Money pit: Who should pay to fix undisclosed, undetected problems with house?


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Dear Real Estate Adviser,
My son and daughter-in-law bought their first home over a year ago and it’s been a nightmare. Many flaws, including plumbing, obvious termite damage and others, weren’t disclosed, and they’re struggling to fix them. They had a home inspection and bought a home warranty from a firm that’s offered to refund their money because the damage is considered pre-existing. Sadly, it looks like a losing battle. They have good credit but can’t afford to continue on this path. Should they sue? Should we encourage them to walk away?
— Mary

Dear Mary,
Oy. Your son and his wife seem to be victims of a combination of professional ineptitude, real estate disclosure fraud and quite possibly, that ol’ home-warranty-policy hard sell.

Nothing like a home-warranty company that doesn’t cover any pre-existing conditions, eh? After all, nearly anything that goes wrong with a newly purchased, previously owned home is going to be pre-existing in some way. Many who bought practically worthless home warranties on fixer-upper foreclosures have found this out the hard way. I guess the fact that your son and daughter-in-law are getting a refund is at least some kind of moral victory.

Today’s lesson

Readers, always ask for a copy of the home-warranty policy you’ve been offered, then thoroughly read the exclusion and co-pay sections before buying. Obviously, home-warranty firms can’t be expected to stay in business by having to pay for everything, but there are some very good, aboveboard operators that will suck it up and dutifully pay for new furnaces and water heaters, much like reputable insurers pay valid claims even after worst-case weather scenarios. Check out online reviews on Angie’s List and other sites to see who has the most favorable ratings — and perhaps more importantly, who has the least favorable ones.

Don’t hire Inspector Clouseau

As for that home inspector: While inspectors can’t see below ground or through walls to determine if old sewer and plumbing lines are in decent shape, a professional and seasoned inspector should at least have been able to discover apparent surface termite damage, especially if your son and daughter-in-law could see it. True, a termite inspection by a specialist is often done separately from a home inspection in many cases. But c’mon inspector, do some inspecting. Your son should check the contract to see what was supposed to be covered in the inspection.

What are the remedies?

Could they sue? Yes, but most inspectors have you sign a contract that limits their liability to their fee. While a judge might override this due to basic professional-service expectations, your son and daughter-in-law would still have to pay court fees and probably gain very little. The same goes for the home warranty company. Both are pretty tough “sues.”

Catch the liar with pants on fire

The most actionable negligence here, at least based on past cases, lies in the seller’s misrepresentation of facts in the “disclosure of property condition” section of the sales contract. Were any of these flaws mentioned there? (Probably not.) Were there records of past termite treatments or repeat plumbing calls specific to a problem area? Did the owner confide any of these problems to the neighbors? Do a little detective work and contact a real estate attorney if you find such a smoking gun. You may at least get a small settlement out of it.

Abandonment is not the way

But I wouldn’t encourage the young couple to just walk away from their home unless it’s truly a “money pit” that promises to be an endless and painful black hole in their budget, and psyches, for years to come, or has a problem such as mold that’s causing health issues.

Moreover, a foreclosure would not only cloud their credit, the lender in some states could level a deficiency judgment (and additional fees) on what they’d owe after the home was auctioned or resold outright. A short sale, in which they’d sell for significantly less than value, is less of a credit blemish but your son and daughter-in-law would either be stuck selling “as is” or face disclosure of those unresolved repairs, plus they may still get hit by a deficiency judgment. You son and his wife may also have to prove financial hardship in the latter instance. Can they refinance or get a loan modification? A loan from you perhaps?

I wish them — and you — good luck in resolving this.

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