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Due diligence required to get from purchasing agreement to closing
“We got the property!”
In my profession, we hear that a lot after someone signs a purchase agreement to buy a piece of commercial real estate — but that’s not actually the case. What they have is a contract, which is really only the first step in the purchase process.
There’s a lot of due diligence that needs to happen between that initial signature on the purchase agreement and the final closing. While you may be able to close on a house or cottage within 30 days of signing an initial contract, commercial real estate can take 60 to 180 days, depending on the size of the property, financing, governmental approvals and related issues.
It’s important to take enough time between negotiating your purchase agreement and scheduling the closing to do some standard — but important — things that will ensure you are getting what you think you are getting in the transaction. Minimum steps to consider in each purchase include:
Get a title commitment. This is the first important step in the purchase process. Once you have signed a contract, a title company will begin reviewing the property to see if it — and you, the purchaser — meet the requirements for title insurance. The title commitment and its supporting documents include a wealth of information, from a legal description of the property and who owns it to potential deed restrictions and tax liens. It’s critical to review all the documents — not just the title commitment — with a careful eye to ensure there are no misunderstandings or mistakes.
The supporting schedules detail exceptions from insurance coverage and the requirements that have to be met before the policy will be issued after closing. The schedules may also detail significant questions regarding the chain of title because of divorce or estate issues, environmental liens and other problems that may diminish the value or use of the property.
Get a survey. The second, equally important, step in the purchase process is to secure a survey of the property by a licensed surveyor. In many cases, this is required before you will be able to secure a mortgage, but even if it is not, don’t be tempted to save money and skip this step.
The survey is a detailed graphic depiction of what the title commitment has told you in words. It will include a list of encumbrances on the property, such as zoning, setback requirements, flood zones, public street access, easements and more.
Get an inspection. If you are buying a building as well as property, be sure to get a building inspection. If improvements have been made recently, you will want to ensure they are structurally sound. A thorough inspection will give you need-to-know information, such as life expectancy of the roof, quality of indoor air, fire protection systems and more — even, in some cases, compliance with the Americans with Disabilities Act and other federal regulations.
Check with government authorities. While the title commitment and survey may touch on some of these areas, it’s a good idea to check with governmental authorities on both building and land issues before closing on your purchase. If you are buying an existing building, does it have a certificate of occupancy? Is it in violation of current zoning? If there is no existing structure and you want to build, what are the requirements? How is the land platted — or is it platted? Do you need government approval to split the property? Put up a sign?
Consider an environmental audit. If you buy property, you are also buying any environmental issues that come along with that property. It’s a good idea to obtain environmental testing to assure you are not “purchasing” environmental liability when you acquire the property, as the exceptions to liability are very limited.
Review the closing documents carefully. While it’s often considered economical for the title company to prepare the closing documents, realize that it is not looking out for the interests of the buyer or seller. Closing documents, which often include occupied calculations and prorated usage fees, are lengthy and not particularly user friendly or easy to understand. The title company is not as familiar with the requirements of your transaction as you or your counsel is, so modifications to the closing documents are necessary to assure that each party is assuming the responsibilities agreed to in the purchase agreement. Be sure you have a knowledgeable advocate review all closing documents before you sign.
And then you can open the champagne — the property is finally yours.
Melissa N. Collar is a partner at Warner Norcross & Judd LLP, licensed real estate broker and chair of the firm’s Real Estate and Condominium practice groups. She can be reached at email@example.com.