By Rafael Solorzano
When in the market for real estate and if you have already met with a real estate agent or the actual seller chances are that you may be in a pressure cooker for a while, not only will you have to be careful with how you handle the relationship with the realtor, to avoid or to identify conflict of interest or from the actual seller, depending on the case, but you have to put the brakes on now to understand the most important part of home buying: Completing your due diligence.
“Due diligence” is how a cautious a buyer goes about making sure he is about to make a safe decision to buy a house, a lot or a condo. Thus it is vital that you identify whatever warts the property may have prior to closing. If you don’t know what you are doing or are in a country with a foreign language and different laws and culture, you may end up making a very expensive mistake.
Prepare a “home buyer due diligence checklist” so that you make sure to complete your due diligence. Consider having a local real estate attorney to assist you, particularly in reviewing the title and closing documents, as only a lawyer is qualified to do so.
WHEN SHOULD YOU COMPLETE YOUR DUE DILIGENCE?
Before an offer, or after? You should always do the due diligence before making an offer. This will make a stronger bargaining position, which you’ll need if there are other offers. But you’ll also incur costs even before you know whether you will get the land or the house. You need to balance the risk (of incurring unnecessary costs, and not discovering all of a house’s moles) versus the reward of having your offer accepted.
ALWAYS ASK FOR A SELLERS DISCLOSURE STATEMENT
Sellers should always provide the buyer with a completed Seller Disclosure Statement that includes:
The seller discloses what the seller knows about various aspects of the property.
The Golden Rule of Due Diligence: You should confirm for yourself anything that is important to you. Do not rely on what the seller or the real estate agent may have said, even in writing. If it’s important, you must confirm it for yourself or have your attorney do so!
(If you are going to rely on a writing, and sometimes you have no other choice, you should have the document reviewed by a competent lawyer).
PERFORM THE INSPECTION, AND THE FOLLOW-UP INSPECTION
The heart of due diligence. Only the most reckless of buyers would even consider buying a house without inspecting it first. Because owning a home can lead to some nasty surprises. You don’t want to be surprised.
- Begin with a general inspection. Find a home inspector. Your agent may be a good referral source, or use one referred by other owners.
- The general inspection is likely to reveal other aspects of the home appropriate for further inspection by a specialist. Common examples include a stonemason to inspect a chimney, an electrician to inspect the electrical system, a roofer to inspect and assess the roof for termites or abnormal wear, etc. Follow up as necessary.
- Make sure HOA fees are current.
- Don’t forget the sewer or septic system, a common and expensive “must-fix” item after closing.
- Perform a title search .
The initial step in buying a property should start with a Letter of Intent to generate a preliminary commitment to handle the due diligence and obtain a title report. The title report gives should provide ideal insight into the condition of the home’s title.
Remember that you are looking for issues with litigation, a probate, any liens a lis pendens, or an easement across the property. These encumbrances should be revealed by the title report.
Have a qualified real estate attorney attorney review the title report and explain its contents and significance to you. An attorney is the only professional qualified to do so, this is not something the realtor should do.
Do not rely on a “courtesy review” or any other sort of review by the realtor or seller. Their review would usually be limited to issues that are important to them and not reported to you, such as an easement.
Make sure your review includes the declaration (if you are buying a condo) or any conditions, covenants, and restrictions (CC&Rs), which are common in newer communities. These documents impose restrictions on how you can use the property. Make sure you are OK with these restrictions. Review the HOA´s management Many homes are subject to a Homeowners Association (virtually all condos, and many communities). Particularly where the HOA is responsible for the upkeep of some or all of the property, like a condo or a community center, at the end of the day, if the HOA doesn’t have the money it needs, you will be on the hook once you close. And you will be stuck with the HOA’s decisions, even if you don’t agree with them.
Good management is essential. Check out the neighbors There is no cure for the proverbial “Bad Neighbor,” other than to move away. So do what you can to make sure there is no Bad Neighbor.
For a single family home, look around: Does the home next door look like a junk yard, or a dog kennel? That’s a red flag. Knock on some doors and introduce yourself. Does the guy across the street seem like a cranky hermit with a nasty temper? That’s another red flag. If there is an HOA, review the meeting minutes (both the HOA, usually annual, as well as the Board, usually monthly). If there is a difficult member of the community, you will likely learn as much from the minutes.
Confirm the house works for you Take some time to fully imagine yourself living in the home. Does it work for you? For example, does your car fit in the garage? Will you be able to tolerate the only bathroom being on the ground floor? Once you close and move in, it is too late to discover something about the house that doesn’t work for you. Review the closing documents before signing Your lawyer should review the closing documents. When using escrow agents and all of them are foreign, make sure that the deed is drafted correctly, to avoid diminishing the buyer’s legal rights.
Lastly, if you are taking over someone else´s Real Estate Trust, make sure how many years are left on the trust, also check if handling fees and property taxes are current, the same criteria applies if the property has a federal zone concession.
Originally published here.