Due Diligence for Buying a House

The due diligence process for buying a house or townhouse is generally much faster vs the time required to conduct due diligence when buying a condo or co-op apartment. The buyer or the buyer’s attorney, depending on the norms in your state, won’t need to wait on a building’s managing agent for building documents or to answer an attorney questionnaire.

In fact, in many municipalities most of the due diligence that a buyer’s attorney would normally do can be done online by searching publicly accessible records. For example, in NYC many lawyers will try to time the completion of their due diligence to occur the day after the buyer’s home inspection so everything can be gone over in the same call with the buyer.

It’s also important to remember that only buildings built after 1938 are required to have a Certificate of Occupancy. So don’t be surprised to not find one if the building you’re looking at was built before then. In that case, they can often furnish you with a Letter of No Objection from the city in lieu of a Certificate of Occupancy.

Complaint history

Attorneys, buyers or their brokers can search for a building’s complaint history as well. For example, New Yorkers can search on the DOB’s BIS website to view a building’s complaint history, which typically consists of complaints from nosy neighbors calling 311.

For example, your typical nosy neighbor might complain to 311 that they hear or see a renovation going on next door, but didn’t see a permit in BIS for the property. Now, this could be because the renovation work was minor enough not to require a permit, but it’s important regardless to see what these are and whether they can easily be addressed ideally before closing.

Do you have a permit for that deck?

A common thing to check for if you notice a backyard deck, garage or roof deck that was recently added, or added after the original construction, is to see whether a permit was ever filed and signed off for it.

Ideally the structure would be listed in the Certificate of Occupancy, which would certainly be the case if it’s a new construction building.

Even though many people think that the DOB may never catch it, if they do then you may be forced to do something as drastic as tearing it down. For example, is that illegal roof deck visible from the street? If so, that’s an easy one for DOB inspectors to see and potentially audit you on.

Pro Tip: In NYC you should also check for Housing Preservation & Development (HPD) violations, complaints, vacate orders and tenant harassment reports here. 2 or more family buldings that are rented out and not occupied by the owner or the owner’s immediate family must register with the HPD.

The next important piece of due diligence when buying a house or townhouse is the survey. The importance of surveys when buying a house or townhouse should not be underestimated.

It’s not only about checking to see whether your fence is within a foot, ideally, of your actual property boundary. A good surveyor can notice potential building violations or structural changes, and ask whether a permit was ever filed and signed off for it.

Remember that the toughest closings can often be when there are issues with the survey. These boundary issues, interestingly enough, are often related to sellers having built their fence too conservatively within their boundary line.

Their thinking goes that if they’re going to pay for a fence, then they’re going to make doubly sure that they place their fence on what is 100% certain to be their land.

The problem with this approach is that if your fence is more than the customary 1 foot inside your property line, you risk losing possession of your additional land over time because of your inability to access your property.

As the saying goes, possession is 9/10th of the law.

Over time, it could be argued that you abandoned your land and thus gave it up. This possibility obviously causes problem with the buyer’s title company. They either will refuse to provide coverage, or won’t cover this specific issue if it becomes a problem in the future.

So how do you remedy this issue? Sometimes you can get lucky and the title company will be okay with the seller installing a gate in the fence so that technically you can access your extra land.

Sometimes you can hire an architect, pull a permit, pay a fine and close it out. Keep in mind that it’s much less expensive to hire the same architect, as a new architect takes on more risk certifying another architect’s work.

Sometimes you won’t be so lucky and the seller might have to just remove the fence entirely, especially if it happens to sit over their boundary line on their neighbor’s land.

Sometimes, it’ll be more complicated. The brokers may have to knock on the neighbor’s door and ask them to sign a boundary line agreement, which is a document that then needs to be publicly recorded. This document basically says that the neighbor understands that they don’t own this extra land. However, as you can imagine many neighbors will be uncomfortable signing something like this, especially when they are not required to do anything!

Pro Tip: Sometimes a difference between a building’s classification and actual use isn’t a problem. For example, let’s say that due diligence reveals that a house is classified as a 2-family building but is marketed and used as a single-family home. This isn’t an issue, but the reverse would be.

The title search is another major piece of the puzzle when it comes to doing due diligence for a house or townhome. Title companies will take 5-6 days or more to send their local examiners to the various local municipal offices to look for judgments, do lien searches, building department searches, permits, violations and even searches on the seller him or herself.

The full report is quite long and can be 100 pages or more, but within 10 business days or so a synopsis, typically 5 pages or so, will be ready for all parties to the transaction to view.

Remember that even though it’s the seller and the seller’s attorney’s responsibility to clear title in order to close, it’s important for the buyer and the buyer’s attorney to review the title search for discrepancies from what they came back with through their own due diligence.

Remember that the title company usually will grant a larger number of exceptions (i.e. as high as 30 for example), but require a smaller number of issues (i.e. say 5) that they need resolved in order to close.

Closing with escrow for unresolved title defects

Sometimes both parties want a transaction to happen within a certain time frame, but the seller needs more time to resolve certain title defects such as permits that need to be signed off. In situations like this, it’s possible to close with the title company holding an amount of money in escrow, only to be paid out to the seller once the issues are resolved.

Note that title companies will often take double the actual amount for more serious issues that need to be resolved post closing such as judgments or liens, especially tax liens on the seller.

What do customized contracts in New York say?

It’s common for contracts to state that open permits or violations must be resolved on or before the date of closing; however, clever seller’s attorneys may customize the contract to say that sellers are only obligated to cure objections to title up to a certain dollar amount.

This language then usually gives the right to the seller to either agree to cure the issue, or if the issue costs more than the limit then the right to cancel the contract.

Pro Tip: Remember that when we talk about violations, we are talking about “violations of record,” meaning violations that have been caught and put in public records. This is what contracts and title insurance refers to vs undiscovered violations that haven’t been caught.

In terms of title defects such as unresolved permits and the like, banks mostly care about health and safety issues. This is why banks often have an issue if the appraisal deems the property to be uninhabitable.

Watch out as this can be an issue with new construction units in South Florida for example where it’s often the case that units are delivered “decorator ready” without any flooring.

Regardless, the flexibility on unresolved permits depends greatly on the lender. Some lenders will be very much check-the-box type lenders, especially if they intend to sell your loan in the secondary market vs holding it as a portfolio loan.

For example, let’s say a buyer has some floor tiles on back-order that will only arrive post-closing. The lender may hold back some of their mortgage loan amount in escrow to be disbursed only once the tiles are put in and have been inspected by an appraiser to confirm it.

Note that it’s uncommon for banks to force a default after closing if the permits aren’t resolved. Usually the banks will then in that case just take the escrowed funds and apply it against the mortgage loan balance.

What is the bank’s clear to close?

Clear to close is a term you’ll often hear mortgage bankers use. It basically means there are no more issues to be addressed, and all of the items that the Commitment Letter specified have been addressed.

This signals that it’s time to get the closing documents to the buyer, such as the Closing Disclosure, and to schedule the closing. Remember that the Closing Disclosure needs to be sent at least 3 days prior to closing to the buyer.

Remember that the Commitment Letter usually, but not always, has some additional clearance items before the bank’s underwriters are comfortable with proceeding with closing. For example, it might be an additional missing bank statement, an explanation for a large deposit etc. Once these additional items are cleared, then the bank is ready to fund and will issue the clear to close.

Pro Tip: Due to increasing bureaucracy and labor shortages, it’s quite tough these days to find a HPD expediter in NYC, and really an expediter anywhere. Remember that an expediter will have to wade through a lot of red tape, check original plans etc.