3 Costly Mistakes Real Estate Investors Can Avoid
By: Julia M. Wei, Esq.
Whether you are purchasing your first home or your 100th foreclosure, a real estate purchase in California is a significant investment. As real estate litigators, we frequently see some recurring themes in real estate transactions that could have been avoided.
1. Failure To Read the Disclosures
2. Failure to Assess Property Conditions
3. Failure to Review the Preliminary Report
4. BONUS - HOA – Failure to Anticipate Special Assessments
1. READ YOUR DISCLOSURES.
California has a mandatory disclosure requirement in the form of the Transfer Disclosure Statement. Additionally, many listing agents will often have the sellers also complete the Supplemental disclosure. The California Association of Realtors offers the Supplemental Statutory and Contractual Disclosures (“SSD”) which gives the seller an opportunity to enumerate on other issues affecting the property, such as insurance claims or matters affecting title, and also the Seller Property Questionnaire (“SPQ”), which is lengthier. The SPQ asks about mold, pets or other animals on the property, boundary issues and many other property related issues.
Sample Forms provided by CAR –
Very few transfers are exempt from the TDS requirement, however sales of new homes as part of a subdivision, trustee sales, tax sales and foreclosure sales are exempt.
Examples of costly items that can be found in disclosures:
a) Neighbor issues – misplaced fenceline, noise or other nuisance.
b) Property conditions – prior repairs, water leaks, mold, rat infestation
c) Changing neighborhood – high speed rail, nearby construction
d) Hazards – underground and environmental issues
2. UNDERSTAND YOUR PROPERTY AND YOUR NEIGHBORHOOD
Not every seller discloses everything. However, in today’s market with the fast turnaround times, a prospective buyer often sees the property at an open house over the weekend, receives disclosures on Monday, drafts an offer with their agent on Tuesday and may be in contract by Wednesday. Often that leaves little time for additional inspections as the seller has often already prepared a disclosure report that includes a property inspection and/or roof inspection.
The buyer should consider leaving in an inspection contingency to continue his or her investigation and obtain specialty reports for things like foundation inspections and septic inspections. While buyers are often told that their offer looks less competitive, the value that comes from having an additional inspection, such as a foundation inspection, could save the buyer potentially many thousands of dollars in repairs.
A further inspection could reveal issues with unpermitted or nonconforming structures, such as a sun room having an non-compliant foundation.
Neighbor interviews are also good ways to learn about characteristics of the school that may not have been in the disclosures. Perhaps there is a school nearby and morning traffic is a gridlock. Perhaps there is a church nearby and they have a conditional use permit to double park on Sunday mornings. None of these may be deal killers for the buyer, but having more data gives the buyer more ability to assess one property when compared with another, or whether a further investigation is needed.
3. REVIEW YOUR PRELIMINARY REPORT AND UNDERLYING DOCUMENTS
Though often referred to as a “title report” the title insurance industry is not actually providing you with a title report. Instead, they are offering to insure your title subject to a long list of exclusions. That means that if the title company has conducted a public record search and found items affecting your property, they will list those items and not insure any problems that arise from those items.
The preliminary report from the title company is often difficult to understand, especially if the property is a condominium or townhouse, or has a metes and bounds description. Your real estate professional is not a surveyor and is not usually in a position to assess if the property’s legal description is accurate. Also, the exclusions often include easements and liens such as judgments and mortgages. Accordingly, your legal professional also may not be able to identify or talk about the effect of the seller’s PACE (or HERO) lien for their solar panels.
These documents often provide further questions to answer and often, consulting with the title officer, any attorney or surveyor or civil engineer may be the only way to definitely answer or assess the issues raised by the preliminary report and linked documents.
*** BONUS – HOA Issues
If you are purchasing a unit in a planned development, the Homeowner’s Association will usually provide a large package of documents. Unfortunately, the buyer often only has a couple of days to review these items. The documents should include a summary sheet and about whether any special assessments have been approved and the documents should also include the HOA minutes, bylaws and financials.
Those documents tell the buyer about the overall health and management of this community. Failure to study these documents closely could lead to a rude awakening. Perhaps the minutes note that the pool will be shut down for repairs for a long while. Perhaps the minutes note that the driveways are in need of repair and that the Board will soon seek competitive bids. Review of the financials may show the HOA has failed to reserve sufficient sums for major repairs and maintenance.
A real estate purchase here in the San Francisco Bay Area is incredibly expensive. Similarly, general contractors and other construction trades are in high demand and also costly to engage and difficult to schedule. A significant repair can derail the investment potential when the investor is already running on narrow profit margins. Taking the time to engage in the due diligence efforts above can save a buyer time and money and hassle. A stitch in time saves nine.