Buyer Perspective

Due Diligence:

The buyers ability to inspect the property and review any and all pertinent information about the property is often called the Due Diligence period. Due diligence can be comprised of as many reviews of the property that the buyer feels is necessary for them to complete the transaction. This may include, but certainly is not limited to, a physical inspection of the property and improvements, water, sewer / septic, soil conditions, access issues, surface impacts from subsurface or easement use, title conditions, common interest community restrictions (i.e. CC&R’s or other title restrictions), survey issues, issues with the buyers intended use, development potential or impacts, leases in force, financial feasibility of the property (if an investment property), and so on. All of these will need to be coordinated or reviewed by your broker and in many cases an attorney. The level of involvement and understanding expected by the buyer will depend on the level of relationship held with the broker.

TITLE:

The “DEED”, which is the instrument that transfers the rights and ownership of real estate from a seller to a buyer, is the single most important part of a sale. This instrument is what dictates what level of protection the buyer has in the sale and what rights are being given. Prior to or during negotiation, a buyer should be educated on the various forms of “deed” that can be conveyed and limits on protection that the buyer assumes based on which deed is utilized. Once under contract, one of the first articles of information that is presented from the seller is a title (search) commitment or abstract. The review of title documents will be based on what is presented in the abstract or title commitment. An abstract is simply a historical list of recorded documents against the property, and an attorney should be engaged to review this to establish the chain of title and if it is clouded (impacted negatively). A title search is a more intensive review of the property and is completed by a title insurance company to determine what limits they will have in the provision of a title commitment. The title commitment is a document that states that the title company will provide insurance to the title of the property (insurance against third party entities from making claims against the use, rights or ownership of the property) subject to the known encumbrances against the property as shown by public record or as disclosed by the sellers of the property. This form will include a few very important sections;

Legal description: How is the property legally defined in the county(ies) it is located in (to make sure the correct parcel is conveyed).

Entities conveying and receiving title: To make sure that the party signing the conveyance has the authority to do so and to clarify the name of the entity(ies) that constitutes the “buyer”.

Schedule B-1 Requirements: This will detail what will need to be completed prior to the title insurance policy being provided. These may include recording of the deed, recording of any deeds of trusts (liens against the property), release of any pre-existing deeds of trust that were held by the seller and any corrections to the chain of title that will be required to “clean up” any possible defects in the ownership of the property.

Schedule B-2 Exceptions: This is the section that is most crucial for a buyer or their attorney to review as this is what defines the rights of “others” on the property. This will usually include “Patented rights”, which are rights that were granted over 100 years ago by the US Government to homesteaders. Depending on the state, there may also be severed subsurface rights (oil, gas, mineral, etc.) that have previously been granted to someone else. Easements for roads, utilities and pipelines will probably also limit the ability of where and how the buyer can utilize the property. Finally, any other rights that have been granted to others (neighbors for access over the land, ditch companies for irrigation, etc) will also be described. This review is important as ALL of these rights supercede the buyer’s rights on their future property and the title insurance will not offer any protection to the buyer for any of these elements!!!

OFF RECORD ISSUES:

This is one of the more confusing diligences. The first question tends to be “what the heck is it?” The problem is that it is fairly easy to define, but much harder to describe what it includes. A basic definition might be: any encumbrances affecting the property in any way that are not: recorded, a part of any home owners association CC&R’s, plat notices or other deed restrictions. All of things listed above are usually generated by title companies, brokers, attorneys and are often the seller’s responsibility to make sure it is provided to you. Off Record matters are no different in that the seller is still obligated to provide a written description of all of the “off record” matters that materially affect the property. The two problems that arise are that the seller may not know any unrecorded agreements that were completed prior to his ownership and simply inspecting the property may not disclose that agreements exist. Some may be more obvious than others. Leases, ditch easements, access or road licenses / easements are usually visibly apparent. Seasonal access to public land, or access to an adjoining property may not be known or visible off season. This also applies to seasonal grazing leases and other less frequent uses. In many states, leases survive (take precedence) over a transfer of title, therefore the new owner would be obligated to maintain the agreement. Depending on the level of title insurance, and the type of deed conveyed, if anyone were to claim rights against the property, the buyer would be able to either file a claim against the title insurance or sue the seller for non-disclosure. If there is no warranty from the seller via the deed, then the buyer would have to assume the liability or try to file for a suit to quiet title.

GOVERNING DOCUMENTS:

Governing documents include ALL documents relating to an owners association, any road maintenance agreements or other common interest community information. This will typically consist of Articles of Incorporation, By-Laws, Covenants, CC&Rs, Minutes of Meetings, Meeting Minutes, Executive Board meeting minutes, financials, annual financials and any amended rules, assessments and other information that may impact the buyers future ownership.

INSPECTION:

In some states this review period is a contingency that allows the buyer the ability to object to the property in their “subjective discretion”. This means that the buyer may object and terminate the contract for “any” reason that in the buyers opinion makes the property unusable based on a physical, mechanical, structural or other feature of the property (which can include the impact of surrounding properties or access issues to the property) outside of title conditions. Although states have different laws regulating who may complete an inspection, the level of work completed may need to be done by several entities. Inspection of the property may include:

Electrical systems, plumbing, HVAC, structure, substructure, roof, windows, hardware, all room functions and conditions (such as kitchen counters and cabinets), septic / sewer, water tap or well, water contamination or toxicology, radon, mold, noxious weed, soils sample, engineering reports for foundation work, drainage issues and road grading, subsurface damage (core sample for contamination), exterior finish, and all mechanical functions on the property.

While this list is far from complete, it does begin to show the level of review that a buyer has the right to make as an inspection of the property. You broker will coordinate with you and the various inspectors to determine what issues you may or may not want to address as an inspection issue with the transaction.

APPRAISAL:

Appraisal is more straightforward then the other issues covered. However, depending on the type and use of the property, the buyer would want to hire an appraiser that is qualified (or that has more experience) in that specific property type. Most appraisers can do standard residential or vacant land. However, for investment property or any transaction that might also include a business, a buyer may want to hire and MAI (Master of Appraiser Institute) as they have a higher credentialing for more unique properties. This process can be very complex and for unique properties, may be VERY broad based and have a large geographic coverage for comparable properties. Your broker should coordinate this for you.

SURVEY:

Survey information goes beyond simply knowing the property lines and boundaries. Various forms of surveys will disclose different types of information. Here are some of the surveys and what they show;

ILC (Improvement Location Certificate): This will roughly show where improvements exist on the property (house, shed, fence, etc.) and if there are any encroachments by any of these improvements.

Plat: This is essentially a map of a subdivision, showing property boundaries, basic easements and any restrictions that the sub-divider created within the plat notes.

ALTA: This is one of the most comprehensive surveys. The surveyor will draft the exact, to scale, property lines, improvements, easements and any other visible (landmarks) or non-visible (any others described in a title policy or commitment) elements. It will also mark what measurement points were used and how they are identified.

The type of survey needed may vary based on what information you would like to know about the property (simply marking the corners or having a full ALTA, the level of protection you feel is needed, and which survey the title company will require for various levels of insurance protection.

The bottom line with completion of Due Diligence is that you only have this time frame to satisfy and all curiosity you have about the property and to make sure you don’t have any regrets or remorse over something that could have been known ahead of time!