Ever wondered if there are cracked floors in that beautiful home that you are about to buy? What about any flood damage that was never fixed? Does this have to be disclosed to you?
It can be a little complicated to figure out since disclosure laws will vary from state to state. Some rules are less strict if the property is owned by the bank or if the house is For Sale By Owner (FSBO). The laws also depend on whether the seller is represented by an agent or not.
What some buyers may not realize is that they can get a CLUE to a prospective house before you decide to purchase. A Comprehensive Loss Underwriting Exchange (CLUE) report provides dates of insurance claims, the type of policy, the insurance company involved, what caused the loss (natural disaster, etc.) whether the loss was property and the amount paid.
The best way to describe a CLUE report is by saying that is sort of like a CARFAX vehicle report. The only difference is that instead of covering the car’s history, it covers residential real estate. CLUE is a database of homeowners insurance claim histories. This database is available to those insurance companies who subscribe to it. According to the Northern Virginia Association of Realtors, about 600 insurers (about 90% of the market) feed into the CLUE database. The report will cover 27 types of losses, including theft, vandalism, earthquake, wind, dog bites, and medical payments. The report cannot be ordered by a potential buyer. Instead, only the people who own the home can order the report.
The report contains the last five years of the property’s history. Any time before this might be hard to come by since it is common practice to remove the information of losses over five years old.
The information in the report is critical to the buyer since its contents could determine whether that buyer reconsiders buying a particular home. The reason is that if there was a loss paid due to storm damage or mold, it could be more expensive and difficult to get insurance. For this reason, a real estate professional might not recommend this to a buyer or seller client, since this information is critical to the home buying decision process.
Why is this critical? First, every buyer should be aware if there is a possibility that something might have to be replaced or repaired in the near future. Second, once the property is closed and ownership is transferred, you could get a letter a few weeks later saying that your insurance company is canceling the policy due to a previous claim. This is a problem since most mortgage documents require the property to always remain insured. If the homeowner cannot find a company to insure their house, they will be forced to pay the mortgage company’s premium insurance rates. This could possibly lead to the homeowner foreclosing on the home since they might not be able to afford the huge payments.
Here is how you handle the problem:
- Ask your agent or the seller to order the CLUE report for their property. This will make you aware of potential problems with the house.
- Make sure the report is for the specific address and contains the seller’s personal information.
- Make the purchase dependent on viewing a CLUE report or on you being able to obtain affordable insurance.
- Check with the REALTOR® association of your state or real estate commission to see if you can put an addendum in the contract regarding obtaining insurance.
The report will also serve as a benefit to the buyer, since it will alert them to the possibility of any incorrect information in the report. The cost of the report is very little. It can be ordered for $19.50 (electronic version for $12.95) per house.