The rule of Caveat Emptor is a doctrine which places the burden of exercising proper care to reasonably examine property on buyers before a real estate purchase and take responsibility for its condition.
While real estate laws and rules vary between states and countries, a common denominator in all transactions is the importance of the buyer’s Due Diligence. In Utah, Title Companies manage the escrow process and as such, buyers do not customarily hire an attorney to guide them through the purchase process, though they may certainly choose to retain legal counsel. The Utah Attorney General has approved a set of real estate purchase documentation through the legislative process, which we as practitioners complete on your behalf.
The Real Estate Purchase Contract (REPC) defines the timing and requirements of due diligence in the Evaluations and Inspections section.
Buyers are typically given approximately two weeks to complete their due diligence, which is an in-depth examination of all factors affecting the property. The Seller must provide the Seller’s Property Condition Disclosure (SPCD) which is an extensive list of property attributes in which the owner confirms their knowledge about a condition based on Yes, No of NA (not applicable) answers. This document is typically supplied shortly after the execution of the purchase contract and should be carefully read in its entirety by all buyer’s party to the agreement. Be mindful of the fact that since many of our properties are owned by investors, they may not have visited the property recently and may not be able to disclose much, so you could be faced with a slew of questions with N/A as the response!
The SPCD will reveal other areas that require further inquiry, which should be examined carefully yet expeditiously during the allotted time period. Focusing on these matters promptly can be a challenge, as no doubt you have busy lives – however I cannot stress enough the importance of devoting quality time to reviewing this document to address all potential concerns. As your fiduciary, I will, of course, review the document and highlight potential areas of concern, but this does not in any way negate your need to thoroughly examine every part of this document. It is extremely specific, identifying everything from evidence of water damage to electrical matters to compliance with zoning regulations around nightly or monthly rental opportunities. I always ask my clients to compile a list by section number of anything they want to explore further so I can work with the Seller’s Agent to obtain responses.
Above is a sample of just 1 question on the SPCD, there are 25 in total.
Once the items of importance to you in the SPCD have been satisfied, as buyers you will want to hire certain professionals to perform inspections on the property. This will vary depending on the property being purchased. I can provide guidance here, depending on which items you have indicated are relevant or important to you. Typically, these inspections might consist of:
- Home Inspection
- Radon Testing
- Mold Testing
- Pest Inspection
- Water Quality Testing
- Sewer Lateral Inspection (most common on older, more rural properties)
- Lead Paint testing (properties build before 1978)
- Asbestos Testing
- Spa Inspection
- Methamphetamine Testing (yes, it may be worth this if the property has been rented)
- Survey (for land purchases)
While this is an exhaustive array of testing options from which to choose. I always discuss recommended inspections with my buying clients based on the subject property and can supply a list of relevant providers for each discipline once we have reviewed the standard Home Inspection report. I ask my buyers to be efficient in contacting these professionals to schedule inspections as time is always of the essence. In the Park City and Wasatch Back marketplace, significant earnest money deposits are usually required, and it is my job to protect those funds by keeping the due diligence process on track.
Each inspection you choose to complete will result in a written report identifying any areas of concern, which might need to be explored further. For existing or new homes, the Home Inspection is critical, and you’ll want to make sure the firm hired is properly credentialed. You get what you pay for, so choosing the least expensive provider in this crucial inspection is ill advised. A thorough examination can be an all-day affair or even longer given the size and complexity of the property. Typically, we meet with the inspector towards the end of the inspection to review their executive summary. The written report, which will be delivered within 24 – 48 hours, can be lengthy and can raise unnecessary alarm if not reviewed by someone accustomed to these reports. I will aid in this process, as there is typically standard language throughout the report which I can filter through on your behalf.
If these inspections reveal any additional defects requiring attention, we will address how these are to be rectified in writing to the seller, with timelines clearly defined. Most of our properties locally are sold in “as is” condition, so typically any defects are addressed by modifying the purchase price via an addendum to the REPC. In order to effectively do that, specialists will need to be consulted to determine reasonable value of the cost to rectify defects. Fortunately, I have built many custom homes over the past two decades and consider my subcontractor list to be an invaluable resource for my clients at times like these.
Equally important as the SPCD is the Title Report which will also be provided by the Sellers side shortly after execution of the agreement. A careful examination of this document is necessary to insure that vesting to the new buyers is in your correct, full legal names, all easements or liens affecting the property are divulged and any other matters of title are revealed. Acceptance of this document will affect the Title Insurance Policy that will be issued at settlement to you as buyers, so all matters revealed must be carefully researched.
If you are buying a property with a Homeowner’s Association (HOA) intact, which is more the norm in our marketplace, you’ll want to dig deep into the Conditions, Covenants and Restrictions, HOA budget and meeting notes to assess its financial health and discover potential planned assessments which might be cause for further negotiations. Most of our gated communities and larger neighborhoods have layers of HOA’s, typically a master that oversees the entire community and an HOA specific to your subdivision. How those multiple entities are intertwined is important to grasp. Additionally, transfer fees are often part of the sales process so understanding who pays what will be negotiated in the REPC.
Once these key items of due diligence have been addressed by the contractual deadline, there are still other aspects of due diligence to be completed by the buyer.
Roughly 50% of the properties sold in our area are financed, so there are added deadlines buyers need to meet. The Financing and/or Appraisal Deadlines will be found in the REPC and are also critically important dates. If you’re like many of my clients, your portfolio can be quite complex, so a mortgage application can require extensive research beyond just digging up your tax returns. It’s always best to have one’s financial house in order when financing is desired; many sellers will actually require full financing approval prior to executing a purchase contract. If that is not the case, the burden of completing the application lies firmly in the hands of the buyers and it is quite a bit of work. Your lender will require and schedule the appraisal; however, many cash buyers prefer to use this contingency to provide assurance that values are justified. The proper amount of time needs to be given for this service as qualified appraisers are typically extremely busy.
Many of our properties are either long- or short-term rentals, so the leases or management/marketing platform agreements need to be carefully examined to ascertain how security deposits or future bookings will be handled or honored. If your property is being purchased furnished by separate bill of sale, a careful review and sign off on the contents inventory is needed.
Once all your concerns discovered through the due diligence process have been addressed to your satisfaction, we will notify the seller of your sign off so the escrow process can be completed, and the settlement date scheduled per the terms of the agreement. During this process, the escrow officer will handle notifying all the utility companies and/or property management professionals servicing your property of the ownership change, with proper billing instructions provided.
If the due diligence results in a change of heart prior to the deadline, we will notify the seller of cancellation in writing prior to the deadline to protect your earnest money deposit.
Careful attention to the satisfaction of all due diligence items means you can start enjoying the property and lifestyle you chose when you made your purchase decision, so please keep that in mind as you work through this sometimes-tedious process. It’s homework that will truly make your home work once satisfied, allowing you to move on to the coveted peaceful enjoyment phase!
Caveat Emptor RE Rules
Leave A Comment