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Due Diligence – Risk Mitigation For Buyers

It is the duty of the buyer to gather all necessary information on actual or potential risks involved in a home or property investment. An experienced realtor will assist you through this process, but It is ultimately your responsibility to examine and confirm that everything you have been provided about a listing actually checks-out to be true. Ignorance is no excuse when undiscovered risks becomes a costly nightmare, in what you thought, was the purchase of your dream home. Was the structure built properly and to local building codes, and has it passed its final building inspection? What’s behind the walls or even under the ground that you can’t see? All good questions, and you won’t know, unless you investigate.

Do not make any decisions without confirming the validity of what is written within the listing description and any documents provided to you from the listing realtor. Those records and documents can be outdated and come from many different sources including prior owners & contractors. The way to help mitigate the risks of purchasing a property with problems, starts with collecting and verifying every piece of information you can about your potential purchase, and including contingencies that allow you to further inspect areas that need vetting. 

Foremost, when you view the listing with your realtor take a pre-printed checklist that you can complete during your visit, this will help you create your own comprehensive appraisal to establish the listings assets and liabilities. You will then know if there are any areas you want the home inspector to pay special attention to and what contract contingencies need to be written. A buyer can write a contingency into a contract offer that makes the sale depend on the seller disclosing all defects in the deed and property of which he is aware. Where a seller does disclose a defect, the buyer needs to research all of its entanglements. 

Be as involved with the inspections and vetting process as you possibly can, and make sure you understand what the findings you are presented with mean. The most common and standard contingency, the boilerplate Inspection, actually refers to four separate inspections, and the buyer usually pays for them. The first is a termite Inspection that includes structures in addition to the house, such as detached garages, barns and workshops. Secondly, a drinking water test to insure the water is tested for heavy metals, chemicals and E. coli bacteria. The third inspection is to confirm if the septic system permit fits current use, and this test should check the age and if the system is functional and up to code. You could be required as new owners, to upgrade to the current septic standard, and code requires special septic systems when the dwelling is near to a lake, river or water source. The fourth, and most telling examination is the house inspection, which must be completed within the contingency time-frame. Hire a licensed and independent party who will document and explain all their findings. This is your one chance to thoroughly examine the entire property with a professional who can tell you if there is something not right.

Other important factors to inquire about include fee ownership and zoning; is the deed ‘fee simple’, which means you are purchasing all the rights the land contains – surface, minerals, water, timber, wind and so on. A buyer needs to know before making an offer whether all rights will be conveyed or if the seller is reserving a right or anything else from the sale. Figure out the market value of the property’s individual assets including; timber, cropland, pasture, improvements, minerals, water rights, farm income, and lease potential. Determine the zoning status of property and the uses that are permitted within that designation. ALR zoning rules have recently changed, always ask if the property is in the ALR and determine if the home or any part of the property is on a floodplain. 

Furthermore, acreage figures given, fence lines and other functional boundaries may or may not align with boundaries and numbers in the seller’s deed. Hire a surveyor if you feel there are discrepancies, and your contract offer can request the seller to disclose any known encroachments and boundary disputes. Verify the properties access, if no entrance exists, check with the correct authority to determine whether a new entrance can be put in. If the seller has a deeded right-of-way easement, the buyer needs to make sure that it’s wide enough for his needs, and doesn’t prohibit certain types of uses. The seller may have a recorded easement to use his neighbour’s property, and/or a neighbour may have one to use his. The buyer gets both in a purchase, and easements involve utility lines, underground pipes and roads. As a buyer you should legally draft language into your offer that requires the seller to disclose any unrecorded easement and any claim of use or ownership.

In conclusion, buyers can mitigate the amount of risk they are taking with any estate investment purchase by completing their own due-diligence research. It takes time and organization of facts, documents and inspections, but when it comes to “buyer be ware” – it’s much better to be “buyer is aware” every time.

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