As a real estate investment company (specifically flipping), we're in a slightly unique situation as we rarely hold a property for more than 3-6 months. As such, we aren't intimately aware of all the nooks and crannies of the home, nor are we able to catch everything that might be wrong with the property. The shorter the holding period, the more this is true.
Quick story to share leading up to the home warranty specifics. We recently bought and sold a property. The entire holding period was less than 3 months and the repairs were relatively minor. It was mostly cosmetic stuff throughout the property such as flooring and paint. We also had some minor plumbing work in the kitchen that was identified during the buyer's inspection. So we addressed those issues and move on to closing without a hitch.
About a month after closing, my agent on that transaction contacted me to inform me that the buyer's wanted to know if we knew about or would address (fix or advise on fixing) a water damage issue in the kitchen cabinets. The initial inspection when we purchased the property, the buyer's inspection, or the request for cure to satisfy the inspection contingency did not address or catch this issue.
Of course, my concern is that the buyer will eventually seek damages against me for this issue. I don't believe that will be possible based on the circumstances but then I don't really want to end up in court defending a case either. I want to do what is right for any buyer by addressing any known issues we find during repairs or by the inspectors. The fact remains that we can't find and fix everything unless we open everything up and we all know that just isn't how it works.
Will A Home Warranty Help In This Scenario?
Now I finally get to the title of the post. I naturally start asking myself how to avoid this type of thing in the future. My mind immediately jumps to a home warranty. In the past, I had thought of a home warranty as an unnecessary expense that wouldn't pay off. After this event, regardless of what happens with it, I've changed my mind a bit on the subject. I am now considering purchasing a home warranty on all of our projects. However, what I've discovered in reading a bit more about home warranties is that the buyer would still not have coverage in this scenario or at least more than likely they wouldn't have coverage.
Take a look at this sample home warranty contract. In reading the fine print there are always exclusions. These exclusions vary by the options chosen (more options, more expense of course). I'd say in most, or perhaps all cases, a home warranty will not cover the scenario I discussed above. If that's the case, the buyer would still come back to me looking for answers and potentially asking for reimbursement for the cabinet repairs.
When we buy houses things like this are going to happen. It's inevitable that we won't be able to find everything. So what am I to do in order to protect us from future issues? There are two things we are, or will start employing when we sell a home. The first is to get a home warranty which covers most things. I think that we'll use a bit of discretion regarding how far to go with the warranty based on the age of the home and perhaps some other variables.
The second thing we identified was a tip from another investor about some language to put into the contract. That language is as follows:
"The subject property is corporate-owned and has never been inhabited by the seller. Consequently, a blank Real Estate Condition Report with all line items stricken is provided. The property is being sold “As-Is, Where-Is” without any warranty or representation as to condition or fitness of any portion of the premises. Buyer shall rely entirely on buyer’s due diligence and inspections to determine the condition and fitness of the property before consummation of the contract. Closing of the sale and payment of the purchase price by the buyer shall constitute acceptance of the condition of the property, and shall indemnify and hold harmless the seller and seller’s agents against any alleged or actual defects in the property that may arise at any time in the future."
Of course, if we included a warranty then we would pull the warranty language out of that clause but include the rest.
I'd love to hear from any investors or agents regarding what you have seen in the past or employ yourselves during the sales process. Or even if you have thoughts on the language I outlined above from the buyer's or agent's perspective, please share and discuss.
Thanks for reading.
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