With mortgage and financing rates double what they were even a year ago, a lot of homeowners and property owners are not selling. They are choosing instead to renovate or make necessary repairs to their existing dwellings. This brings up the subject of warranties and what’s included in them. 

For instance, if you’re a homeowner that badly requires a major repair or even replacement to your existing air conditioning system, you might be asking yourself the obvious question: does a home warranty cover AC? The answer is not always set in stone and can vary from home to home. 

Says Cinch Home Services, a home and property warranty company, most home warranties will provide coverage for the breakdown of an AC system’s components and parts, so long as they malfunction as a result of everyday wear and tear. The components covered in the HVAC system will usually include the evaporator coil, mini splits, the geothermal system, the duct package, the electrical split systems, the blower, and more. 

But HVAC is just one of many components the owner of a home or commercial property needs to keep in mind when purchasing a new or used property. Sooner or later, the real estate market will return to some kind of normalcy and when it does, there are some important things to keep in mind for property investors. 

According to a new report by the Boston Business Journal, the past two to three years have been difficult if not strange times to sell and purchase both commercial and residential real estate. A variety of factors have contributed to the issue including what were then low-interest rates and the COVID-19 pandemic.  

What resulted was a seller’s market where many conveyance norms were tossed to the side or ignored altogether. But as real estate transactions begin to more closely resemble the real estate market of the pre-pandemic years, what processes and skills should buyers and sellers reacquaint themselves with? 

Says the Boston Business Journal, buyers should once more pay strict attention to due diligence. All too often over the past 24 months, purchasers were eager to waive physical inspections of properties, existing warranties, plus surveys and environmental investigations simply because they didn’t want to lose the home or building to another buyer.  

Right or wrong, ever since the second quarter of 2020, purchasers were acting as if the seller had an eager second or even third prospective buyer. That is a buyer who would be willing to purchase the property sight unseen and without checking to see if warranties were still in place, or if there were municipal ordinance violations, or surrounding property encroachments and violations. All of this would cost the buyer in both the short and long terms. 

Many overly eager buyers didn’t even bother to see if the HVAC system worked, if the boiler was in good shape, or if the roof was leaking. These are all conditions that would have been discovered had the overly eager buyer done his due diligence. In the end, many regretted their purchases not with their hearts and minds, but with their pocketbooks. They also had no legal recourse.    

When engaging in a commercial purchase, the buyer needs to be aware that one to two months for conducting due diligence is appropriate if not reasonable. At the same time, it’s during this period that they should ask sellers to produce existing property documents including leases, insurance policies, warranties (even if expired), environmental assessments, plus surveys. Potential buyers should also contract their own surveys. These “Phase 1” site investigations can turn out to be very useful even if the lender isn’t asking for them. 

It should be noted that residential buyers should only waive a home inspection as a last resort or if they are planning on demolishing the existing structure which means old HVAC and oil tanks won’t require inspection much fewer warranties. However, there could be environmental issues to worry about.  

In 2023, potential purchasers need to relearn the ins and outs of warranties and representation. In other words, it’s not unreasonable for a buyer to request the seller to make necessary representations regarding the physical state of the property being sold, including the existing conditions of the home or building that constitute a legal violation. 

The buyer needs to be aware that there are no underground storage tanks, no open building permits, and more. These representations are said to survive for a long period after closing. It’s possible the seller can refuse or object to such requests, but that’s when the buyer should start thinking twice and perhaps consider another for-sale property altogether.    

In 2023, financing skyrocketed along with inflation. Buyers must keep this clearly in mind when purchasing a property. Price ranges should be adjusted accordingly, and they must be prepared to work with their commercial lender to satisfy any concerns about due diligence.  

Today, many commercial lenders will request that the survey exception be waived from a title insurance policy. They will request Phase I to be conducted no matter how eager the borrower is. In turn, sellers are becoming less willing to offer to finance due to the grim economic outlook over the next year, including an anticipated recession. With that in mind, it is said to be prudent to review and perhaps even negotiate the default provisions of your commercial loan, plus the mortgage that secures the property in question as collateral.    

In short, sellers need to reevaluate their position in negotiation. Economic conditions have rapidly changed since 2020, and many sellers simply don’t have the leverage they did back in 2021 and 2022. If that’s the case, the seller needs to be prepared to concede certain points they didn’t need to in the recent past, which include property representations, existing warranties, and due diligence inspections.   

More Cautions for Sellers and Buyers

Again, both home prices and mortgage financing are double what they were just one year ago. With financing far more expensive, purchasers and their commercial lenders are going to want to take a far closer look at their investment with the sole purpose of seeing if it’s worth the asking price. Purchasers must be prepared for lenders objecting outright to issues that did not seem like red flags just twelve months prior. 

For instance, buyers along with their lenders might find themselves insisting that the seller produce a certificate of compliance that addresses a past order of conditions prior to closing. Or they might require that a portion of the asking price be held in escrow pending a post-closing inspection certification. 

In 2023 and beyond, purchasers and lenders will likely require that representations survive closing due to their concerns that investments will be devalued by something like an undiscovered malfunction in crucial building systems such as HVAC or the boiler(s), or even by an open building permit or expired warranties.  

With 2023 financing far more expensive than in the recent past, purchasers will want to reconsider related issues such as seller fit-up work and seller financing. In many cases, the seller will not have the capacity to serve as the purchaser’s lender. But bear in mind, there will be some sellers who can create a viable path to the closing process. 

One more financing concern to keep front of mind: on certain occasions, purchasers have had to renegotiate the sale and purchase agreements when they were not able to secure their own financing required to take care of fit-up work the purchasing agreements mandated as a part of the closing conditions.  

But with real estate transactions changing rapidly to reflect brand new, more expensive, and difficult market conditions, sellers and buyers need to reevaluate the processes and skills that they relied on for years prior to the COVID-19 pandemic. By doing this, they will create invaluable protections and, at the same time, assist in the closing process.  

Purchasing new and used properties in 2023 and beyond, be they residential or commercial, is simply not as easy as it was during the pandemic, and prior to new regulations set forth by the current Washington, D.C. government administration. A new reliance on energy-efficient systems and materials is now the presiding mandate. 

Even gas stoves, once considered the best cooking system possible, are now being attacked by green legislators who wish to see them banned. The same goes for wood stoves. Properties that contain these items could, in the long run, cost the purchaser considerable money should they have no choice but to replace them with less efficient and more expensive electrical, grid-dependent models. 

With this in mind, when the real estate business in the U.S. begins to normalize, it’s important the purchaser not only do his due diligence when it comes to a property’s representations and warranties but also to what the government is now regulating in 2023 and beyond. Or perhaps, putting off the purchase of real estate altogether until 2024 is the better route to take.

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