by Marti Kilby
Once all of this information is gathered, a title officer reviews the data and issues a Preliminary Title Report, which is shared with the buyers, sellers, escrow officer, agents, and the new lender. This report is issued prior to issuance of an actual title policy and will list any matters that may be exceptions to the coverage. For instance, an existing deed of trust, items recorded in the Declaration of Covenants, Codes, and Restrictions (CC&Rs), or a judgment may be listed as exceptions. Some exceptions, such as an existing deed of trust or judgment, must be removed prior to title passing and issuance of a new title policy, while other items, such as utility easements or CC&Rs, pass along with the property. This is why it’s important for all parties to carefully examine the Preliminary Title Report.
The title officer will also examine the buyer’s and seller’s Statement of Information in order to verify the legitimacy of their identities. Once the necessary exceptions have been removed and the identities verified, and once the purchase funds have been wired to escrow by the buyer and lender, the new title and, if applicable, new deed of trust, will be recorded. After recording, the title officer will write the policy and release it to the new owner and lender.
Policy Types
There are two basic types of title insurance policies issued in California: CLTA and ALTA. The CLTA policy is issued by the California Land Title Association. This is considered a standard policy that protects against financial loss by fraud and forgery and recorded claims or unpaid taxes from a former owner. The ALTA policy is issued by the American Land Title Association and offers additional protections against unrecorded matters, such as encroachments and boundary disputes, among other items. Many title companies also offer an upgraded policy that goes beyond both the CLTA and ALTA policies in terms of expanded protection. It’s a good idea to review these policies with your title officer to see which level of coverage you really need.
Savvy Shopper Tips: Always purchase title insurance, even if paying cash. Investigate the types of policies offered. Lenders generally require an ALTA policy because of the extended coverage. Before purchasing an upgraded ALTA policy, review carefully to see if you really need the additional coverage. Always read your Preliminary Title Report carefully and ask questions about any exceptions you were not aware of, such as easements or encroachments.
Fidelity National Title, California Buyer & Seller Guide to Title & Escrow (Fidelity National Title, 2012), accessed June 2018, http://zabemortgage.com/wp-content/uploads/2016/04/ZABE_Fidelity_EscrowBuyerSellerGuide.pdf.↩
Ibid.↩
Chapter 14
Home Inspection and Repairs: What Should a Buyer Expect?
I have a very good client who I’ve helped buy five investment properties over the years. He is a smart guy and now owns about 19 properties. On every property, however, he has ignored my repeated suggestion that he get a home inspection, insisting he knows what to look for and an inspection is a waste of money for him. He may, however, change his mind next time around, as he just learned the hard (and expensive) way that a home inspection really can save you money.
His latest purchase was a condo built in 1982. When doing his walk-through, he turned on the heater and felt warm air coming out of the ceiling vent. He then switched it to A/C and again put his hand near the vent. After a few seconds, the air coming out seemed to be cooler, so he was satisfied that the system worked to both heat and cool the home.
After closing escrow, he did some painting and replaced the living room carpet, getting the unit ready to rent out. One particularly warm day, one of the contractors working on the property turned on the A/C, but even after running it for 15 minutes, the air blowing into the room was barely cool. The A/C was not working.
My client called an HVAC repair person, who determined that the A/C unit was the original one that had been installed back in 1982, and it simply wasn’t worth repairing. On the same visit, he inspected the forced air heater and determined that it too was on its last legs and should be replaced. $6000 later, my client was singing the blues.
A home inspection would have revealed both of these problems, and even if my client still wanted to go through with the purchase, he could have asked the seller to replace the A/C and heater, or requested a price reduction.
We’ve all heard the expression “caveat emptor,” meaning “let the buyer beware.” And nowhere is that more true than in the purchase of a home. Whether purchasing a brand new home in the suburbs, a downtown high-rise condo, or a 100-year-old lake side cottage, a home inspection by a trained professional will not only provide you with a clear picture of the property’s condition, but it could also save you thousands of dollars.
What Is a Home Inspection?
A home inspection is a detailed examination of the interior of a residence and the immediate exterior area that identifies any health or safety concerns as well as any system or structural problems that might require repair or replacement. The report is usually broken down into categories, such as electrical, plumbing, roofing, HVAC, foundation, grading, etc. Within each category, the items inspected are identified and commented on by the inspector. So, for instance, when examining a water heater, the inspector may note that it is only a year old and functioning properly, but he might also note that it is incorrectly braced according to California law. He would then make the recommendation in his report that the earthquake bracing be corrected.
In a slow-moving market where there is little competition, a buyer might opt to pay for a home inspection prior to writing an offer. However, in a competitive market where buyers are writing multiple offers and time is of the essence, home inspections are ordered after an offer is accepted and escrow is opened. Unless otherwise noted in the Residential Purchase Agreement, in California, the time period for completion of all inspections is 17 days from date of acceptance.
Often, homes are advertised and sold “as-is,” indicating the seller is not willing to make repairs. A home inspection is still recommended, as an inspection might reveal costly repairs that could alter your decision to purchase or perhaps renegotiate the price.
It should be noted most home inspectors are generalists, and they often suggest further evaluation by a licensed contractor in a specialized area. Most home inspectors do not climb up on your roof to inspect every valley, nor do they test wells or attempt to explain cracked walls. Their job is to report any anomaly that might, in the worst case, be a symptom of a larger problem, such as water stains in the attic or doors that don’t close properly.
The length of time required to complete the inspection will vary according to the type of home, the size, and the age. These factors will also help determine the price. A 20- to 30-year-old, 2,000 square foot home with three bedrooms, two baths will probably take about 2.5–3 hours to inspect. Very large homes may even require two inspectors, or a much longer time, and condo inspections are generally completed in a shorter inspection period. If ordering a home inspection as a buyer, it is recommended that you be present, along with your agent, so that the most important findings can be discussed with the inspector. It is also somewhat easier if the seller is not present and all rooms are accessible.
How to Choose a Home Inspector
Many home inspectors come from some type of background in the trades, or are licensed contractors. It is also desirable that they have specific training from an accredited inspection training program and are members of one of the professional inspection organizations. In some states, licensing may be required, so it is always a good idea to ask about an inspector’s credentials before your hire them.
Besides credentials and training, there are other important considerations, including the type of technologies they use. One of the most useful is an infrared thermal imaging camera. This allows the inspector to point the camera at a wall or appliance and check moisture and heat levels. This may reveal a small hidden pipe leak in a wall or a circuit breaker that is overheating; problems not visible to the naked eye, but real potential concerns. Many ins
pectors today are also taking advantage of drone technology or giant selfie sticks to get a more thorough view of the roof.
It is also a good idea to inquire about the format of the report itself. For any item an inspector comments on, it is useful if there is an accompanying photo included in the report that specifically identifies the problem. Without a photo, you may be scratching your head a month from now asking, ”Which pipe is he referring to?” Handwritten reports are becoming a thing of the past. A well-organized report created with a software program and saved as a PDF file is the new industry standard. This is a report that is legible and can be easily saved for future reference, or sent to the listing agent or a contractor for comments or quotes.
If you’re unsure about where to begin your search for an inspector, ask your real estate agent for one or more recommendations. If they’ve been in the business for any time at all, they have probably located a local inspector they trust to do a thorough job.
What Does the Seller Have to Repair?
Unless you are purchasing a brand new home with a builder’s warranty, the answer is “not much.” In California, the seller is required to have the water heater properly braced and smoke and CO detectors installed in specific locations throughout the home. If you are purchasing with a VA or FHA loan, your lender may require that some items be in working order prior to close of escrow. That being said, it isn’t always the responsibility of the seller to fix those items, and repairs may be a matter of negotiation.
One thing to keep in mind when you first see the inspection report is that no home is perfect, especially a resale home, and over time the number of flaws generally increases. The inspection report is not a laundry list to hand to the seller with a request to repair everything. Rather, it is a reference guide that provides a broad picture of the condition of the home and helps you prioritize repairs and improvements. The report will make several distinctions for each item inspected, indicating whether the item is dysfunctional versus deficient and whether or not it should be replaced or repaired.
The process of determining what to ask the seller to repair should start with what you are paying for the home and how many repairs are necessary. If you are paying top dollar, you are in a better position to expect the seller to make repairs or to provide a credit to cover the costs of repairs. On the other hand, if you got a steal of a deal on the home, or purchased a short sale or REO, it is unlikely repairs will be made or a credit provided.
Another thing to consider is whether or not you had knowledge of the needed repair prior to writing your offer. If it is obvious to even an untrained eye the roof needs to be replaced, that should have been taken into account when writing your offer, and it is unlikely the seller will cover that cost. However, if as a result of the home inspection you discover that the entire HVAC system is inoperable, that is likely not something you knew prior to writing an offer. That would be an expensive repair and one you might ask the seller to make, or provide as a credit.
Repairs are negotiable, but when asking for seller repairs or credits, it is in everyone’s best interests to be reasonable. Ask for the big-ticket repairs if appropriate, and just figure that you’ll take care of the smaller items, like a broken outlet cover or a torn window screen.
A home inspection is always important, even for an experienced investor. Not everything is immediately apparent on a walk-through. Think of it this way: A home inspection is rather like being able to fast-forward in a marriage by five years and learn all about your spouse before the wedding day! Certainly not an opportunity to be missed.
Savvy Shopper Tips: Always get a home inspection, as the benefits far outweigh the cost. Don’t panic when you see the report. It is the job of the inspector to note all anomalies and no home is perfect. Discuss the report with your agent and determine which repairs are the most important to address. Do not ask for everything to be fixed unless you’re purchasing a brand new home.
Chapter 15
Uh-Oh! A Word about
Real Estate Disclosures
Several years ago, I was contacted by a couple who wanted to sell their home ASAP, despite the fact they had only lived in it for a few months. They explained that, after closing escrow on a Friday, they were awakened the next morning by the very loud whirring of 100+ motorcycles, and it was non-stop until 6 p.m. It turns out that down in a canyon about a quarter mile from their home is a dirt motorcycle track that is only open on the weekends. When house hunting, they had only viewed the home on weekdays, and as the track is not visible or accessible from the street where their house is located, they had no idea it even existed.
They were devastated! Their decision to buy in that particular community was because it was out in the country and quiet! Later when speaking to the neighbors, they also learned that the reason they were able to purchase the home at such a low price was that home values had dropped over the last few years, as the track had become more and more popular and the noise level grew.
Their disappointment quickly turned to anger. Why hadn’t the previous owners disclosed information about the track and the noise? Why hadn’t their agent warned them? She worked in that community and certainly knew about the noise issue.
While there is a certain level of responsibility that falls on the buyer, in this situation, the seller and their agent were clearly at fault for not disclosing the noise nuisance. We managed to get their house sold, with full disclosure about the noise, but they sold at a loss. They sued the sellers and the agent, and to the best of my knowledge, they’re still battling. So, not only did they lose money on the purchase and sale, but they’ve also racked up thousands in legal fees. As I always tell my sellers, disclose, disclose, disclose!
Two Basic Categories of Real Estate Disclosures
The number of disclosures now required by law has increased over time as a result of legal actions, often taken by buyers against sellers who failed to disclose pertinent information about the property, as illustrated in my story above. A disclosure pertaining to a specific property prepared by the seller who has knowledge of the property is the first category of disclosures. This would also include disclosures about whether there is an HOA, or any special fees associated with owning the property. Although the laws vary, every state now requires sellers to provide some sort of disclosure about their knowledge of the property, including any potential safety hazards or conditions that could increase the expense of ownership or reduce the value of the property.
The second category of disclosures are those referencing existing conditions that may be inside or outside the home and unknown to the seller, such as the home being in a flood zone or fire danger zone. Some of these disclosures are prepared by companies who analyze the location of a specific property in relation to hazards, such as earthquake zones or airports. This information is compiled into a Natural Hazard Disclosure (NHD) Report, which is typically ordered by the seller’s agent, paid for by the seller, and delivered to the buyer. Along with the NHD, several other informational booklets may be delivered to the buyer, covering topics such as earthquake safety, environmental hazards in the home, and energy conservation. These are typically issued by the state or local authorities as a means of educating homeowners about potential health and safety concerns.
California Real Estate Disclosures
As noted above, it is the responsibility of the seller to pass along all pertinent information about a property to the buyer, including any reports or inspections. Failure to disclose could result in fines or liability for the seller for any resulting damages. In California, there are many disclosures and some are specific to particular situations, such as a short sale or purchasing a foreclosure.
In the following list, I’ve put together a brief description of the most common disclosures used in the sale of a 1- to 4-unit residential property. These disclosures are offered by the California Association of REALTORS and made available to agents licensed in the state. Other forms may be legally acceptable, but these are the forms m
ost commonly used. They are often referred to by their initials, which I’ve included next to the names.
Agency Disclosures (AD)—Clearly identifies the agents and brokers who are representing the buyer and the seller.
Agent Visual Inspection Disclosure (AVID)—Agents visually inspect the property and make note of specific issues or attributes that are easily identified, such as a hole in a wall or a broken window. They are not responsible for doing a home inspection or testing appliances.
Transfer Disclosure Statement (TDS)—A comprehensive statement regarding the condition of the property. This is completed by the seller unless the seller has never lived in the property; in which case, they are exempt from completing.
Seller Property Questionnaire (SPQ)—Used in addition to the TDS or when a TDS is not required. The SPQ provides the buyer with additional information about known material facts regarding the property.
