Why due diligence is important to the buyer
Congratulations! You are under agreement to purchase a home! All of that binge watching HGTV for decorating tips is about to pay off. Maybe stopping by Home Depot to “look” at the kitchen displays? Possibly dreaming of a ballet slipper tub in the master bathroom? Better yet, the house you are about to buy is perfect and in turn-key condition and all you have to bring is your toothbrush. It’s all smooth sailing from here….or is it?
You signed no fewer than 10 documents getting ready to purchase your home. You may have breezed by one (of many) important section of the purchase and sales agreement in that flurry of excitement. In New Hampshire, one of many important categories is found under #15 and entitled “Due Diligence”. What the contract provides is an agreed-upon time frame between you and the seller for your review of the following categories as they pertain to your purchase prior to closing:
- Restrictive Covenants of Record
- Easements of Record/Deed
- Park Rules and Regulations
- Condominium Documentation
- Co-Op/PUD/Association Documents
- Availability of Property/Casualty Insurance
- Availability and Cost of Flood Insurance
None of these are as cool as picking out a beautiful Carrera marble countertop or a ridiculous outdoor grill. But they are very important for you to review before you head to the closing table. Typically, the time frame for the review of these items is between 14 and 28 days from the effective date but can be as long as you would like as long as the seller agrees to the time frame. This can also be extended after the fact if needed with a fully executed addendum. But what are we looking for exactly? Let’s start at the beginning and review a possible example of something that could come up in each category.
First and foremost, if you are obtaining financing to purchase your property the bank will be hiring either a title company or an attorney to prepare the closing documents and prepare what is called a “Title Opinion”. This is a review of the items found on record at the Registry of Deeds associated with the county your home is located in and specifically the categories found under “Due Diligence”. All Registry of Deeds records in NH are now online. You can view the documents for free, but there is a charge for printing. A few examples of documents that are recorded at the Registry are:
Plans (survey maps of the property)
Mortgages and Assignment of Mortgages
Tax Liens both from the Town and Federal Taxes
Easements or Lot Line Adjustments
Association Covenants and Restrictions
Road Maintenance Agreements
Writs of Attachment (This is when a vendor such as a plumber/carpenter/electrician has not been paid to service your property and has proven such in court. The judge then issues a Writ of Attachment which means when you go to sell your house, this vendor gets paid…before you do.)
Discharges of Mortgages, Tax Liens and Writs (Phew!)
You do have some say here as to which Title Company or attorney you prefer to use, but contact your bank to confirm that they are willing to work with your choice. Also, please use a NH licensed title company or attorney. It makes everyone’s life a lot easier. If you are using cash to purchase your home (lucky you!) this decision will be yours to make alone as to who represents you for the preparation of your closing documents inclusive of the title opinion.
Creating the title opinion is a bit like being a detective. But the story begins in the Deed. There is a local real estate class that has a famous tag line of “Read the Deed!” It truly is that simple. When you looked at your home you were probably handed a packet of information inclusive of the most recent Deed which transferred ownership to the sellers when they purchased the property. If you have misplaced it, your real estate agent can get you a copy. In the Deed, there are several helpful hints to help you in your quest for knowledge. First, if the property has been surveyed it will hopefully give you the Plan Book and Page for the survey recorded at the Registry of Deeds. This too may have been in your packet of information, but not necessarily. Not all properties have been surveyed. By obtaining a copy of the plan, you will be able to see the lot lines of your property as well as any other important factors like the possibility of any right of ways, private (creepy) cemeteries, exact amount of water frontage, and size of neighboring lots. The Town will also have what is called a “Tax Map” on file. Although these are a great resource, they are historically not 100% accurate when it comes to lot lines and such. Tax Maps should only be used as a reference. Some towns have their tax maps available online for free.
Other information found on Deed are any “Restrictive Covenants of Record”. An example of this can be seen below:
“The premises conveyed hereunder shall be used for single family residential purposes only.”
Pretty straight forward. But let’s say that eventually you decide that you would like to finish off your attached garage as an in-law suite that you would like to rent out (should your town zoning allow for such a thing). Now you have turned your residence to a two-family. This is not something that is allowed as you are “deed restricted” from doing so. But is there a deed police? A secret service that paws through building permits while reading your deed to exclaim “gotcha!”? No. But you most likely DO have neighbors. If your neighbors, who almost certainly have the same deed restriction in their conveyance do not like your expansion plan, they can make a case before the town and possibly in court to prevent your plan.
While we are on the topic of Town Zoning, one fun outing you may want to consider is a trip to your Town Hall for your soon-to-be building file. Sometimes the file can be an inch thick including every building permit that has ever been taken out to construct your home. Sometimes, it is literally an empty folder. Your Realtor should have done this already so that they know the property as best they can with the information that is available to them. But this is not always the case. An example of when this outing is useful is regarding septic systems. If your property has a septic system that was installed after 1980 it should have a certificate of operation on file with the Town. On that certificate it will list the state approved number of bedrooms allowed at your property.
The next topic found in due diligence is regarding “Easements of Record” An example of this can be seen below:
“Together with a right-of-way over said wood road is it runs along the easterly boundary of said parcel.”
In this case, the lot description in the deed cited the “woods road” as one of the boundaries of this property. In reality, when at this property, there is a very obvious dirt road running along the easterly boundary to the woods behind the house. The neighbor also has the right to use this right of way to access the woods. So, from a buyer’s perspective, this would be helpful information to know before moving forward with a purchase if you were not excited at the prospect of having another party drive down your driveway at any given time to access the back land.
One of the most common Easements of Record that you will find on deeds in NH are those conveying rights to the Telephone and Electric Companies. What these are providing is in the event of a storm or loss of power/telephone service, PSNH for example can come onto your property to repair any lines that may have come down without your express permission to do so.
In New Hampshire, septic systems and wells are very common. Also common, is sharing some of these components with neighboring properties. In some associations there are both shared water systems and large shared septic systems as well. In an association, the Covenants and Restrictions/By-Laws typically cover what the costs of the shared services are also what happens in the event of an unexpected repair.
But let’s use the following example of a non-association shared system. You and your neighbor share a well, but technically the well is driven on your neighbor’s property. All of a sudden a major thunderstorm rolls through NH. Out of nowhere CRASH a bolt of lightning hits the well head. It shocks the motor and now…sadly…no water. You knock on your neighbor’s door to discover that they are not home. Do you now have permission to go onto his land to have the motor repaired? Also, who pays for this?
What you will want to do before you buy a property with a shared well or septic is see if the easement is recorded at the Registry of Deeds. Sometimes there is a reference for such an easement in the deed which will give you the book and page that the agreement is recorded. Hopefully, the agreement spells out access, cost of repair, cost of replacement etc. If not, you will want this formalized before you move forward with your purchase.
Moving on, “Park Rules and Regulations”. When you purchase a mobile/manufactured home in a park you will be subject to that Park’s rules and regulations. All parks are different. Your Realtor should have those rules and regulations available to you before you make your decision to move forward with the purchase and sales agreement. But if they did not, reviewing them within the agreed upon time frame is completely within your rights prior to closing. An example of a Park Rule is as follows:
“Membership is open to adult residents who own and occupy as their primary residence a manufactured housing unit in the park and remain in good standing with the Cooperative”
In this example, you couldn’t buy a unit in this park and rent it out.
Now onto CONDOS! Ah, the dream. No more mowing the yard. Maybe a dock slip perhaps? A community beach, hooray! All for the bargain price of a condo fee. But what about my precious pot belly pig George? He’s only 45 pounds. This is America! Of course he can move in too. Not so fast….
“Condominium Documentation”. An example of this can be seen below:
“No animal, other than common household pets, shall be kept or maintained on the property, nor shall common household pets be kept, bred or maintained for commercial purposes on the property.”
Associations can be very loose or very strict or a bit in between. Sometimes they can be as low key as just an agreement regarding the road and the plowing/sanding/grading of the same as it pertains to all the residents in the neighborhood. Other times, Association Documents can be as strict as to say the minimum square footage size of your home and that the association has the right to review your building plans.
“Co-Op/PUD/Association Documents” An example of this can be seen below:
“Plans and specifications for all structures, residential or otherwise to be erected on any homesite in ____________ must be submitted and approved by the Building Committee.”
Translations – Probably no geodesic dome shipping container houses allowed in here.
“Availability of Property/Casualty Insurance” – Now this one is a bit tricky. You can insure almost everything. The manufacturer of Head and Shoulders shampoo has insured the hair of Troy Polamalu, a football player, for $1 million. For any payment to be made under the policy, Mr. Polamalu must lose at least 60 percent of his hair in an accident. But the real questions is, how much was that policy. Let’s say you have a house that has a lovely deck on the back of the property. But the deck doesn’t have a railing. Not the safest option, especially because this deck is 10 ft. off the ground. If the seller refuses to add a railing prior to closing and you in turn refuse to add one post-closing you will have trouble securing insurance. This is why you MUST contact your insurance provider PRIOR to closing (well before, say 3-4 weeks but really within the time frame identified within the Due Diligence terms of your purchase and sales agreement) to obtain a quote for insurance. Most properties are already insured with one company or another and there is a shared data base that insurance companies use to collect information. Let’s say that your property had a fire in an exhaust vent years ago and filed a claim. But the seller forgot to mention that in their disclosure. If they filed a claim, then your insurance company MAY have a record of that from this database.
“Availability and Cost of Flood Insurance” – The real takeaway here is “cost”. As mentioned above, you can insure almost anything. But the cost of Flood Insurance is very expensive. This can add up to hundreds of dollars per month to your expenses. You can check the address of your property by going to FEMA’s website here: https://msc.fema.gov/portal/search to see if your home is in the flood zone. If it is, don’t panic yet! Once I sold a property that was on a hill over 50’ up and above the lake it was situated on. But FEMA had determined this was in the flood zone by drawing a line 50’ from the water’s edge for ALL the properties on the lake. In the owner’s words “If this property floods, we should see an ark coming by any minute”. You can apply for a “Letter of Map Amendment Determination” from FEMA to remove your property from the list if it falls within the safety criteria that they require. We applied for and were given this waiver prior to closing so the buyers did NOT have to obtain flood insurance moving forward. Another common occurrence in NH is the “family camp” which is a lakefront property that has been in the same family for a generation or more. The FEMA maps are updated regularly but especially after Hurricane Katrina in 2005. If a property has been owned by the same family since before the map was re-drawn they honestly may have no idea that it is now determined to be in a flood zone. This is yet another example of why it is so important to contact your insurance provider during your due diligence period.
Buying a house is exciting. Maybe it’s your first house, or your dream home, a camp by a lake or a condo on the slopes. The purchase and sales agreement has built in a period of time for you to review all of the information about your house that you can up until a mutually agreed-upon date. IF, you find something in the deed, covenants, easements, or after calling your insurance company that you are not satisfied with and the seller is either unable or unwilling to meet your satisfaction you can back out of the deal while still retaining your deposit. But you must do so in writing, through your realtor, and submit the same before the Due Diligence contingency date has passed. Once it has, you can’t go back and change your mind that an issue bothers you because you are now risking your deposit.
Alright, who wants to go back to Home Depot?