Exercise due diligence early

The revised Agreement for the Sale of Real Estate (Form ASR) published by the Pennsylvania Association of Realtors® includes a new requirement that buyers order a title report from a reputable title company within so many days of execution. The provision, vetted for a least a year and approved by PAR’s Standard Forms Committee, is intended to address a range of frequently recurring problems in residential transactions.

To begin, it’s been said many times that “buyers buy title blind.” We require disclosure of material defects and suggest inspections of the physical property to the tune of hundreds of dollars or more, but ask a buyer about the quality of title they are accepting, and you are likely to get a blank stare.

Our agreement requires that sellers provide “good and marketable title…free and clear of all liens, encumbrances, and easements, excepting however the following: existing deed restrictions; historic preservation restrictions or ordinances; building restrictions; ordinances; easements of roads; easements visible upon the ground; easements of record and privileges or rights of public service companies, if any.” That’s a lot of exceptions. Having marketable title is good, but how good is it when that marketable title includes easements that crisscross the property preventing the buyers from building the addition they had been planning for since first seeing the property? What good is it to learn, at settlement, that there are restrictive covenants that restrict domestic animals to two when the buyers have three beloved dogs? I could probably give you 30 examples of title surprises that are the subject of past and present litigation between buyers, sellers, real estate licensees, title companies and lawyers – all of which still would have granted “marketable title” as defined by the agreement!

Sellers also benefit from knowing the title issues at the outset of a transaction. Everyone loses when a title report revealing unknown encumbrances or conditions affecting marketability of title is received three days before settlement. It is likely that the seller was anticipating settlement proceeds in order to fund her next home. Now what?

In many markets, it is already common practice to order title early in the transaction. While it is true that this affirmative obligation to order a title report within a certain time period is an additional item for buyers to comply with, it is just one of many such elements in the agreement. Provisions related to mortgage applications, property inspections, municipal permits and many others all seek to have buyers complete certain tasks within certain time periods. Like all of those other items, the pre-printed time in this clause is only a suggestion and can be negotiated between the parties.

For example, the mortgage contingency clause requires buyers to make completed mortgage applications within a specified time (seven days if not specified). What’s a “completed” mortgage application? What happens when the buyer makes an application a day late? Will the provision lead to buyer defaults? History shows that while application deadlines may be missed, this has not been a major problem in the residential real estate world. Title and mortgage contingencies are standard matters that are designed to facilitate a transaction, not to provide either party with an advantage. The goal is to have everyone in the know well before closing. Remove the blind spots. Discovery that property title is objectionable should not be last minute stuff.

This statement is hardly profound: Title is complex, and no form agreement is perfect. Residential real estate is also complex, which is why PAR expects more from its members and why it continuously looks for the high road. Yes, agents may have seen their duty expand ever so slightly and someone someday may fail to do that which should have been done. We have, however, inched closer to that time where we will not settle blind to title.