What You Should Know About Homeowner’s Insurance
If you are buying a new home, you will be required by the lender to have homeowner’s insurance, the purpose of which, in part, is to protect the lender’s collateral. No insurance, no closing.
If the home is a condo, then there should be a master insurance plan for the complex and that may be all you need, but check with your lender – you pay for your portion of this insurance in your monthly HOA fees. It is still prudent to also have a homeowner’s policy to cover the cost of your appliances, the walls, flooring and all your personal stuff.
If you are buying a single “family” home, then you will need to:
- Make sure the home is insurable during the contingency period as stipulated in your contract [this may vary in states outside CA] by checking with a insurance company (perhaps one you already use), and
- Obtain a 1-year paid in advance insurance policy with a binder (the receipt) to provide proof of coverage at the time of closing.
You should also know that some insurance companies perform on-site inspections of the home before they will set up a policy (AAA for one) and more and more are doing so because of problems with under-insurance, existing damage (e.g., REOs and short sales), potential liability issues (pools, spas, tennis courts), and to make sure the cost of replacement is accurate (if there are lots of upgrades but these are not part of the policy, your replacement cost will be less…a big problem).
Buying a Home “As Is”
At some point in your home searching you are likely to see a listing where it says the home is being sold “as is.” I decided to mention this so you can watch for it, but also so you will give careful consideration to what it means.
1. AS IS generally means the home must be purchased in its current condition, i.e., the seller is not going to do any repairs, should they show up in your visual inspection or in the home inspection. Use of these terms may vary from area to area and may have somewhat different meanings. You may also see “seller will not do any repairs.”
2. AS ISmay have particular implications for the contract, an inspection contingency that buyers often insert in their offer, and other matters. It is smart to talk to your agent to find out what this may mean for you locally. This does not mean, I don’t believe, that you can’t do an inspection (although check on the requirements) but that you will be on the hook for them yourself. Depending on the issues it could raise a question or red flag for your mortgage company and in the appraisal of the property.
3. I would not necessarily assume that AS IS means you CANNOT negotiate some repairs. I have had a few situations where I was able to negotiate some repair work for my buyer clients on AS IS properties. This is more likely in cases where there are safety issues (problemswith the electrical wiring, presence of carbon monoxide from the furnace) or perhaps structural or foundation defects. A lender is not going to want to, and may not, fund a home that has significant structural or similar issues because of the risk to the loan. So do your due diligence.
4. Another matter to consider is insurance. An insurance company may not insure a home that has significant risk factors, or past claims. And if you doget insurance and a problem occurs with the home that is deemed to be a pre-existing or long-term condition, the insurance may not cover the claim. Plus you may lose the policy.
This is NOT to discourage you from looking at homes that need work, andwhere the seller is not willing, or is unable, to make any repairs. However it IS a caution to you to do your investigate work carefully and work closely with your agent when SOLD AS IS pops up. I have also seen a few cases where this was not mentioned up front but arose later in the negotiations, particularly in the case of lower offers.
Finally, in these cases it is even more important for you to do a home inspection so you know what you are getting.
Consider a Home Warranty
When buying a new home here in California (not just new construction) it is typical that a buyer will request a home warranty, to be paid by the seller, as part of the offer. This is not always to the case is other parts of the country. And it is not mandatory.
A home warranty provides the new homeowner the assurance that problems with appliances, plumbing, and similar issues will be taken care of within the first year of living in the home (depending on pre-existing conditions vs. not and other factors). This can result is a big cost savings shouldthere be significant issues. A “typical” home warranty will run about $250 – $350 depending on the house. And you can add in things like A/C for additional premiums. There are many companies, like American Home Shield, that provide these warranties. But do your due diligence, since companies vary in reputation, service, details of their warranties, consumer satisfaction, and more.
If you are not in our area, you might want to consider obtaining one of these if not offered by the sellers on the home you are buying. Or ask about having this provided as part of your offer (talk with your agent). And they can be renewed each year in many cases. Consider it money well spent.
Insurance on your new home – Part 4
Here’s some more advice on insurance for your home.
Q. Can a seller include a requirement that the buyers demonstrate their insurability as a condition of the sales contract?
A. Yes, although not common, such a requirement could be included in an agreement. However, the specific language of such a condition should be carefully considered. Check with your real estate agent to find out if any standardized language has been developed in your community and/or consult with your attorney. As discussed herein the factors used to determine a particular buyer’s insurability will vary from one insurance company to another and can leave questions regarding whether and when such a condition had been satisfied.
Q. Can a buyer include a requirement that property be insurable and/or the insurance be affordable as a condition of the sales contract?
A. Yes, but the specifics of such a condition should be carefully considered. Check with your real estate
agent to find out if any standardized language has been developed in your community and/or consult with your attorney. There are multiple factors which might be used to determine a property’s insurability or the “affordability” of the insurance in such a clause. The factors used in a contract clause could include, but are certainly not limited to:
a. acceptable C.L.U.E. report
b. purchaser is satisfied of the insurability of
property
c. secure binder of property insurance on property
d. cost of insurance doesn’t exceed specified
threshold
Both buyers and sellers should be aware that there are advantages and disadvantages to such a clause that should be considered. The advantage of such a contingency is that it may allow the buyer to cancel the transaction if the property proves uninsurable or insurance is unaffordable. This avoids reliance on a financing contingency and any question regarding its application where the property and borrower would otherwise qualify for a loan. On the other hand, the inclusion of such a clause may affect the acceptability of an offer, particularly if the offer is being made in a competitive environment.
The information in these 4 installments on insruance were prepared by the Risk Management Committee of the National Association of REALTORS®
Insurance on your new home – Part 3
Here’s the next installment of important insurance information relevant to your home purchase. If I can help in any way, please send me an email, or visit my website for more information. There is also some helpful information related to moving on my blog Relocation A to Z.
Q. Should I get a copy of the C.L.U.E. Report? A. While this decision is up to the property owner, it is important to understand the limitations of the report. The report contains only raw information and how that information will affect the insurability of a property isn’t explained as a part of the report. Moreover, not all insurance companies use the report and those that do use it don’t all use the information in the same way. As a result having the report may not enable you to predict whether a particular company will insure the property. If you want information on how a C.L.U.E. Report or other similar report may affect your ability to obtain insurance contact your insurance agent.
Q. Are there factors unique to a buyer that can affect their ability to obtain insurance?
A. Yes, although not used by all insurance companies in determining eligibility for insurance, some companies do review the claims filed by the buyer on properties owned by the buyer during the preceding five years. This is another aspect of the C.L.U.E. Report database that focuses upon the insured individual rather than the insured property.
Another more controversial factor is the use of Insurance Scores. Insurance Scores, which are formulas developed by insurance companies in an effort to predict the likelihood of an individual filing claims, are sometimes used to determine to whom or at what price an insurance policy will be issued.
Insurance scores are not standardized within the insurance industry and both how they are calculated and how they are used is generally not known outside of individual insurance companies. If you want additional information on how insurance scoring may affect your ability to obtain insurance contact your insurance agent.
Something Funny!
Performance Evaluation Quotes…
w “He would be out of his depth in a parking lot puddle.”
w “This young lady has delusions of adequacy.”
w “He sets low personal standards and then consistently fails to achieve them.”
w “This employee is depriving a village somewhere of an idiot.”
w “This employee should go far – and the sooner he starts, the better.”
w “When she opens her mouth, it’s only to change whichever foot was previously in there.”
Insurance on your new home – Part 2
Here is some more information on insurance and stuff you should know as a home buyer.
Q. When should a buyer apply to obtain an insurance policy to cover the property being purchased?
A. The interest of both buyers and the sellers now suggests that the buyers should begin their search for insurance no later than the time of the contract to purchase is signed. This helps to assure a firm commitment for the issuance of a policy well in advance of the settlement of the transaction. Waiting until the last days or even weeks before the closing can limit the opportunities of the buyers and sellers to address the affordability and availability issue and, if needed, to find alternatives for difficult to insure properties. There have been many examples of transactions which have been adversely affected in some manner because of problems associated with insurance availability/affordability.
Check with your agent regarding any state-specific requirements that may exist or forms that need to be signed as part of the purchase agreement. What we have here in California may not apply to your situation, but the concept of checking on insurance is a wise precaution anywhere.
Q. What kinds of events/records can affect the ability to obtain insurance on a property being purchased?
A. A number of factors can affect the availability and cost of homeowner insurance on a property being purchased. For example, they include:a. past claims filed on the property (up to previous five years)b. poor insurance credit score of the prospective purchaser c. past claims filed by the property purchaser on other propertiesd. physical characteristics of property (e.g., leaky roof)e. characteristics of the property’s location (e.g., proximity to fire station, regional weather conditions) Q. How does the insurance company know what claims have been filed in connection with the property?
A. Approximately 90% of all insurance companies contribute information regarding
claims to an insurance industry database. When underwriting a new policy the insurance company may obtain a report from this system from one of a couple different sources to determine the property’s claims history. This report is most often identified as a comprehensive loss underwriting experience report or a “C.L.U.E. Report.” The report contains information regarding property claims filed in connection with a particular property and claims filed by a particular insured person. For a fee the current owner of the property may obtain a copy of this report. A copy of the report is available to the property owner through companies such as ChoicePoint, Inc, either by writing to ChoicePoint, Inc. located in Alpharetta, Georgia, or by going to their website, choicetrust.com, and A-Plus, either by writing to A-Plus located in Jersey City, New Jersey or calling 800/709-8842.
Didja know?
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Insurance on your new home – Part 1
Here is the first installment of a discussion on insurance for your new home. This is important stuff! (this information is from the National Association of Realtors)
Q. How can insurance availability/affordability affect the real estate transaction?
A. The affordability and availability of insurance affects both buyers and sellers. Buyers will typically be obtaining mortgage financing to pay the purchase price of the property. The lender will require that there be property insurance to cover their interest in the property. If proof of insurance is not available at closing the lender will likely refuse to release the funds and therefore delay or even derail the transaction, either of which can impose both inconvenience and cost to both the buyer and seller. Even in a “cash” transaction the buyer may be hesitant to complete a transaction where insurance is not available to cover the buyer’s equity in the property.
