Buying Real Estate? Make Sure Your Contract Protects You.
It’s easy to forget the basic, but important elements of a solid real estate deal. A buyer should be sure to confirm the following about the property and that the contract gives the buyer the right to walk away if these conditions are not satisfied:
- The title to the property is good.
- The property is clean.
- The property can be used for the buyer’s intended purpose.
- The condition of any improvements is acceptable.
Let’s look at each of these elements in a little more detail. At the conclusion, I will comment on how a buyer can reserve the right to walk away from a deal if any of the above are not established to the buyer’s satisfaction.
Is the title to the property good?
In other words, is the seller able to convey full, unencumbered title? Good title is established through a title search, typically performed by a title insurance company. The title company searches the record of title to determine if there are people or entities other than the current owner who have an interest in the real estate. Unless resolved, the buyer’s title will be subject to those defects, making it essential to require the seller remove them prior to closing. Examples of title defects include a mortgage granted by a prior owner to a bank, a lien by a contractor who performed improvements to the property or a judgment against the seller. It is also essential to identify and understand the nature of any easements affecting the real estate. The property may have a utility easement, an easement to allow access to a neighboring parcel, a conservation easement, or a shared driveway easement. The buyer must understand how any easements could affect their plans for use of the property. Title defects are diverse and at times complex. The title to a property should never be taken for granted.
Closely related to the quality of the title is confirming the boundaries and ensuring that there are no encroachments by neighbors. The only sure way to establish property boundaries is through a survey. A licensed surveyor will stake the boundaries, confirm the legal description and identify any encroachments. The discovery of a neighboring building, drive, or fence extending over the property line as well as differences between the legal description of the parcel and the actual boundaries are factors that at a minimum should impact the price, but could be serious enough to kill the deal.
Is the property clean?
Environmental laws make the owner of real estate responsible for cleanup whether or not the owner is the one who contaminated it. Before acquiring ownership it is important to ascertain if the land is contaminated. In some cases, the potential for contamination is minimal, as in purchasing farmland (although fertilizers, herbicides and pesticides can be an issue). When there is the potential for contamination, Buyers can learn about the potential risk by requiring a Phase I Environmental Assessment. In addition to an examination of the property itself, a Phase I will reveal whether the property is close to any other known hazardous waste sites. If the Phase I identifies issues, it can be followed with a Phase II Assessment involving sampling and analysis. Where appropriate, a good contract will include the right to conduct an environmental investigation and make the sale contingent upon results acceptable to the buyer.
Can I use the land for the purpose I have in mind?
The condition, size, and location of the parcel might all be perfect, but that’s meaningless if the buyer’s intended use conflicts with the current zoning. When zoning is an issue, the sales contract should provide that the closing is contingent upon the Buyer obtaining needed zoning approvals and the closing set out far enough to give the buyer adequate time to obtain them. Street access is another issue to consider. Where ingress and egress is critical to the buyer’s use, closing should also be made contingent upon approval of the buyer’s plans for street access by the relevant authority.
What is the condition of any improvements?
Assessing the condition of most improvements to property is accomplished through the use of professional inspectors. Various building systems can also be assessed by firms that specialize in the installation and maintenance of similar systems. A good inspector will verify whether prior improvements were permitted and built to code. If the buyer is planning to remodel the building, care should be taken to identify any pipe cladding, insulation or tile backing containing asbestos, as its removal can significantly increase costs. A special problem can arise when buildings do not conform to property boundary or shore land setbacks, or other zoning requirements. In these situations, structural repairs or alterations to affected buildings may be limited to 50% of the assessed value of the building. Another concern is understanding the limitations imposed on building alterations for structures on the National or State Register of Historic Places, as well as within local historic districts.
All of the above elements should be addressed in the real estate contract. A good contract makes closing contingent upon the buyer signing off on these issues after a reasonable opportunity to perform the necessary reviews or inspections. If the buyer is not satisfied, the buyer should have the right to exit the deal. The buyer should not assume that because an agent or broker is involved or a form contract is used that the above elements are addressed. Ultimately, agents are paid on commission, and commissions are generated by closings, so neither the agent nor the seller are likely to make the inclusion of contingencies a priority.