On January 13, 2015, the New York Times published an article by Julie Creswell outlining the problems buyers are having when purchasing multi-million dollar mansions in Malibu, California. Specifically, some buyers are allegedly being duped with respect to the square footage of their new homes. In some cases, the actual square footage of the new mansion is substantially less than advertised.
Although not many of us are buying $30 million mansions on the Pacific, the article is interesting and instructive for anyone planning to purchase property – a good reminder that it is important to do one’s homework in advance. While having an appraiser or other real estate professional re-measure your home or commercial building before purchase is an option, it is an expensive one and may not be as important to you as someone buying a west coast mansion. However, inspecting your property before you purchase is critical. You must do your due diligence.
What to Inspect
Physical Condition of the Property. The most obvious inspection involves the property’s physical condition, especially if the property has been recently improved. Whether the property is industrial, commercial, or residential, a current inspection of the improvements should always be undertaken before closing. A good inspector will assess the “bones” of the improvements (the roof, foundation and structure), as well as all of the systems serving the property, including all plumbing and mechanical systems. The inspector will also check for water damage and rot, and give you an estimate to correct any defects. Be sure to hire a reputable inspector.
Pests. Prior to the purchase of a home, a pest inspection is also highly recommended. A buyer should pay for a reputable pest inspection company to fully examine the home. Pests can, and do, destroy homes. The writer’s own home was infested with termites and the eradication cost $1,500. If pests are an issue, you should know this before purchasing the property and have the seller pay for treatment.
Title and Zoning. The condition of title is critical. As a buyer, you will typically be provided a title commitment for an owner’s title insurance policy, which should be reviewed by a real estate attorney. Easements, judgment liens, tax liens, and building restrictions are all issues that can affect development and enjoyment of the property. Remember, if there are problems, once you have purchased the property, it may be too late. In most cases, you are purchasing property in “As Is” condition. The zoning should also be checked so that, if you have plans to further develop the property, you will know exactly what you can do before you purchase.
Survey. A survey is recommended, especially for commercial property. A lender may require it, too. All easements and title conditions should be shown on the survey. It is critical to “see” what affects the property. A good survey will disclose any trespass issues with neighboring property, show the size of all buildings in relation to the property, the location of all utilities, the distances between all improvements, and the boundary lines of the property. It will also show you whether your commercial lot has sufficient parking. All this information may or may not be necessary, but it will help you determine what you do need before closing.
Environmental. Buyers need to know the environmental status of the property. This is also essential, especially for all industrial and commercial properties. What is important to understand is that a purchaser of industrial and commercial property must typically obtain what is known as a Phase I Environmental Site Assessment, which are conducted by environmental consulting firms. The consulting firm may recommend testing of the soil or groundwater. If the soil or groundwater is contaminated,then, under Michigan law, you may still be able to purchase the property without liability for clean up of existing contamination by obtaining what is known as a Baseline Environmental Assessment. If you do not inspect properly, you may be held liable for cleaning up all contamination at the property even if it existed prior to your purchase and you had nothing to do with it. Clean-up costs may be astronomical.
If you are buying property, there is no substitute for doing your due diligence before purchase. A skilled real estate attorney can assist you with the purchase process. The expense is typically minimal compared to the overall cost of purchase and skimping on due diligence could cost you substantially more in the long run. It’s not worth the risk.