Enroute to Your New Home: You Could Be Headed for a Buyside Flop Without the Appropriate Due Diligence
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.
THE DEVIL IS IN THE DETAILS OF YOUR REAL ESTATE DEAL
GET AHEAD OF THE SNAGS EVEN IN DIFFICULT TIMES
You’d think with house sales reaching almost six million in the United States over the last few years, the process of buying and selling a home would be commonplace. Perhaps. But real estate contract details are so numerous that they can prove tricky, triggering the well-known adage about best laid plans going awry.
From the moment your real estate attorneys go to work creating and reviewing the contract, you should make sure to understand what you’re signing. A contract is still a contract even in these difficult times— especially if you’re in the middle of a sale. Whether it’s during “normal” times or during our new normal: Ask the right questions. Fully understand your responsibilities. And know your deadlines during the various stages of the buy/sell process. Anything less could throw a monkey wrench into the sales process and delay—even worse, scuttle—your deal.
An important laundry list of real estate contract details
Many state realtor associations have developed a boilerplate contract that features a laundry list of details. These include:
- The names of the parties, a description of the property and the purchase price
- The rights and obligations of the parties
- The condition of the property, including what personal property is and is not included in the sale (e.g., refrigerators, washing machines, smart TV’s, etc.)
- The amount of the earnest money deposit
- The proposed closing date
- The terms under which the buyer can take possession of the property
While our attorney review systems—even closings—may be virtual during this pandemic crisis, the contract requirements will not change.
The big three: common real estate contract contingencies
Typically, real estate contracts include contingencies, actions the parties must perform and complete for the deal to close. Contingencies reduce risks for buyers and sellers and give either party a chance to legally back out of the purchase under certain circumstances that will make it difficult for them to complete the sale.
The three most common contingencies require buyers to initiate certain actions:
- Home Inspection – allows buyers to “kick the tires” by hiring a licensed home inspector to evaluate and provide a full picture of the condition of the interior and exterior of the property and its systems and receive recommendations on repair.
- Financing – gives buyers the time to apply for and be approved for a loan that will combine with their down payment to cover the home’s purchase price; not to be confused with a pre-approval letter which simply starts the mortgage application process, financing requires underwriting during which the lender thoroughly evaluates the buyer’s financial capability to buy the home and confirms that the property appraises at a value that squares with the needed loan amount
- Clear Title – provides buyers with an official ownership history of the purchase property title and ensures it is clear of liens, disputes, or other issues.
During the pandemic, the practices around contingencies may require virtual rather than face-to-face handling. But the resolutions around each contingency remain the same. Following the home inspection, financing and appraisal contingency reports buyers and sellers may have to renegotiate terms. For example, following the home inspection, the buyers may request repairs that sellers refuse to make; the buyers’ loan application may be rejected following the underwriting evaluation; or in the case of the appraisal, the market value of the home may fall below the amount needed to support the buyer’s loan application. If the parties cannot compromise, they may legally walk away from the deal.
As for the title contingency, a title search can reveal unknown situations which make transfer of title to the buyer difficult—and sometimes irresolvable. Overall, according to Homelight, 11 percent of closing delays come from title issues. More startling, they may come as a surprise.
In a typical situation, the title company will review the title on the purchase property and resolve any issues. But there can be worst case scenarios. Say the title reveals that an easement falls on the property line right where a buyer wants to build a fence or put in a pool. Liens or debts can also cloud a title. The title contingency gives buyers a way out of the contract.
A buyer’s favorite
One additional contingency, the home sale contingency, is a favorite among buyers. This contingency allows buyers a specified period to find a buyer for their current home. If they can’t find a buyer within that time, they have the freedom to walk away from the sale.
Unfortunately for buyers, this contingency isn’t loved by sellers who risk taking their home off the market for little-to-no assurance that the buyer will ultimately be able to complete the purchase.
As a buyer, you can still choose to include it but recognize that it can weaken an offer, especially in a hot market.
Meet deadlines and don’t get cold feet
Contract contingencies and the outs they provide are one element to the contract. But buyers—and sellers—can’t simply get cold feet and bail. What’s more, buyers’ feet are held to the fire to meet all target dates. In addition to a timeframe for scheduling the home inspection (typically 14 days from contract signing), this includes deadlines such as:
- The due date for earnest money – This is paid upfront at the time of the offer; earnest money serves as a good faith deposit and signals sellers that buyers will honor the contract and perform on deadline. The earnest money deposit is held in escrow, or kept in custody, by one of the real estate attorneys until the closing. At closing, the title is officially transferred from seller to buyer.
- The due date for a mortgage commitment – This is the date by which a buyer must produce a commitment from a lender to loan money for the purchase of the price. More substantial than a preapproval letter, the commitment typically is issued only after the buyers’ financials have been thoroughly vetted and an appraisal has come back at the right amount.
In worst case scenarios, failure to perform on the contract can result in breach which occasionally can turn into a battle over any earnest money deposit. A seller may seek to retain the deposit to cover any damages, although likely will have to initiate a breach of contract claim to receive any money. Both parties should seek to avoid this result.
Final walk-through surprises
It’s incumbent on sellers to leave their homes in the condition specified in the contract. Buyers verify the sellers’ compliance during the final walk-through. Truly the time when the rubber meets the road, this inspection is an important part of the sales process. It is also one of the most common causes of a delayed closing.
Anything from the home not being empty, to it being damaged from the move or dirty, to property that’s missing but specified in the contract (e.g., a seller promises to leave the washer and dryer but inadvertently takes it), to negotiated repairs left undone…these are among the things that can wreak havoc near the end of the sales process.
Not over till it’s over
In fact, sometimes even closings go awry and, believe it or not, many of them do. For example, the closing can’t go through unless a closing disclosure form is signed by the buyer. If this form is to be signed on time, the title company or mortgage lender must send the document to the buyer no later than three days before closing so that the buyers can review it thoroughly and understand what they’re signing. If your closing is scheduled for Friday, the buyer must have the CD in hand by Tuesday or you’ll have to reschedule the final paperwork.
As crazy as it sounds, sometimes the seller and buyer get their signals crossed about move-in day timing. Realtors have reported that they’ve had moving vans in the driveway and the buyers crying because the sellers have not yet moved out.
And among the worst of situations that can disrupt closing: buyer financing issues. Over a third of closing delays may put your sale at a stalemate. With the business shutdowns of the current pandemic, your buyers could lose their sole source of income abruptly and unexpectedly. Or, in more stable times, the buyers could simply go on a shopping spree to furnish their new home. Either of these scenarios could cause the lender to question the buyer’s ability to keep up with mortgage payments.
ATTORNEYS HELP NAVIGATE CONTRACT DETAILS
From offer to final signature, a home sale requires a million little details to come together without a hitch. By working with your agent and your real estate attorney you will not only come to understand the contract but also anticipate snags. Whether it’s during “normal” times or during our new normal, understanding the contract details will enable you to be proactive rather than reactive, expect the unexpected, over-communicate, and act quickly to address problems. There’s no better path to a no-glitch closing
At Phelan, Frantz, Ohlig & Weqbreit, LLC, we’ll help to provide the education, insight and perspective about your real estate contract and your transaction. Please call us at 908.232.2244 to learn how we can assist you to effectively, efficiently and successfully navigate from offer to closing.
FIVE THINGS TO KNOW BEFORE MAKING AN OFFER ON YOUR DREAM HOME
At Phelan, Frantz & Peek, we love working with first-time home buyers and introducing them to the home buying process with its ups and downs, twists and turns. Here’s a sneak peek at the top 5 things we want our purchasing clients to know before they put in an offer:
1. START WITH A FULL LOAN REVIEW
In most cases, the lender pre-approval is only as reliable as the piece of paper its printed on. Many buyers wait to talk to their lender until they are far along in the process and often not until they have actually put in a bid on a home. A prospective buyer can start this process much earlier and when they do so, they should insist on a Full Loan Review (americanunited.com/approval-first/). Experienced lending partners will be able to facilitate this request. Once approved, the buyers can position themselves as a much more attractive purchaser in the negotiating process.
2. INSIST ON A FULL HOME INSPECTION
Even though every New Jersey real estate contract states that a property is being sold “as is,” buyers have every right to conduct a full home inspection to “kick the tires” and satisfy themselves that the home they are purchasing has no material defects. During the inspection period, a buyer should have the property evaluated by a licensed home inspector and a wood-destroying insects inspector. A radon test also should be completed by your home inspector.
3. SCAN FOR UNDERGROUND OIL TANK
In addition to a thorough home inspection, buyers should also invest in having the surrounding property scanned for an underground tank. Older homes may have had oil heat at one time or another. In many cases, owners had these underground oil tanks decommissioned by having them cleaned out and filled with sand, but leaving the tank itself in the ground. This method of decommissioning a tank is no longer industry standard because many were later found to have leaked and caused soil contamination even though they had been legally decommissioned. Buyers should invest the couple hundred dollars to have the property scanned to satisfy themselves that no tank exists and, if one does, insist on its removal and any associated remediation before proceeding to close.
4. TITLE INSURANCE IS WORTH EVERY PENNY
A title insurance policy protects the new homeowner from any loss suffered as a result of an issue with ownership of the land. These issues are rare, but may arise for a variety of reasons including a forged deed, undisclosed heirs having an interest in the property, mistakes made in the public record or fraud. The one-time premium is relatively minimal compared to the peace of mind such protection offers.
5. CLOSING DATE IS NOT SET IN STONE
A contract closing date is always an “on or about” date. It is practically impossible to settle on a fixed closing date weeks in advance given the many moving parts to a home purchase. There are home inspections to complete. Lenders require an appraisal and homeowners’ insurance, as well as a significant amount of financial information from the buyers. Title companies must be given time to complete their search. And Sellers often have their own agenda about when they will be vacating the property. It is your lawyer’s job to coordinate all these factors to make the transaction as uncomplicated as possible. The attorneys at Phelan, Frantz & Peek pride themselves on being accessible and responsive in order to make your home buying experience a positive one.