If I had to pick one issue that perpetually appears in term sheets and letters of intent negotiated by clients on real estate purchases, it is the issue of timing. In short, the self-imposed deadlines agreed to by the parties are often disconnected with reality.
Understandably, the seller in a real estate transaction wants to close as soon as possible, and the buyer may also be faced with pressures that dictate a tight deadline. However, there are certain realities that come into play and cannot, or should not, be ignored.
First, a buyer needs to allow adequate time to conduct a thorough diligence review of the property. In some counties, a title examination might be completed in a week, depending on the time of year, but more often than not, plan on at least two weeks. In certain counties it can take even longer, or if the title on a particular parcel or parcels is complicated more time will be required by the title agent. Timing for a survey depends on the type of survey. A mortgage location survey can be completed in the one to two week time frame and typically costs a few hundred dollars. While a location survey may be sufficient to remove the survey exception from the title policy, it doesn’t provide all of the information that an ALTA/NSPS survey covers. Also, most lenders, depending on the size of the mortgage loan, will require the more comprehensive ALTA/NSPS survey. This can take several weeks (more than 30 days) to be completed; particularly if being completed during a harsh winter.
All purchase agreements provide a limited time frame in which a buyer may object to information in the title report. If there is any likelihood that a survey will be completed as part of buyer’s due diligence, then buyer’s objection period should not start until buyer has received both the title report and the survey. It is more efficient to review these two items in tandem.
Environmental diligence is another key item that can slow down a deal. A Phase I environmental review can take 4-5 weeks as well. If the Phase I report identifies any significant issues that warrant testing or further review, then several more weeks will be required. Allow for extensions of the diligence period to complete this review if needed.
Second, if the purchase will involve financing, allow time for the lender to conduct its diligence and underwriting on the loan. In addition to title, survey and environmental, a lender will typically require an appraisal, zoning letters, and other financial and leasing information on the borrower and the property. Appraisals can take a few weeks and zoning letters may not be quickly obtained depending on the responsiveness of the local government providing the letter. Keep in mind that an older property may be categorized as ‘legal, nonconforming’. This means the zoning has changed but the property is grandfathered and not held to the new zoning requirements. This often happens with older multi-family residential properties or older office buildings where local codes have changed requiring more parking spaces than were required when the building was constructed.
Additional work is needed in these situations to determine what will happen if there is a casualty that damages all or a substantial portion of the property. In many instances the local municipal code (or the state statute, if the local government defers to Ohio law) allows a property to rebuilt along its same footprint and retain its ‘legal, nonconforming’ status so long as the property is rebuilt within certain time frames. It can be as short as 6 months or as long as 2 years. A lender will want to confirm what is or is not required in these situations (as should any prudent buyer) and may require the buyer to carry additional insurance to cover any changes in the zoning and building codes that would drastically impact the cost of rebuilding after a casualty.
Keeping all of the foregoing in mind, potential buyers should allow sufficient time in their purchase agreements so they do not have to go back to the seller and request (frequently at significant cost) extensions of time to close. Third party providers and lenders are not bound by the deadlines in a purchase agreement and will take the time they require to properly complete their work. Acknowledging that reality can spares parties to an agreement a lot of heartburn.