November 24, 2020
It’s a crazy real estate market right now in large part thanks to COVID-19. In the tristate area, people have been flocking from the city looking for suburban surroundings in which to raise their families. Eager buyers have bid up prices as they vied to land that very special house they were determined to call home. It’s been an exciting, heady time, and for both buyers and sellers, there were many happy outcomes.
It’s always gratifying to see clients achieve what they set out to accomplish. Unfortunately, however, not all the stories have happy endings. Sometimes buyers get so set on a particular house that they’re willing to cut corners to have their offer accepted. But as human nature can sometimes show us, over-eagerness can cause even positive events to turn sour. In matters of the heart, that could lead to a bad marriage. And, in real estate, much like with love between partners, acting too quickly, can cause deals to go south.
There are standard precautions you should take in doing your due diligence on a new home that can prevent a deal breaker from turning up too late. We can’t guarantee that taking these precautions will prevent you from being disappointed if you uncover an undesirable issue that prompts you to withdraw your offer. But thoughtfully approaching what is likely to be one of the biggest purchases of your lifetime will save you from the risk of lost time, lost money and an abrupt end to your transaction that may have steep financial consequences and the lost opportunity to bid on something else.
Here are three instances when moving too quickly and without appropriate due diligence could cause your real estate deal to implode.
Decommissioned Oil Tank: Far From Buried Treasure
Back in the day, the trend was for homeowners to convert from expensive oil heat to gas. To do this, the practice was to decommission the oil tank – most often located underground – by pumping out the oil and filling it with sand. Fifteen years ago, there was no reason to worry—or so it seemed. In most instances, this practice was sanctioned by town inspectors and environmental regulators. We have since learned, however, that many of the decommissioned tanks had holes and had leaked before they were decommissioned. For this reason, industry standard today dictates that even properly decommissioned tanks be removed.
Particularly in and around Union County, it is recommended that every potential home purchaser conduct a scan for underground tanks during the inspection period. Discovery of a tank can derail a transaction, particularly if the parties were intent on a quick close. If the tank is pulled and found to have leaked, soil remediation must take place and the New Jersey Department of Environmental Protection must review the test removal, remediation, and test results in order to issue a No Further Action letter sanctioning the work that was done.
Anxious buyers might be tempted to take a credit for tank removal to allow the sale to go through. But underground oil tanks represent an unknown financial liability. Remediation is costly, and it’s difficult to predetermine the cost without testing. A small leak can cost $5,000.00 to $10,000.00—larger leaks tens of thousands of dollars.
Even worse, you could close on the property and move into a nightmare: discovery of an active spill that has reached the water table. What if traces of the oil get into your new next-door neighbor’s water? Contractors are telling you that you could be spending $120,000 or more to clean it up.
If you’ve set your sights on an older home that weathered the transition from oil to gas, it’s imperative to hire an independent environmental company to test the soil and the tank for leaks and corrosion. A written report certifying that the tank hasn’t leaked and tainted the soil is the only proof that can guarantee that the property has not been compromised by oil.
Waive the Appraisal Contingency: Pay a High Price for a Low Appraisal
The appraisal contingency is very important when you’re financing your purchase, because lenders rely on the value of the home in determining how much money they will loan you. Buyers seeking to borrow 80% of the purchase price need the home to appraise at full value or else they face having to restructure their financing, pay private mortgage insurance, or find ways to come up with additional cash to close. That said, waiving the appraisal contingency has become a trend in a highly competitive market as a way to beat competing bids from other buyers. It is important that you fully understand what you are giving up if you intend to take this tack. Do you have funds to make up the out-of-pocket difference? Or, even if you have the money, would paying extra eat up your cash and/or savings?
Understanding the Importance of the Title Contingency and Title Insurance.
A title search will dig up all kinds of information—things like if there are any liens on the property or, believe it or not, that a third party has an interest in your home. A title search may reveal that the seller has failed to pay their income taxes for a period of time, leading the IRS to put a lien on their home. If the seller also has a mortgage, it may be that the proceeds from the sale are insufficient to cover the amount due on their mortgage and the amount owed to the IRS.
In another troublesome scenario, a title search could reveal that a distant relative, or an ex-spouse, actually has a claim to the home’s ownership. The third party can rightly say that the seller did not have permission to sell the house to you. If that happens, a judge could support the party’s claim.
Part of the title search includes paying for a survey of the property to make sure there are no encroachments (from neighboring fences or sheds) or easements on the property that interfere with its use. Some buyers are reluctant to pay for a survey, feeling it is an unnecessary additional cost among the many expenses of buying a home. Reluctance to obtain a survey to save a few hundred dollars can have a tremendous impact, however, if these issues later are discovered.
The title search gives everyone a chance to eliminate trouble spots before proceeding with the sale—or to call the sale off, if anything too serious is uncovered. The title insurance policy purchased during the transaction provides future protection if these issues arise after closing. The important thing to remember about not cutting corners on the insurance is that you must purchase title insurance to protect you as well as your lender.
Long story short, it is not worth it to cut corners in purchasing a house, even if you believe it to be the home of your dreams. If you waive any of the above protections, and then find an issue that leads you to want to terminate, it can create a dispute with the seller about the legitimacy of your termination and may put your deposit at risk. Trust that there will always be another property if the first one doesn’t work out and protecting yourself is the best path forward.
At Phelan, Frantz, Ohlig and Wegbreit, LLC we want nothing more than for you to have a seamless closing and a purchase that gets you the house you want. But we also know that moving too quickly and without the proper due diligence can result in financial consequences, lost time and the huge disappointment of a transaction that could be abruptly terminated. While ultimately, decisions are yours, we want to remind you that contingencies, inspections, and title insurance are rights to which you’re entitled. Our guidance is always to exercise the due diligence activities appropriate for your transaction and circumstances. Because our goal remains constant: enabling you to purchase the home you want and being in the position to fully enjoy it.
Editor’s Note: This is the first in a two-part series that describes how home buyers and sellers sometimes fail to include important contingencies in their real estate contract and exercise the appropriate due diligence—and they end up with a deal that flops.
Call us at 908.232.2244 to schedule an appointment and turn your homebuying dreams into reality.