One man's junk fee – A rerun

A rerun from November, 2006…

“Junk fees” we often hear them called. Those are all those fees that the buyers and sellers pay during the transfer of real property. Buyers and sellers alike groan over the need to pay the final tab, and the complaint I hear most often relates to the charge for Title Insurance.

In San Diego and in most cities, it is the seller that pays for the preliminary title report (PR), with the buyer responsible for obtaining additional coverage for their lender. A preliminary title report is a document that is intended to identify situations which may “cloud” title to a buyer’s new home. These situations might include outstanding taxes or assessments, easements, liens, and encumbrances. The PR will also identify anyone with special rights to the property (such as Crazy Uncle Bob who loaned the seller $14.72  twelve years ago and consequently appears on the loan and the recorded deed). The preliminary title report then becomes the final title report at closing, where the foregoing conditions become exceptions to title and therefore exclusions from the buyer’s title insurance coverage. 

In any real estate transaction, the buyer’s acceptance of the title report is a contingency of sale. Therefore, it is incumbent on the buyer, with the help of their agent, to review, understand and accept the report’s findings within their contractual due diligence time frames.

Seems pretty simple, yet it is astounding how few people actually take the time to read and understand this document. I do not blame the buyers for this; they are typically ear-deep in confusing fine print paperwork when the PR lands in their lap. Conversely, I blame their agent for not reviewing the PR carefully for any issues of potential concern. We are supposed to understand the reports when our clients may not. That it precisely why it has been our policy (Steve’s and mine) to initial every page of our copy of the PR before filing it away; it gives evidence that we have touched every page, and therefore forces us to read and understand it. Call it accountability.

Now for our latest real-life example of how the information contained in the PR can be of consequence and material to the transaction. This is Steve’s example, actually. He was representing a client in a home purchase here in San Diego. To the client, one of the big appeals of this particular home was an unusually large side yard. (We are talking “large” in San Diego terms, so don’t get too excited). A week into the transaction and during the contingency phase, the buyer, who currently lives in another state, flew in for the property inspection. Steve dutifully scurried to make sure that all disclosures were available with the intent of dispensing with all of the disclosure “formalities” during the buyer’s brief visit. While reviewing the PR prior to meeting with the buyer at the property inspection, Steve noticed an innocent little dotted line running along the side yard on the plat map: An easement. Now, easements by their very nature are not evil. It simply signifies that someone other than the underlying property owner has use rights to a portion of the land. We see them all of the time, and they can be blanket easements (non-specific, for instance those dealing with utilities) or specific, as was the case here. This one happened to be a sewer easement. Again, not a big deal, except…

The buyer wanted a pool some day, maybe. They admitted they might never build the pool, but then again they might. One of the conditions of your typical public easement, however, is that no permanent improvements be located within the easement boundaries. If the city needs to get in and replace a pipe some day, they obviously don’t want a guest house in the way. The bottom line is that Steve immediately summoned the buyer and pointed out the issue, knowing that the transaction was toast. It was his fiduciary obligation. The bad news was that the buyer was into the process for one very expensive plane ticket and a lot of time and energy. The good news was that he didn’t end up owning a home that didn’t offer a feature important to him – room for a pool.  Six hundred dollars or six hundred thousand dollars? I think it turned out to be a small price to pay, and that is precisely what a buyer contingency period is for.

In reliving the events leading up to the revelation, Steve and I had lengthy discussions about how or if this could have been avoided. Ironically, the buyer was grateful, saying he didn’t pay any attention to the PR himself and would have never known about the easement issue had it not been pointed out. Should the listing agent have known? Certainly the seller should have disclosed this up front. But absent a seller disclosure, the agent would have to smell something fishy, and it simply wasn’t that obvious (not all large yards involve something sinister). Should Steve have known? For the same reason, probably not. I think all we can learn from this is that the system worked, and one man’s “junk fee” is another man’s treasure.

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