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Your due diligence checklist for buying real estate
The rule in purchasing real estate is “buyer beware.” A seller’s goal is to sell property “as is” with as few representations and warranties as possible regarding its condition, permitted use and title. The burden is on you, as buyer, to make sure you receive what you bargained for.
Once closing occurs and money changes hands, you’ve lost most of your leverage to negotiate a reduced purchase price or another remedy for defects in condition, permitted use or title. Consequently, the best way to minimize your risk is to make your purchase contract contingent upon receiving satisfactory results from due diligence performed by qualified professionals before closing your purchase. Here are some areas where you should concentrate your due diligence efforts:
Investigate the property’s condition. When you purchase property, you assume liability to maintain it in the future. Hence, a physical inspection is essential to limit your liability by identifying existing damage, construction defects, deferred maintenance and code compliance issues. This should include testing building systems such as heating, air conditioning, electric, plumbing, well and septic. To identify and avoid liability for existing environmental contamination of a commercial property, do an environmental inspection. Consider the need to perform radon, asbestos, lead paint and other specialized inspections.
Don’t forget the common facilities. If the property is part of a condominium or property owners’ association with shared facilities, or if it shares use of other common facilities such as a private road, investigate their condition. Will they require repair or replacement? Have adequate funds been reserved for such work?
Look for ordinance violations. Read the zoning ordinance and talk to the municipal zoning department to confirm you can use the property for your intended purpose. If you plan to construct new improvements, make sure they are permitted. If a zoning change or variance is required, obtain it prior to closing. If the current use is only permitted because it predated changes in the zoning ordinance, confirm whether the ordinance permits you to rebuild following a casualty and consider whether the current ordinance would prohibit changes to the improvements or your use. If the property is served by a private road, make sure it complies with any private road ordinance.
Check the title. Order a title commitment to ensure your interest in the property. Make sure all mortgages and liens identified in the commitment are paid by the seller at the closing. Obtain and read all the title exceptions listed in the commitment. Do the exceptions include use restrictions that will limit your intended use of the property or permit neighbors to engage in uses that would pose a nuisance? If the restrictions require you to obtain developer or association approval for planned construction, then get that approval prior to closing.
Exceptions such as roadway or utility easements, mineral reservations or oil and gas leases may disclose others’ rights to enter and use the property. Recorded rights of first refusal, options to purchase, or requirements for condominium or property owners’ association approval of your purchase will be disclosed by the exception documents. Make sure necessary releases and approvals are obtained. The commitment may highlight liabilities you are assuming, like property taxes, special assessments for public improvements, condominium and property owners’ association assessments, and assessments for private road maintenance. Confirm none of these liabilities are a surprise and all have been paid to date.
Get a survey. A staked survey will let you “eyeball” the property and confirm you are getting what you expect. Does the survey map show buildings, fences, roadways or other improvements encroaching across the boundaries that put you on notice of possible claims by neighbors? Do the building setbacks comply with use and zoning restrictions? Does the survey confirm you have direct physical access to a public or private road, and public utility lines and easements? If it doesn’t, insist the seller address such issues prior to closing.
As a buyer of real estate, one of the biggest mistakes you can make is failing to do adequate due diligence prior to closing your purchase. Be smart. Make your deal contingent upon satisfactory due diligence and then do it. If you aren’t happy with the results, then you can renegotiate your contract or terminate the deal.
Bill Hall is a partner with the law firm of Warner Norcross + Judd, where he often assists in the planning, acquisition and development of commercial and residential properties. He can be reached at email@example.com.