Ten Rules For Buying Real Estate
Unexpected problems sometimes arise when companies buy new buildings. Take these hypothetical cases, for example:
Company A found a building that was ideal for its corporate headquarters. The first floor was vacant. The tenant on the second floor had a short-term lease, according to the salesperson who showed the property. But after it purchased the building, the company discovered that the "short-term" lease was to run for two more years. To obtain this needed space, company A had to pay the tenant a relocation fee of several thousand dollars.
Company B, a small electronics manufacturer, wanted to operate an assembly plant in an old supermarket building. The company signed a purchase agreement after checking with City Hall to make sure that the proposed use complied with local zoning ordinances. Just before closing, the company hired a lawyer to look over the documents. He noticed a use restriction in the title papers that prohibited "manufacturing operations" at this site. Rather than risk a lawsuit by neighboring property owners, the company forfeited its $5,000 and called off the deal.
Company C knew it could get a 12% mortgage loan to purchase a much-needed warehouse. The bank president had told the company treasurer over lunch that such a loan would be "no problem." Four months later the company signed an agreement to buy a $400,000 building. But the bank -- now headed by a new president -- informed the company that the best it could do was give a 16% mortgage loan. Locked in by the purchase agreement, the company accepted these mortgage terms, but it had to drastically alter its other financial plans in order to make the monthly payments.
All these hypothetical problems could have been avoided if the companies had asked their lawyers for carefully crafted purchase agreements. A purchase agreement describes completely all the elements of the sale and is signed by both the seller and the buyer. Here are some guidelines:
1. Include all details in the first paper you sign. Depending upon local custom, that paper may be called a sales agreement, purchase agreement, contract of sale, offer, binder, preliminary sales agreement, earnest money agreement, or receipt for deposit. Whatever it's called, the first document should answer these questions:
* What is the purchase price?
* When is it due?
* What property (real estate and personal property) is being sold?
* What type of deed and title evidence will you receive?
* Under what conditions can you withdraw from the purchase and get back your deposit?
* To what extent does the seller guarantee the condition of the building?
* When can you take possession?
* How will taxes and utility bills be allocated between you and the seller?
Don't sign preliminary papers with the idea that details can be supplied later. Preliminary papers generally are binding contracts -- even if they're somewhat sketchy. You can safely sign an incomplete preliminary agreement only if your lawyer assures you that the document isn't a binding contract and that you can get back your full deposit on demand.
2. Watch out for the "standard contract" ploy. If a seller hands you a printed sales contract with the blank spaces neatly filled in by an electric typewriter, say "I'd like my lawyer to look this over." There's no such thing as a standard real estate contract. Virtually every word in a real estate purchase agreement is negotiable. If you need to insert additional language to protect your position as a buyer, the necessary changes can be typed or written on the face of the contract or placed on an attached sheet (called an addendum).
3. Consider alternatives to an outright purchase. For example, you might buy an option to purchase. You pay the seller a modest sum -- say $500. In return, the seller gives you the right to purchase the building at a set price within a fixed period of time, perhaps 90 days. If you decide not to buy, you simply forfeit the option fee. A variation is to sign a lease with an option to purchase. If you choose one of these methods, the agreement or lease should state the terms of the possible sale with the same completeness as a full-fledged purchase agreement.
4. Be careful about accepting an agreement signed by someone other than the owner. Try to have the purchase agreement signed by the legal owner of the property. Get your lawyer's advice before accepting an agreement signed by an agent or executor. In many states, a wife has a dower interest in her husband's property. In these states, you'll want both the seller and his wife to sign the agreement, even if the husband has legal title in his name alone. If the owner is a corporation, ask to see the board of directors resolution showing that the person signing the agreement has the authority to commit the corporation.
5. Be sure the agreement contains a full legal description. Don't accept an agreement that refers to the property by street address only. Insist on a full legal description, and make sure it covers everything you think you're buying. The present owner may be renting a parking area that's owned by someone else. Don't assume that the legal description includes driveways and parking areas. If necessary, require the seller to furnish a survey that shows exactly what's covered by the legal description.
6. List all fixtures and personal property that go along with the building. Many a seller has stripped a building of valuable equipment such as air conditioners, shelf systems, and counters. If items are attached to the building, they are "fixtures" and should remain there, but it may take a costly legal fight to establish your right to them. Your purchase agreement should list in detail all removable items -- whether fixtures or personal property -- that you believe are part of your purchase.
7. Protect against late delivery of the premises. Generally, courts give a seller some leeway in delivering possession of a building. If the agreement calls for a possession date of July 1, the court may say that delivery by August 15 is reasonable. If it's important to get possession on time, the contract should say, "Time of the essence." Your lawyer can also draft a "liquidated damage" clause that requires the seller to pay you a specified sum for each day of delay in delivering possession.
8. Look into restrictions on your use of the building. Your building and the land on which it's located may be subject to zoning ordinances, building and safety codes, privately adopted building and use restrictions, and rights of way for utilities, sidewalks, and streets. Be sure you can withdraw from the deal if you uncover restrictions that would interfere with your anticipated use of the property. (This would have prevented the problems company B encountered.)
9. Use contingency clauses to protect your rights. A contingency clause lets you cancel the purchase if certain conditions are not met. For example, a financing contingency lets you withdraw if you can't obtain the mortgage loan you need (as with company C). You can also make the purchase contingent on the sale of your present building, or on favorable inspection reports on the condition of the building you're buying.
10. Get warranties in writing. If the seller has made statements to you about the condition of the building or about its compliance with building and zoning ordinances, include these statements in a contract clause called "warranties and representations." This bolsters your legal position if the seller's statements turn out to be untrue (as with the seller in company A's case).
One final word: See your lawyer before you sign a purchase agreement. If you delay until a problem arises, it may be too late for the lawyer to help.