NEW HOME BUYERS BEWARE
BE VERY AWARE!
For most Americans, the purchase of a new home is the fulfillment of the American Dream. It’s an opportunity to own a piece of the Earth, an opportunity to build wealth and financial security. But all too often that opportunity turns into a nightmare. Even when you hire real estate professionals to guide you through the maze of potential issues, it’s easy to come out on the short end of the stick.
“What could go wrong,” you ask? This article will discuss some of the more common problems that arise when purchasing residential real estate in the State of Indiana. While some of the issues described in this article might be a concern in any state, this discussion will focus on Indiana real estate and Indiana law as it applies to these concerns.
Problems most commonly suffered by purchasers of residential real estate in Indiana include:
1. Purchase agreement disputes;
2. Title issues;
2. Hidden defects within the building structure;
3. Boundary encroachments;
4. Zoning problems;
5. Easement issues;
6. Insect infestation;
7. Hazardous materials;
8. Neighborhood covenant issues;
9. Predatory lending;
10. Real Estate Settlement Procedures Act;
12. Warranty issues;
13. Mold problems.
PURCHASE AGREEMENT DISPUTES
A contract for the sale of real estate is not enforceable in the State of Indiana, unless it is in writing and signed by both parties to the sale. Therefore, a written contract is the generally accepted means of purchasing and selling real estate. When you think about the myriad of issues that give rise to conflicts during a real estate transaction, there should be no doubt about the importance of a written agreement. Real estate professionals typically use boilerplate forms, which are tried and proven in their ability to address most of the contingencies that might arise between the time the offer is made and the time the closing is concluded. However, despite the best laid plans of the drafters and the real estate professionals who fill in the blanks, things often go wrong.
Buyers and sellers need to be concerned about such things as deadlines for submission of earnest money, deadlines for closing, insurance coverage up to the transfer of ownership and thereafter, right to inspect the property, right to withdraw the offer, right to make repairs, right to possession, responsibility for property taxes, express and implied warranties, what appliances and other personal property stay with the real estate, and more. By reaching agreement on these issues at the inception of the contract, the parties can expect to avoid problems later. When contingencies arise, some parties find themselves inextricably shackled to a legal problem and those legal problems are often complex enough to require the assistance of an experienced real estate attorney.
WHAT YOU SHOULD DO TO PROTECT YOURSELF.
There is not much the seller needs to do to guard against contract disputes other than to play fair and hire experienced real estate professionals to assist with the sale. The buyer should do the same, but keep in mind there are so many unknowns from the buyer side of the transaction, a buyer cannot afford to be anything less than vigilant. “Let the buyer beware. A simple checklist may go a long way toward guarding the unsuspecting buyer from a disastrous transaction.
BUYER’S CHECK LIST
1. Consider making your purchase subject to financing, even if you are not dependent upon financing. This may give you an escape option you might not otherwise have.
2. Require a Warranty Deed and an insured closing through a reputable title company, whenever possible.
3. Make your offer subject to inspection, and then hire an inspector to inspect the home. Don’t sign a contract with an inspector, if he limits his liability in any substantial way. It is not unreasonable, however, to limit their liability to matters which can be seen by a visual inspection.
4. Be sure to have a pest inspection. This type of inspection is usually not included within the scope of a standard home inspection.
5. Have a survey performed by a licensed surveyor and then review the survey and the property by personal inspection to rule out the possibility that structures on the real estate or neighboring real estate are encroaching and to insure the existing structure does not violate any city or neighborhood set-backs.
6. Review the Indiana Seller’s Real Estate Sales Disclosure Form carefully, and ask about
matters that might not be disclosed on the form, such as prior illegal drug dealing activity
at the location, and other psychologically related history. (No such form is required for
new construction or for sellers who never owned or lived in the home, such as the County Sheriff, or the Executor of an estate).
7. Ask for a copy of the covenants. Under Indiana law, a buyer of residential real estate can withdraw the purchase offer, if they make a timely objection to the covenants. So be sure to obtain a copy, review it carefully, and prepare to object timely, if you can’t abide by the restrictions and obligations set forth within the covenants.
8. Require licensed contractors to perform all work required by any inspection response and always, always, always have the inspector re-inspect the property after the work has been completed to insure the work was performed properly and according to code. You won’t get another bite of this apple after the deed transfers into your name.
10. Have a radon test performed, and if radon is discovery, make sure remediation is confirmed prior to closing. The EPA recommends remedial action be taken, if radon is discovered above 0.4 pCi/L.
11. If you are buying from a builder or developer, require a written warranty and a signed vendor’s affidavit at closing.
12. Never close without a title search.
13. Insure access to the property is either directly connected to a county or state road, and if it is not, insure a proper easement is in place to insure you won’t be held hostage by a neighbor on whose property the driveway may traverse.
14. When purchasing a home with new appliances demand all owner’s manuals and product warranty information, where applicable.
15. Never waive the walk-through prior to closing.
Ownership of real estate is evidenced by a deed of conveyance. Conveyance requires a document containing a legal description indicating the Seller is granting to the Buyer the real estate described therein. It also requires the deed be delivered by the Seller to the Buyer. It does not require the deed be recorded. However, recording your deed is the best way to insure your deed is valid and superior to any subsequent deeds of conveyance from the same Seller.
Common problems with title to real estate include errors in the deed, liens, encumbrances, restrictive covenants, easements, survivorship rights, incompetency of grantor, bankruptcy, divorce, encroachments, judgment liens, tenants, and Lis Pendens notices. When your purchase is closed through a title company, a title search is expected to reveal problems that might interfere with a buyer’s interest. When problems are discovered, they are either resolved, waived, or unable to be resolved, in which case the closing will almost always be halted. However, some problems don’t get discovered until after closing, and sometimes closings occur without a title search, as might be the case when closing a cash sale or land sale contract.
Where the buyer is purchasing without an insured closing or without the benefits of title insurance, the following checklist should be helpful to avoid the more common problems clouding title.
1. Order a title search prior to closing. (A title search does not give you title insurance).
2. Order a survey. You may not need a staked survey, unless there are structures that appear to be situated close to the presumed property lines.
3. Search the public records for Lis Pendens notices, which are typically filed with the clerk of the Courts in the county where the real estate is situated.
4. While at the clerk’s office, do a search for the Sellers’ names to make sure there are no active lawsuits or unsatisfied judgments against them. Buying real estate from a Seller who has an unsatisfied judgment could subject your property to the judgment lien. (Information found at the clerk’s office will typically appear on a title search).
5. Review any covenants for limitations on the use of the property.
6. If there is any reason to suspect the Seller is not of sound mind or incapacitated in any way, then hire a lawyer to help you find out and look for ways of avoiding a void or voidable real estate transaction.
7. Search the federal bankruptcy records to make sure the Seller is not currently in bankruptcy. Once a Chapter 7 or 13 bankruptcy proceeding is filed the Bankruptcy Trustee usually takes over legal control of the property making a conveyance without the Trustee’s consent void. (This information will typically appear in a title search).
8. A search that reveals your seller is a party to a pending divorce could signal problems as well. Indiana law treats all real estate owned by a married individual as marital property, which may give the spouse rights to the property even if his or her name is not on the deed.
9. If you are purchasing on contract, make sure the Deed is signed and will be held in escrow by an institution independent from the seller that can be expected to be in existence when the payoff is anticipated.
10. Purchasers in a land sale contract should also require their payments be sent directly to the Seller’s mortgage company, if possible, to guard against foreclosure. This is a common problem for purchasers in these types of sales.
11. The same issues regarding mortgage payments should apply to the payment of property taxes and casualty insurance.
HIDDEN DEFECTS WITHIN THE BUILDING STRUCTURE
It is nearly impossible to build a perfect home or building. Problems occur due to poor quality workmanship or materials. Sometimes external forces can cause construction systems and appliances to fail. The list of problems that commonly occur are too numerous to mention here, but there are some fundamental things even the most inexperienced buyer can look for.
The roof and the foundation are two fundamental components that should never be overlooked. Shingled roofing which shows signs of aging, such as missing shingles or discoloration, may be due for a replacement. Foundations with noticeable cracks may indicate serious structural problems exist elsewhere within the structure. Highwater marks in the basement evidence flooding problems. Uneven floors, doors that do not close properly and cracks in drywall or plaster are also indications of foundation problems. If you see any of these issues, think twice about making an offer, unless you are prepared to live with problems that will almost certainly result, even if repairs are made prior to closing.
It may surprise you to learn that once you make an offer to purchase subject to inspection, that you are bound to follow through with the purchase even if your inspection reveals problems, provided the Seller agrees to fix those problems. The only exception under Indiana law is typically that you may rescind the agreement, if you find major structural problems.
Frequently, a buyer asks for the problems noted in the inspection to be repaired prior to closing, and the Seller agrees to repair, but the Buyer learns all too late the problems are not properly repaired. This is often due to the Seller attempting to do the repairs himself rather than hiring it out to licensed contractors, and the Buyer failing to have a follow up inspection conducted.
While this article is not intended to address common problems associated with the purchase of commercial properties, it is not uncommon for properties which once served as a commercial property to become residential. Where that is the case, an environmental survey should also be performed, especially if there is any reason to believe the prior commercial use was related to any type of enterprise where toxic or hazardous chemicals were used. Underground tanks can become a huge headache for unsuspecting buyers, because they will eventually breakdown and leak and the residual contents in those tanks will leach into the soil and contaminate everything it comes into contact with, including drinking water from nearby wells.
Boundary lines are determined by the legal description. They are not determined by fence lines and other physical structures. In other words, you can’t tell where the property line is simply by looking at structures built upon it. Therefore, it is important to know where the property lines are before you purchase.
Garages, driveways, fences, and utility lines are among the most common structures found to encroach upon another land owner’s property. Resolving encroachment problems can be very expensive, especially where a structure must be moved or torn down.
Having a survey performed prior to closing is the easiest way to shift responsibility for these problems back to the Seller prior to closing. Failing to catch an encroachment problem after you close may leave you with no recourse against the seller, unless you can prove they defrauded you in the Seller’s Residential Real Estate Disclosure Form.
Buying a home in a platted subdivision is not likely to lead to zoning problems, provided your intended use of the property is simply residential, but many homes don’t exist in these residential developments. For properties that are not located in a residential subdivision, be sure to do your homework.
Zoning dictates the way a property can be used and where and how structures can be built. Almost all properties in Indiana have setback requirements for building purposes. It is good to know what those setbacks are before you buy. It is also helpful to know how other properties near the property you are interested are zoned.
When zoning conflicts arise, property owners typically seek out the assistance of a real estate attorney to help them either petition the local zoning board for a rezoning order, or a variance, which is like a temporary re-zoning and it typically expires upon the sale of the property to another seller or change of use.
Be sure to carefully review the seller’s statements on the Indiana Residential Real Estate Sales Disclosure form as they pertain to zoning, and everything else on that form for that matter. If zoning issues arise later, this may be your only port in the storm.
When a utility company or neighboring property owner desire the right to use a portion of another property owner’s real estate, they typically secure that right by means of an agreement, called an easement, which is recorded in the county Recorder’s Office. These easements are called appurtenant easements and they run with the land. This means the easement will remain and pass with the property when the property is sold. The property owned by those granted the right to use the other property is considered the dominant parcel. The property granting the use is the subservient parcel.
One common problem occurs where a new property owner discovers his driveway passes over a neighbor’s property, but no easement was ever created. This might happen, for example, where the one property owner granted the neighbor a license to use the property. Since the license expires upon the sale of the property, the new owners may find themselves cut off from the use of the driveway to their home.
It is imperative to know before purchasing whether the property has direct unfettered access to a public thoroughfare. If not, stop the presses! Secure an easement with the aid of the Seller before closing.
Insects are everywhere and usually in places you can’t see with a casual inspection. Some insects, such as cockroaches and bedbugs pose a serious health concern. Others, such as Carpenter Bees, Carpenter Ants, and Termites pose a threat to the building structure itself.
Experts say termite damage costs homeowners billions of dollars every year in the United States. They work fast and silently and, if unchecked, they can do sever damage to the structure of any building or home.
Have a Wood Destroying Insect Infestation Inspection done at the same time as the Property Inspection. Remember the best time to have the problem addressed is before you close. If you ask the Seller to treat the problem and he/she refuses, you may have the right to terminate your contract under Indiana law.
HAZARDOUS AND TOXIC MATERIALS
Much has been done in the last several decades to clean up hazardous waste. The Environmental Protection Agency is the federal enforcement agency in charge of sites where problems of hazardous waste and toxic materials contaminate the land. While they are aggressive administrators of the agency and its goals, they cannot be everywhere. Contamination continues to be a big problem, both in industrialized urban areas as well as rural areas where farming is the most prevalent industry.
Factories, whether they are actively manufacturing or not, may have a long-term contaminating impact on surrounding land. Farming operations may have a similar impact on surrounding real estate. For this reason, it is important to do your homework before you buy.
Rural areas tend to experience more problems with contaminated drinking water than urban areas because rural areas rely so much on wells as a water source. Some of the more common sources of this contamination come from farmland runoff containing animal feces, fertilizer, herbicides, and insecticides. Another common contributor is the poorly serviced or inadequate septic systems on site or from neighboring properties.
Environmental surveys can be expensive, but not as expensive as unknowingly purchasing a property with environmental problems. Ask the seller for copies of any prior environmental surveys. Consider having your own survey done. Commonly a Phase I environmental study can determine whether there is evidence of contamination on the site or surrounding properties without the expense of core sampling. If a phase I assessment reveals cause for concern, then a Phase II might be required to conduct core samples, and when contaminants found, a phase III may be required to assess the full scope of the problem. For commercial and industrial real estate purchases, banks typically require some environmental assessment. Purchasers of residential real estate near farms or other commercial or industrial sites may find it prudent to follow the same course of action.
NEIGHBORHOOD COVENANT ISSUES
Real estate which is developed as part of a residential plat plan or industrial or commercial park, frequently comes with private land use and development restrictions attached to it. These private restrictions are placed on the land when the owner or developer of the larger development places restrictions on the use of the individual parcels sold to individual buyers. These restrictions are generally intended to harmonize the use of the real estate with neighboring parcels, and help insure minimum standards with the hope subsequent owners will refrain from activity that would harm the value of the development.
Covenants may specify the set-back lines for buildings, the size and style of structures, the materials which must be used to erect the structures, even the type of flowers you are permitted to plant in the front yard. Covenants may affect a great many aspects of a property owner’s use.
Amending or vacating the covenants typically requires a unanimous consent of all property owners within the development. Alternatively, the purchase by one buyer of all parcels within the development would also vacate the easements by the doctrine of merger. Consequently, covenants are generally scene as permanent restrictions. Given the rigidity of such restrictions, it is crucial for purchasers to become acquainted with these covenants before purchasing.
For residential purchasers who submit written purchase offers, they are entitled to withdraw their offer to purchase, if they timely object to any provision found within such covenants. The timeline for raising such an objection is ten days from the date the covenants are submitted to the purchaser. This is one of the few “escape hatches” to a purchase agreement under Indiana law.
The term “Predatory Lending” is a catchall phrase referring to abuses lenders sometimes employ unfairly and deceptively to the disadvantage of unsuspecting borrowers. These abuses typically occur in the “sub-prime” end of the residential mortgage industry and include the following:
- Inadequate disclosures in the loan process;
- Risk-Based interest rates (pricing);
- Inflated or unwarranted closing fees associated with the loan;
- Requiring or urging borrowers to buy loan insurance (Loan Packing);
- Use of balloon payments to trigger future refinancing fees;
- Negative amortization;
- Unusually high pre-payment penalties.
Borrowers who suspect they are victims of predatory lending should consult a real estate attorney. One option a borrower has through the Truth In Lending Act (TILA) is the right of rescission. They may also sue for actual damages.
REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)
The Real Estate Settlement Procedures Act (RESPA) was enacted by the United States Congress in 1974 to protect home buyers from being cheated by unscrupulous real estate professionals. The Act applies to all real estate closings that deal with government insured loans. Commercial and construction loans are generally exempt from these regulations. The Act is designed to tightly control the procedures used to close a residential real estate transaction and insure the consumer is given timely, relevant, and accurate information about their loan and the closing process. The Act also made the common practice of paying out “undisclosed kick-backs and referral fees” illegal.
Borrowers have three (3) days in which to rescind their loan and this information must be made known to them during the closing of the loan, as required by RESPA. Rescission may also be an appropriate remedy where the lender otherwise violated RESPA requirements. Alternatively, violations of RESPA can lead to the recovery of actual damages plus attorney fees, and is most often used in defense of a mortgage foreclosure action. Borrowers, who believe they may have been victimized by someone during the closing can send a Qualified Written Request (QWR) to their lender requesting information pertaining to their loan and associated closing documents. Upon receipt, the lender must provide the requested information within 30 days. The information obtained as a result of the QWR may help document a RESPA violation. This can be a game changer for homeowners facing foreclosure.
For disgruntled real estate purchasers, fraud is the key that opens the lock to a lawsuit they would not otherwise be able to maintain. This is because Indiana permits sellers to use the “Merger by Deed” defense to lawsuits against them by buyers who believe the real estate somehow fails to exhibit the qualities they expected when they agreed to purchase. The rule provides absent fraud or mutual mistake of fact, all prior and contemporaneous negotiations, or executory agreements, oral or written, leading up to the execution of the deed are merged into the deed and are thereby satisfied. That leaves fraud and mutual mistake, and of the two, fraud is generally most supportable.
Fraud is generally defined as the making of an intentionally false statement of past or present fact, to another party, who justifiably relies upon the statement and suffers some form of detriment or injury. Note that “future facts”, such as “I’ll gladly pay you Tuesday for a hamburger today” must be distinguished from past or present facts, because future facts that turn out to be false are merely broken promises. They are broken contracts, while false statements of past or present facts make the claim that some fact exists now or existed in the past.
Fraud is criminal in nature and forms the basis for many lawsuits filed by dissatisfied purchasers, when their newly purchased home turns out to be a lemon or not as represented by the seller. The two primary documents that provide the evidence are the listing itself, and more importantly the Indiana Residential Real Estate Seller’s Disclosure Form (“Seller’s Disclosure”). The Seller’s Disclosure is signed under oath by the seller when the real estate is first listed for sale, and again at closing.
Because the standard of proof for a fraud claim is clear and convincing evidence, a purchaser must have very strong evidence to demonstrate the seller knowingly made false statements on the disclosure form. Absent clear and convincing evidence, a purchaser will find it difficult to succeed with any type of claim against the seller.
A warranty is like an insurance policy that gives the holder the right to have an item of property, real or personal, replaced or repaired, by the party extending the warranty. The warranty is a benefit paid for with bargained for consideration, and where the consumer has not fully paid the seller, the requisite consideration may not trigger the benefits of the warranty.
Warranties related to real estate transactions generally include builders’ warranties, contractors’ warranties, third-party home-buyer warranties, appliance warranties, and implied warranties. Under Indiana law, builders who sell new homes must provide a written (10-4-2) warranty which warrants against major structural problems for ten (10) years from the purchase date, roof shingles and structure for four (4) years from the purchase date, and all other workmanship and materials for two (2) years from the purchase date. Implied warranties of habitability, good workmanship, and fitness for a particular purpose may also apply, unless specifically excluded by appropriate language placed within the purchase agreement that meets Indiana’s construction warranty statutes.
Sellers and buyers of existing homes may also incorporate a limited warranty for used homes into the sale. Such a warranty is sometimes paid for by the seller as an incentive to the purchaser. It is sometimes obtained by the purchaser at their own expense to help insure against the unknown.
Warranties issued by appliance manufacturers become binding contracts between the manufacturer and the home buyer once the products are registered with the manufacturer. Claims that arise under these arrangements must be resolved by the owner and manufacturer, typically without the involvement of the builder or seller.
One important thing to know about any warranty is that they usually expire after a certain amount of time, and they are almost always triggered only when the consumer follows the specific directions found within the warranty itself about notice to the party obligated to back the warranty.
There are over 100,000 types of mold. Mold, in general, is not particularly dangerous, except when individuals with hypersensitivity to allergens encounter its spores. Those with hypersensitivity to mold may suffer asthma, lung infections, or sinus attacks. Sometimes mold can become toxic, which can cause those who come in to contact with it to become very sick, even if they don’t have any hypersensitivity to mold. Some toxic mold spores have been blamed as the cause of death to infants and pets.
It is difficult to pin liability for the growth of mold on any individual person or entity, because mold is known to grow anywhere there is moisture. All homes have moisture. Therefore, proving the seller or builder is somehow responsible for the growth or existence of mold may be difficult. It may be a bit easier for a tenant to hold a landlord liable, particularly where the landlord is responsible for the maintenance of the home.
The issues described above represent common real estate problems affecting the sale of real estate. They are by no means an exhaustive list. What is obvious from this brief survey of real estate related issues, is that there are a great number of legal issues that affect real estate and the people who buy and sell it. When things go wrong, consult with a qualified experienced real estate lawyer, and take steps to protect your rights and your investment.