Property News, Guides

5 property financial disasters homeowners don’t realise they’re exposed to

November 1, 2017

property financial disaster homeowners

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Singapore has experienced zero natural disasters, and our crime rate is lower than the temperature on a polar bear’s ass. Add that we all live close to each other (you can’t pick your nose in the common corridor without 11 witnesses and appearing on Stomp) and it’s not surprising plenty of homeowners don’t expect things to go wrong. But there are potential property financial disasters you probably haven’t thought of before… such as:

1. If your contractor is an idiot, you can get stiffed with a ridiculous fine

Before you make any major renovations on your home, you need to get approval. Condo owners are probably familiar with the $1,000 deposit, to be used in case your contractor breaks anything. And that would be the total amount you can lose if anything goes wrong – in a world where chickens walk around ready-roasted, and babies promptly fall asleep at 9 pm.

You most definitely are liable, if the damages caused by your contractor exceed that $1,000 deposit. But even this would be fine, if the contractor’s insurance covers it*. The problem is that  the contractor’s insurance provides $0 worth of coverage for being stupid.

If the contractor decides to, say, cram the garbage chute with waste wood and flooring material, and the management council needs to fix it, guess who’s paying. It could mean a $5,000 fine, because you’re paying to unjam it.

That’s just one of the thousands of things a lazy, or plain stupid, contractor can do to cost you money. Other issues, which do happen, include damaging the common corridor (such as by ramming your heavy cabinet into a wall), wrecking the lift (breaking the lift mirrors, or cracking its floor), or dumping all your garbage somewhere inappropriate, and then leaving it there for months after they’re gone.

The lesson here is pretty simple: pay attention to what your contractor is doing. They may be professionals with licenses and all, but we all have moments of stupidity. Or laziness. This is one of those property financial disasters that can be averted if we do the necessary background checks and homework.

*Note: damages during renovation are claimed from your contractor’s insurance, not your home insurance.

2. Wait till you see what happens to the fridge, if your power goes down while you’re away

This is another one home owners seldom see coming.

Say you’re out on a three-day vacation to Port Dickson, because that’s the perfect cure for having too much excitement in life. While you’re out, the power in your house trips.

Hey, no problem right? No one is using the power anyway. Except, you know, that refrigerator that’s packed with sorts of food, ready to spoil. Over a period of two weeks, that food will start to rot. And while your sealed up refrigerator is good at stopping the smell from escaping, it also ensures all the relevant germs are good and trapped in there.

By the time you come back, the smell from the fridge will be strong enough to make a sewage worker choke. If you open the door more than three centimetres, the police will turn up demanding to know where you hid the body.

Chances are, you haven’t just lost several hundred dollars worth of groceries. Depending on the kind of fridge you have, it may not be easy to clean it out. There’s all sorts of germs and contaminants in the freezer box, for instance, if you kept raw meat in there. You may need to get a professional to come clean it out, and in extreme cases you may just want a new fridge.

So if you’re going on vacation, clear out the fridge. Don’t stock up on groceries for a while, before you leave. While not one of those major property financial disasters per se, crying over spoilt milk and cleaning up thereafter is not going to be a very pleasant experience.

3. If something is stolen from your home, the most you’re getting is probably $2,500

You’re wiser than people with only fire insurance. Your entire house, along with its contents, are all insured (home content insurance). So now you’re covered for millions of dollars, and you may as well leave all your gold and jewellery at home. Why pay the bank for a deposit box?

Except if you look at your home insurance policy, you’ll see the millions of dollars of coverage doesn’t apply to every item. For a specific kind of loss, such as lost cash, or lost jewellery, there’s usually a cap. And no matter how valuable an item is, the cap is usually $2,500, with a maximum limit of $5,000 for stolen items / cash (some policies may have higher or lower payouts).

So if you have two Rolex watches worth $50,000, and they’re both stolen during a burglary (or lost in a fire), then prepare to swallow $45,000 worth of losses; even with the home insurance payout. This is one of those property financial disasters of epic proportions!

As such, insure your valuables separately, or keep them in the bank. Don’t rely on home insurance to cover them. At the very least, buy home insurance with better coverage (but that can make premiums pretty damn expensive).

4. A margin call from the bank

This seldom happens in Singapore, but when it does, we can hear the screaming from our office in Indonesia. A lot of homeowners will, happily, never have to deal with a margin call. But for those who bought expensive properties at their peak, it can happen.

A margin call occurs when the property devalues significantly, to the extent that the (1) the value of your property is below your outstanding home loan, or (2) the depreciation throws the Loan to Value (LTV) ratio out of whack.

For example, let’s say you purchased a pricey condo, with a loan of $1.5 million. That was in 2013, when you could plausibly sell a zinc shack for the price of the Versailles Palace. Now however, the overpriced condo has fallen in value to $1.2 million, and you still owe $1.4 million on the loan.

The bank could make a margin call, and ask you to top up the excess $200,000.

Another example is if the valuation falls, and the LTV is no longer accurate. Say you have an LTV of 80 per cent; that means a bank loan is only supposed to finance 80 per cent of your property. On a property worth $1.875 million, the maximum loan amount is $1.5 million.

However, if the valuation of the property should fall significantly (e.g. to $1.2 million), then the maximum LTV should only be $960,000. There’s a difference of $540,000 between the loan amount you’ve got ($1.5 million), and the actual loan amount you should have. That’s the margin call you need to make up.

As you can see, buying a bad property can mean something a lot worse than walking 30 minutes to the train station. Avoid inflated prices, by doing proper comparisons on 99.co. Use the map-based system to ensure your property is fairly priced for its location.

(If it makes you feel better, you can use your CPF to pay for margin calls).

5. Don’t forget your house can injure other people, and you’ll be liable

Say your Uncle Bob is visiting, and he needs to use your bathroom. As he’s doing so, a loose bathroom tile causes him to slip, and the falls knocks his senses – and his love for you – right out of his skull.

You can be sued for that, and it’s up to your home insurance policy to cover it. You uh, have got a home insurance policy besides fire protection right? Because the “personal liability” component is what pays out, in the event that you get sued like this.

If you don’t have home insurance besides basic fire protection, then you better have a rock star lawyer. Given that it was a faulty part of your house that caused it, things don’t look good for you.

These situations happen more often than you think: your window breaks and the glass falls on someone. A party guest helps out in the kitchen, when your malfunctioning stove decides to blow up. Your son’s tuition tutor flips a bad light switch, and gets electrocuted.

These almost always catch homeowners off-guard, because we just don’t see them coming. If you haven’t done so, start looking at an insurance policy that goes beyond basic fire protection. These sorts of injuries are just are likely – if not more likely – than a house fire.

If you found the information in this article interesting, check out our pieces on selling versus taking a reverse mortgage and the importance of maintaining a good credit score.

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