damaged, as well. It’s extremely beneficial to have this; however, be sure to check if it covers you NO MATTER where the loss or damage occurs.
- Added Living Expenses, i.e. A hotel stay if your home is damaged and uninhabitable
- Specialized Insurance to cover geographically predictable perils, i.e. hurricanes, major flooding, and earthquakes
Once your policy is chosen, the insurance company will notify your lender and add the prepayment of one year’s worth of premiums to the closing costs.
Choosing an Inspector:
Word of Advice: New or old home, doesn’t matter…hire an inspector! Look for one skilled in new construction if necessary. You want to know everything and anything relevant to the current condition of the home you are about to purchase.
- Licensed, or a Member of a Professional Inspector’s Organization
- Background in a skilled profession (such as engineering)
- Enrolled in ongoing training
- Equipped with errors and omission insurance
- Samples of past inspection reports to view
- Specialization in a construction type
- Decent cost
Word of Advice: The longer it takes to get an inspection, the longer you are delaying closing!
Due Diligence involves the buyer investigating all aspects of the property they are interested in so they know everything they need to know before they finalize their purchase. A typical residential sale will have a due diligence time period of fourteen to twenty-one days, but there is no “standard” due diligence period unless a contract is signed, setting a finite block of time during which everything must be accomplished. This is at the discretion of the buyer and the seller (commercial proceedings take far longer).
THE FINAL VERDICT: Focus on the BIG issues; don’t sweat the small stuff!
Word of Advice: Consider issues that pose health and safety hazards first! Large, threatening issues that are uncovered by an inspection entail structural damage: weak or cracking foundation, jagged or diagonal cracks inside the house (windows/doors included), aged and damaged roof shingles, water stains and damage that can lead to mold and structural harm.
Property Inspection entails learning the ins and outs of your new home!
This is the nail-biting part of the process that reveals the hidden flaws of your seemingly perfect dream home. The key is to take the information you receive from your inspector back to the seller, who will typically either agree to fix the problems or lower the sale price of the home to cover the cost of all repairs.
Word of Advice: Sellers will cover certain costs and repairs—especially those for anything that was deferred or neglected within the household. However, anything linked with the regional location is blamed on the environment and is not really the seller’s responsibility.
Fair warning: don’t laundry-list any and all repairs or issues that are uncovered to the seller. Chances are, this will aggravate them and be a deal-killer. You need to talk with your inspector and agent to decide which repairs are most important and possibly time-sensitive to address.
The only time this will not happen is if the seller decides to sell the home “as-is,” which is when you would decide if the property is still worth the pre-inspection value. Before accepting this deal and possibly the responsibility of paying for one or more major repairs, consider your short- and long-term life goals, your living plans, and whether or not it’s worth the time and energy to fund.
Word of Advice: Before spending money on an inspection, read the Seller’s Disclosure, a written report of the property’s current condition, based on the owner’s knowledge. If a previous potential buyer held an inspection and an issue was reported, it may already be exposed in the report.
Reaching a Final Agreement:
Handle the negotiating period with care! If the seller continues to keep counteroffering your proposals, be considerate of the fact that he or she may look for a different buyer and find that easier than settling your disagreement. Therefore, your priorities are where you are willing to give in to make the deal work, if you are willing to buy the property “as-is” if that is the only choice you are given, and/or if you would consider using the inspection clause and walk away from the deal if the seller is unwilling to compromise. It comes down to using your heart, but also your head and deciding if going through to closing is the best decision and investment for your future.
What’s next? Your job gets a lot simpler from here on out. Your agent and lender handle the next few steps involving a survey, the title, and appraisal.
STORY TIME: Melissa & Ben
Home-buying is an Investment; Ensure Your Future
Melissa and Ben made a rather poor decision when they went about choosing their homeowner’s insurance policy. The rule of thumb is that the higher the deductible, the lower the monthly premium you must pay. Their policy, however, steered them off track with a monthly premium sky-high, which they eventually could no longer pay for on time. Insurance is supposed to protect you and your finances, not harm you. Unfortunately, after they could no longer cover monthly fees, their policy was canceled.
Melissa and Ben’s policy was canceled on December 20th and as they would find, “when it rains, it pours.” Conveniently enough, a blizzard struck Staten Island on December 23rd. It was so bad that people were snowed in until the day after Christmas. Of course, despite weather conditions which restricted family traveling, neighbors and family members who lived within walking distance of each other ventured out into the storm, hoping to spend some quality time together. Coincidentally, a middle-aged woman of about forty-eight years of age slipped on the sidewalk in front of Melissa’s front porch. Badly injured with a broken femur, she set out to sue.
Had Melissa and Ben still had insurance, they would not have been held personally liable for her medical expenses. With no insurance, though, they had to pay out of pocket, thus costing them the equivalency of at least five months’ worth of premiums, when you add in lawyer fees. The takeaway lesson from this story is simple: it is extremely important to shop around for insurance rates. Put an equal amount of time and effort into choosing your policy as you did when you chose your real estate agent and loan officer.
Important Note: Homeowner’s Insurance is not a luxury, but a necessity! Homeowner’s insurance also covers replacement costs if anything should happen to your property, whether it is damage from vandalism, a freak accident, or a natural disaster. Melissa and Ben had learned their lesson. Soon after their case was settled, they went to speak with loan officers, as well as insurance company officials to compare rates and find what policy would be suitable and affordable for them, relying on the salaries of a teacher and a plumber. An unnamed and unlimited policy is more expensive, but beneficial because one never knows what can happen. This policy is more expensive, but if you have the ability to fund this type, it can save you BIG BUCKS in the long run. However, even just to have a “named peril” policy that outlines how one is protected from certain mishaps is extremely beneficial. One can also look to acquire special insurance for personal property, natural disaster relief if they live in an area of high risk, and added living expenses one may foresee paying is their home is temporarily uninhabitable.
Any coverage is better than no coverage! Lastly, not only can not having insurance bite you in the butt, however, so can not conducting an inspection or not stressing the importance of hiring a good, thorough inspector. Take this advice: read the sellers’ disclosure first to get a sense of the property—its updates and its downfalls. Next, interview inspectors and ask for referrals, have whoever you hire investigate all aspects of the property to ensure no issues may arise after closing. No one wants to sign papers and then discover a crack in the foundation that could have changed their mind about purchasing the property, or a leaky bedroom ceiling that the seller could and should have repaired. Sure, it is impossible to close the deal being 100% positive that nothing will come up, but a good inspection will boost morale at the closing table. Don’t sweat the small stuff, as it can drive you crazy, but be assertive and make sure you stay informed. Know what you are getting yourself into well before you sign those papers. This home, and how you insure it and maintain it, represents your level of investment in the rest of your life. Enjoy it and be proud of it. Do it right!