Insuring to avoid expensive defects

In bypassing inspections, warranties to improve their chances of getting a house, many buyers are taking a gamble and might get stuck with a home in need of repairs.

July 24, 2005|By Ryan Basen | Ryan Basen,SUN STAFF

Monir Hossain really wanted a three-story townhouse he saw in Ellicott City. He was competing against several other potential buyers, so, to make himself stand out, Hossain bid over the listing price and waived a home inspection.

His strategy worked. He landed the house in May for $395,000.

But when he and his family moved in, Hossain discovered that the heat pump did not work. The replacement cost: $1,800.

Fortunately for Hossain, his Realtor had purchased a home warranty for him, which covered the cost of a new pump.

Hossain was lucky. Many other buyers are not.

In today's red-hot housing market, inspections and warranties for existing homes (also called "service contracts"), once usually the responsibility of the seller, are now purchased by buyers - if they are ordered at all.

Many buyers are taking a big chance if they don't buy the protection, experts warn.

Neglecting home warranties and home inspections is "a mistake," said Allen J. Fishbein, housing director for the Consumer Federation of America, the advocacy group in Washington. "Buying a home is probably the single greatest financial investment people will make in their lifetime. As desirable as it is to get that home of your dreams, it's equally desirable to make sure that house doesn't turn into a nightmare."

Professionals usually conduct home inspections after the buyer and seller have agreed on a contract. Costs range from about $250 to $800, depending on the house size, with an average in the $300s; inspectors check everything from the electrical wiring to the water supply, roofing and structure of the house.

Usually the sales contract calls for the seller to make repairs - unless a problem is too big and voids the sale. In some sales contracts, the buyers agree to absorb costs up to a certain amount.

Home warranties are one-year renewable contracts costing $300 to $450. They mostly cover major appliances, plumbing and the house's foundation. Sellers purchase them to entice buyers, while buyers purchase them after the house is sold.

Both services are used as "bargaining chips," said Lew Sichelman, a syndicated real estate columnist based in Chesapeake Beach. In a buyer's market, sellers purchase warranties and accept home inspection stipulations to entice buyers. In a seller's market, buyers often pay for these services.

"When there are multiple offers at or above the asking price, [sellers] don't have to offer any incentives whatsoever," Sichelman said. "If a buyer doesn't want an inspection or doesn't care about service contracts, which contract are you [the seller] going to take?"

Paul Jones is glad he and his wife had an inspection clause for the $360,000 home in Laurel they bought in May.

The inspector "found things that I would have never thought of," Jones said. "It was worth it. ... You felt like you were not going to be blindsided."

Since the Joneses stipulated that the sale was subject to a home inspection, they didn't have to pay for the repairs.

Buyers who drop inspection clauses from their contracts are essentially taking on any repairs - major and minor - themselves. Some buyers can be in for a shock.

Sometimes, "we get called in after [a sale] and we tell them what we find," said Tom Morgan of Morgan Builders Home Inspection Services of Baltimore. "If they would have known prior to going through the whole transaction, they might have backed out."

Morgan, for instance, found major structural damage in a Baltimore house after its new owner hired him. Fixing it would cost more than $100,000, he said.

"The house should have been demolished - not sold," he said.

An inspection can pay off by spotlighting flaws that are cheaper to correct sooner than later, even after settlement. In some cases, it's a safety issue.

"We inspect a little over 500 houses per year and find problems with virtually all of them," said Terry Heller, head of Residential Property Inspections Inc. in Forest Hill.

Heller recently discovered faulty aluminum wiring in a Bel Air townhouse - a major fire hazard - and a carbon monoxide leak at a Towson house.

But buyers sometimes don't ask for an inspection for houses priced under $500,000, where competition is hottest.

Joe Deaner, a buyer's agent for Pat Hiban Real Estate Group, recently instructed a buyer to do so to enhance his bid for a Windsor Mill townhouse. The strategy worked. He got the house despite being outbid by more than $15,000.

Instead of an inspection, Deaner advised the Windsor Mill buyer to get a home warranty.

"With the way the marketplace is," Deaner said, "many times we have to waive the inspection."

Buyers are increasingly buying home warranties now that sellers are not offering them as often, real estate brokers and warranty companies say. About half of homebuyers order warranties nationwide, said Art Ansoorian, a spokesman for the Home Warranty Association of California.

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