Warranty policies aren’t cheap, but buyers who don’t get one may later regret it.
DEAR DAVE: The offer we made on the home we want to buy was accepted but, because the housing market in our area is still hot, we agreed to skip a professional home inspection to speed up the closing and make our offer stand out from competing buyers who made their offers contingent on the home first getting a passing grade from a pro inspector. Now our real estate agent says that we should pay for a one-year home warranty plan that would cover the cost of repairing or replacing things like built-in appliances and the like if they break down after we move in. The annual fee would be about $700. Is it worth it?
ANSWER: Before I respond to your question, I’ll repeat what I have written in this column before: No buyer should ever purchase a home without making their offer contingent on receiving a satisfactory report from a professional home inspector, even in the hottest of housing markets. There are just too many things that can go wrong, from hidden defects that even the seller didn’t know about to easy-to-discover problems that the seller simply didn’t disclose.
That said, paying the $700 for a one-year home warranty policy would be a good idea — especially because you didn’t get an inspection.
A typical warranty policy — sometimes called a “service contract” — provides for the repair or replacement of most appliances, electrical and heating systems, the water heater and a handful of other items that might break down or wear out within a year after the new buyer moves in. Coverage for other items, such as a pool or spa, can usually be arranged for an additional charge.
Such policies not only give buyers an extra measure of confidence to make an offer and close a deal, but also can protect sellers if something goes wrong several months after they move out.
Spending $700 or so for all the coverage that a home warranty policy provides would be a wise investment on your part, offering both you and the sellers an extra layer of protection if something goes wrong after the sale is completed.
REAL ESTATE TRIVIA: Rather than paying monthly or annual premiums for a warranty policy that might not be used soon, some homeowners instead put an equal amount into a reserve account that they can tap to make repairs if something breaks down a few years down the road. As a bonus, money in the reserve account can eventually help pay for a new roof or other items that a typical warranty won’t cover.
DEAR DAVE: What is an “aviation easement”?
ANSWER: It’s a local rule that restricts owners of properties situated near an airport from having structures or trees that exceed a certain height.
The height restrictions help to guarantee that planes or helicopters arriving or departing the airport won’t encounter an unforeseen object, protecting the safety of their passengers as well as the people who live below.
DEAR DAVE: Is a “life estate” the same thing as the “living trusts” that you sometimes write about?
ANSWER: No, though I suppose you could consider them the real estate equivalent of kissin’ cousins when it comes to holding title to a home.
The primary reason why homeowners form a living trust is to ensure that their property will pass quickly and relatively inexpensively to their heirs after they die instead of requiring the heirs to suffer through the long and costly probate process. The names of the heirs, though, usually don’t immediately go on the title to the property.
A life estate, sometimes called an “estate for life,” works differently. It’s a seldom-used method of holding title to a home, sometimes utilized by older folks who want to leave their home to a grown child but want the security of knowing that they can stay in the place for as long as they wish.
To illustrate, say that widow Helen Homeowner wants to transfer her property to her son, but wants to stay in the home for an indefinite period of time. By creating a life estate, she could add her son’s name to the title of the home today and stay there until she either moves out or dies.
In legal parlance, Helen would become a “life tenant,” while her son would be considered the “remainderman.”
By adding her son’s name to the title, the home would automatically pass to him upon Helen’s death without having to go through the costly and time-consuming probate process.
Still, creating a life estate can have its share of drawbacks. For starters, adding a grown child or children to the home’s title can make it more difficult to refinance or eventually sell because everyone would have to agree to it. After all, the kids would be co-owners.
In addition, if Helen Homeowner had a falling out with the remainderman, she couldn’t unilaterally remove his name from the title unless he agreed to it first. He would also have the legal right to share in any resale proceeds.
Creating a life estate may even trigger a federal or state gift tax or unleash a bevy of other tax-related problems. Because of these and other issues, it’s important for anyone considering the formation of a life estate to first discuss the plan with both a tax pro and a real estate attorney.
Unlike a life estate, creating an inexpensive living trust provides important estate-planning flexibility while also avoiding the need for lengthy probate proceedings. For a copy of our “Straight Talk about Living Trusts” booklet, send $4 and a self-addressed, stamped envelope to D. Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405. Net proceeds will be donated to the American Red Cross.
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