Caveat emptor: Let the buyer beware. Sure, we’ve all heard it before and we know what it means. Sadly, many don’t pay heed.
There is an investment rule that all homebuyers should learn about called “due diligence.” Investopedia defines due diligence as “an investigation or audit of a potential investment,” and notes that “generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.”
In a real estate transaction, the buyer is expected to perform all the necessary inspections, review all pertinent documents and perform all calculations before making the purchase. If they don’t, and something goes wrong, they have little recourse in a court of law.
Read on to learn about some nasty surprises that can occur when buying a home and how to avoid them by performing due diligence.
Read the Fine Print: Developers Can Retain Mineral Rights
Well, probably not gold, but there could be oil beneath that home you have your eye on. If it’s a new home, read the paperwork carefully because some developers are tenaciously hanging on to the mineral rights of land for sale in new home communities.
Homebuyers will learn quickly that when they purchase a condominium, they will actually own only the interior of the unit. The ground it sits on is owned in common with the other homeowners in the development. When purchasing a single-family home, however, the expectation is that ownership includes not only the home, but the land as well – and anything that “runs with” that land.
Reuters journalists Michelle Conlin and Brian Grow looked into the practice of developers severing the mineral rights from land they sold, and found that it’s common in at least 35 states. Unsuspecting homebuyers nationwide may own land that is leased to oil companies for drilling and fracking.
The report tells the story of a Colorado homebuyer who never suspected that he didn’t own the mineral rights beneath a home he recently purchased, until a neighbor invited him to a neighborhood meeting with a company called Mineral Resources. At the meeting, officials told them “the company was about to begin drilling under their neighborhood – and that it was putting 22 well heads right across the street (the number has since been reduced to about 16).”
Many of the homeowners present said that they were never made aware of the mineral rights issue when they bought their homes, according to the report. They would have been aware, however, had they read the mineral rights disclosure in their paperwork.
Protect yourself from this and similar situations by running all purchase paperwork by a lawyer. The cost of a legal consultation could be worth its weight in gold – or oil – even if it’s just for the peace of mind.
Pay Heed to Dodge HOA Headaches
We’ve all heard of various homeowners association (HOA) nightmares. Jackie Faye of NBC-17 News refers to HOAs as “little governments,” and some homeowners even call those that sit on the board “little despots.”
Still, in the run-up to purchasing in a managed community, homebuyers should be aware of the propensity for an HOA to run amok. The unknown dangers are only to be found in the huge stack of papers known as the HOA Resale Package, or simply the HOA documents.
These documents can run into the hundreds of pages and typically include, at the very least:
- Governing documents
- Current budget
- Articles of Incorporation
- Information on pending litigation
- HOA meeting minutes
Your job, as a potential buyer exercising due diligence, is to read and understand every word on every page of these documents. If legalese makes steam come out of your ears, you’ll want to hire a lawyer to break it down for you. If you choose to forego legal counsel, be prepared for any number of problems that may arise after you’ve taken possession of your new home.
Take the example of a couple who purchased a condo only to find out shortly after closing that homeowners were being assessed $850,000 to repair construction defects. Their share amounted to $7,500. Were they swindled? Not at all. It was common knowledge to those who lived in the community, and this particular couple would have known about it too – had they read the HOA documents. Instead, they learned about it three days after closing on the home.
If you plan to rent out the unit, you’ll find out if that’s possible by reading the HOA documents. Want to work out of your home? Read the documents – it may be forbidden. If you’re anxious about future assessments, read the HOA’s financial statements to find out if the organization has savings to pay for them.
Performing due diligence entails more than merely hiring a professional home inspector. It also requires that the buyer ask the right questions, investigate thoroughly and read every document before signing.