CAVEAT EMPTOR: Buyer Beware!

Two recent cases, Heid v. Mohring, Nassau Supreme Court, and 98 Gates Ave. Corp. v. Bryan Jr. Kings County Supreme were decided against the buyers of real property due to their failure to adhere to the doctrine of caveat emptor.

In “Heid” the court determined that the buyer did not exercise the obligation to inspect the property. “Gates” was determined based on an issue of title and the failure of the buyer to purchase title insurance for himself, not just the lender.

Buyers of real estate are not absolved because they didn’t know the law. The best protection is to retain a real estate attorney who does.

To explore this subject, I interviewed Douglas C. Sinski with the law firm Schwartz & Sinski located in Southampton.

Doug advised that his clientele is divided almost evenly between buyers and sellers, and all are a result of referrals.

I started by asking about the Property Condition Act that became effective in New York on March 1, 2002 intended to aid buyers of residential properties. It requires a seller to answer forty-eight questions contained in a disclosure form but does not relieve buyers of their responsibility to conduct their own due diligence. The law also allows the seller to issue a $500 credit against the purchase price of the home at closing in lieu of providing the Property Condition Disclosure Form. (PCDF)

DS: Given the price of homes in the Hamptons real estate market, it makes perfect sense for the seller to give the $500 credit to the buyer in lieu of filling out the form, which may not be the case in some upstate communities. We never let our clients fill out the form. A seller who does is subject to a court action for up to six years from the date of signing it.

JV: Explain the merger clause in the contract of sale and specifically its application with respect to the PCDF.

DS: The merger clause prevents the buyer from refusing to close, if for example, he didn’t perform a search of the property for liens and other encumbrances before the date of the closing. Usually a buyer would have to demonstrate fraud on behalf of the seller to negate the merger clause. That’s not true with respect to the PCDF. A seller’s simply checking the “I don’t know” box on the form doesn’t relieve them of responsibility.

JV: What about when you represent the buyer? Do you ask for the form?

DS: Yes we do, even though we are going to perform our own due diligence. It’s a “belt and suspenders” concept, but we never get it.

JV: Explain the issue of certificates of occupancy (C of O) with respect to transfer of title.

DS: The incorporated villages within the townships require that the C of O be updated on the transfer in the purchaser’s name within thirty days of the purchase of the property. What we do is require the seller to produce an updated C of O within at least thirty days prior to closing as a requirement of the contract. A complication arises when the improvement requires an updated survey issued by the municipality and is not able to do so before the closing. What we do in that case is have the seller declare that no improvements have been made to the prop[erty that would require a new C of O.

JV: Are you ever consulted by a seller who is contemplating entering into a contract with a broker regarding the sale of their property, and if so, what advice do you give them?

DS: Yes we are. I make sure they understand their obligations to pay the broker’s commission depending on the type of listing agreement they enter into and that the obligation to pay is contingent upon the transfer of the property.

JV: On January 1, 2009 the Commission Escrow Act intended to aid real estate brokers in collecting commissions on residential sales became effective. Can you address that?

DS: The amendment provides that an affidavit of entitlement filed by the broker before closing would require the seller to deposit the broker’s commission in escrow with the county clerk’s office. I have never seen it used.

JV: Just to be clear. The affidavit if it were filed does not constitute a lien on the property?

DS: Correct!

JV: With respect to transfer taxes paid at closing: the seller transfer tax, the “Mansion Tax” and the “Peconic Bay Region Tax” paid by the seller, to whom are the checks written?

DS: They are written to the title company.

JV: Am I correct that the “Mansion” and “Peconic” taxes are not deductible when they are p[aid but may be added to the adjusted cost basis when the property is sold?

DE: That’s correct.

JV: Would you differentiate between a mortgage commitment and the actual funding of the loan?

DE: When we have clients purchasing with mortgage financing, we always qualify the standard contract language which says that the commitment is firm even if the lender fails or refuses to fund the loan for any reason. We add: “attributable to the purchaser.” In this way the seller is protected in that the buyer can’t harpoon his own commitment and the buyer is protected against the non -funding which he had no control over.

John is a St. John’s University graduate, licensed Real Estate Broker, DOS Certified Instructor, and real estate consultant. He previously taught at NYU, LIU, and The Cook Maran Real Estate School, which he helped found.  www.johnaviteritti.com