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The Seven Steps of Real Estate Due Diligence

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For those working in real estate, "due diligence" is a common turn of phrase in the industry. Homebuyers are probably less familiar with the term and just how much paperwork and research are involved in protecting their interests in real property. 

It’s amazing that most people don’t know much about the closing end of a real estate transaction and how many people work behind the scenes to ensure there are no liens, municipal debt, or other issues affecting the property that could be passed on to the new and unsuspecting owner. In order to make sure the home buyer is protected, they should be sure to get an owner's title insurance policy. The title agent will research the property's ownership history (chain of title) and make sure there are no recorded liens against the property in the public record. This is, of course, just the tip of the iceberg of responsibilities for an agent. As a result, many title companies look for help to check off items on their list more efficiently.

 

Unrecorded municipal lien searches are a part of the real estate due diligence process. 

 

This process is a list of things that need  to be done before closing on a property to cover the homebuyer and lender and issue marketable title. Each item on that list is just as important as the rest, including Municipal Lien Searches, because if missed, it could mean HUGE fees to the new owner. A savvy homebuyer or investor can learn how to do a municipal lien search on their own, but if they want these potential issues to be covered in the title policy, the settlement agent will need to obtain this information themselves or through a third-party vendor like PropLogix. 

We've discovered code enforcement violations totaling in the millions! With that in mind, it's highly advised that homebuyers are sure to request this search in addition to the traditional title search when relevant. When a property is under contract, the following is a list of MUST DO's before and after the transaction closes. 

Constantly we struggle to educate  people about:

  • What an unrecorded municipal lien is and how it differs from a typical, recorded lien.
  • How these hidden property issues can seriously cost the homebuyer.
  • Why a search for these types of problems has to be a  part of the property buying process.

Here's an infographic that gives a rundown of each part of the process. (Be sure to share it with real estate agents and anyone getting ready to make a purchase!) 

 



 Step One: Title Review

The title company searches public records to ensure the seller has the right to sell the property and that the title to the property is free and clear of encumbrances or defects. An encumbrance is a right to, interest in, or legal liability on real property but that diminishes its value. There are several different classifications of encumbrances from financial, like a municipal or contractor's lien, or non-financial, like easements and private restrictions. Because title to a property can be divided among individuals in several ways, it's important to have an experienced professional, either a title agent or real estate attorney, review the chain of title to make sure that no one else tries to claim they have a right to the property after the deal closes. If an issue arises, having an owner's title insurance policy will help with litigation if an undisclosed long-lost heir claims a right to a new home. 

 “One out of every three searches reveals a title or public record defect that’s fixed before the transaction closes,” - Jeremy Yohe, American Land Title Association

In some states, the buyer pays for the title insurance policy while in others, it's the seller. Whoever pays for the title insurance, has the right to select the company. However, if the seller is pushing his or her title company that was used years earlier in their transaction, be wary. A title search from the same company will most likely yield the same results because many searches aren't using actual records but summaries or extracts of those records. Getting a new title company to do the search for a new transaction could uncover problems that were previously missed. 

Step Two: Municipal Lien Search

Ordering a municipal lien search will find issues like expired and open permits, code enforcement fines, unpaid utility bills, and other costly issues that do NOT always show up in a public record search.
This an overlooked search on many contracts but is becoming a growing issue for buyers.

Many municipalities keep records of daily accruing fines and unpaid bills on a property but don't always file a lien with the county clerk of records. Cities and counties will rectify certain code issues by sending in crews to mow lawns and demolish dangerous and unpermitted structures. If these issues aren't revealed before closing, owners with these swelling debts pass them on to the unsuspecting buyer because they are tied to the property and not the individual. The municipality will seek to recoup their losses after the sale. 

Buyers and real estate agents should ask if this search is being conducted in addition to the traditional title search for added protection. Sometimes, the title company will gather this information before the closing as a stipulation of the title commitment but not always. It's important for buyers to understand all the stipulations, exceptions, and exclusions covered in their policy. They should contact their escrow officer or attorney if they are concerned or have questions. Learn more about common misconceptions of Municipal Lien Searches! 

 

Step Three: Survey/Zoning

It's standard practice among many real estate professionals to simply reconvey the old survey to the new owner. But just as using the same title company from the previous transaction means that undiscovered issues remain unaddressed, the old survey can be inaccurate to the current state of the property. 

Insist on a new survey of the land to ensure there are no boundary or title issues. For commercial properties, request a zoning letter to ensure the land use is consistent with current zoning regulations. 
Want tips on how to read a land survey? Take a look at our guide!

 

Step Four: Association Certificate

If the property is located in a community association, a statement of current, past and potential fees and assessments must be requested from the management company. This is a standard part of a title commitment for a property within a known governing association. Think you need help with association certificates? Check out our Cheat Sheet to help you decide!

 

Step Five: Inspection

A certified inspector will check that the structure is safe and up to general code standards. However, this inspector won't necessarily uncover every municipality's building code violations, so it's important to request a permit history search during step two. If the private inspector is armed with this information, it will help reveal any work that was started and not properly finished. There are also municipalities that will send out their inspectors to confirm there are no issues with the building in addition to a record search of a permit history. 

 

Step Six: Appraisal 

A licensed Appraiser will determine the property's value. This information will be used by the lender and tax collector. This will help a lender determine if the property's contract price is an appropriate reflection of the property's condition, location, and improvements. The tax collector uses this information to determine if the property is being assessed for the appropriate amount of taxes. 

 

Step Seven: Payoff Tracking aka Release Tracking

After closing, the last step is for the title agent to follow up with the county clerk and the lender to make sure the instruments in the title commitment (mortgage, HELOC, judgments, Lis Pendens, etc.) are properly recorded in the public record. This last step is important for both the seller and the buyer.

 This list doesn't represent ALL the work required during the contract-to-closing period and beyond, but it's a start to some of the most important steps to protecting a buyer's interest. If you're a real estate professional, be sure your clients and your reputation are protected by completing these steps for every transaction.

 

How PropLogix helps title agents with the real estate due diligence process

PropLogix provides services for busy title agents and real estate law firms. By partnering with us and utilizing either our ordering platform or an integration within their closing software, settlement agents can optimize their daily workflows. Our services include Municipal Lien Searches, Association Estoppels, Payoff or Release Tracking, and much more. Homebuyers also have the option to order these services themselves or request information directly from a municipality or association. Be sure to contact your real estate agent or title agent to see what information is covered in the closing costs and in the title policy. Depending on how your state regulates title insurance, homebuyers and investors may have the ability to negotiate the coverage options and prices for their title policy.

 

If you're just learning more about real estate due diligence, you may find these posts helpful:

Why Do I NEED a Municipal Lien Search?

How doing your own estoppels could cost you $1,000s

7 things a surveyor wants a title agent to know

What is Payoff Tracking and why should I give a crap about it?

common misconceptions about lien searches

How Efficient is Your Work Force?
Happiest of Holidays and Ugliest of Sweaters!

About Author

Lindsey Gordon
Lindsey Gordon

Lindsey Gordon is the content strategist and video producer at PropLogix. She loves using video and digital media to help educate the title industry and help clients and give the world a glimpse of what it's like to work at PropLogix.

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