New Construction — does that property even legally EXIST?

This post is not legal advice. For legal advice, consult an attorney in person and not via a blog.

I recently had the opportunity to submit an offer on behalf of a client for a new construction home. The price was right and the clients really liked the house. However, in preparing the offer it quickly became apparent that the developer had yet to record the short plat used to create each of the new parcels that contained the new construction (there were a total of three new parcels, each with a SFR).

Before I go further, and in case anyone is wondering “What’s a short plat?”: Generally speaking a short plat is the division of an existing legal parcel of land into smaller parcels. Depending on the jurisdiction (e.g., King County, City of Seattle, City of Bellevue, etc.) a short plat can consist of up to 9 new parcels. A short plat must be approved by the jurisdiction in which the property is located. Once approved and recorded, the short plat creates the new legal parcels of land.

So what’s the big deal in buying a property BEFORE the short plat is approved and recorded? Well, in that instance you’re buying property that is not yet a legal parcel. If for some reason the short plat is not approved or recorded, then you could be in for a real hassle in terms of paying taxes or dealing with the city or county in regards to your property. To be perfectly frank, I don’t know exactly howthat might play out, but I do know it would be a pain (and if you have to hire a lawyer, expensive). On the other hand (and perhaps a title insurer or escrow agent will weigh in here) its possible that the transaction would not close until the plat had been recorded.

But there is at least one other issue as well: A short plat can create additional legal interests (such as easements) in or restrcitions on the property. If you commit to buying the property before the short plat is recorded (by signing a purchase and sale agreement, which certainly can happen before the plat is recorded) you may be in for an unpleasant surprise. For example, what if you discover that you have a shared driveway?

The bottom line: Be careful in buying property that legally does not exist when you sign the purchase and sale agreement. At a minimum, any purchase and sale agreement for property that does not legally exist should include a contingency allowing the buyer to receive and approve the recorded short plat before closing.

22 thoughts on “New Construction — does that property even legally EXIST?

  1. I wonder if that’s the same property one of my clients had a transaction on… we could not lend on that since there is no legal description until the short plat is recorded (as you referred to in your post). It was a surprise because it was not disclosed until we received the commitment which came late (I wonder if they were stalling for their builder??)

    The client walked away from that property and bought another home.

  2. I would think this is the type of concern that would be covered in a title review in the title contingency addendum in a purchase and sale agreement. Even the current NWMLS Title Contingency form does not relieve the seller of the obligation of delivering marketable title.

    In my experience, most real estate professionals use this type of contingency in virtually all transactions. I can’t think of any transaction in the last few years that I have written where I did not use one.

    I’m pointing this out because this situation is extremely rare. The average buyer should not worry too much about this kind of issue when entering into a purchase and sale agreement if their agent is using a proper title contingency and having a title officer help review it.

  3. Jim is correct…to a point. I have a buyer client in escrow on a new construction home on a short platted lot. Unlike the post topic, the short plat was complete, but there are some resultant after the fact complications involving a well on one of the short platted lots.

    I scheduled a face to face meeting with the Title Company executives to review all potential Title Insurance issues, including a lis pendens involving the well. The house is on public water, but the well is on the property and a significant issue as to shared rights. While the house had it’s Certificate of Occupancy, when I investigated further I found that the County “did not know” there was a well on the property when it issued the CO. That’s hard to believe since I can SEE the well house from the deck of the house, and have scars on my legs from going through the blackberry bushes to take pictures of it πŸ™‚

    The agent for the seller wanted us to merely rely on the Title Contingency as Jim suggests and likely “customary”, but that only covers the seller resolving the issue to the satisfaction of the seller and “clear title”. That’s the minimum needed “to close the sale”, but not necessarily the minimum needed to protect the buyer client.

    One of the most important phrases in Craig’s post, and this covers most any Title problem and not just short plat being recorded:

    “allowing the buyer to receive and approve the…”

    Just because the Title is cleared enough to close, is not enough. Historically real estate has been operated as if the buyer “has to” if the seller is ready to, and unfortunately many of the boilerplate forms express that sentiment, and are insufficient when representing a buyer client vs. a seller client. The Title Contingency gives 5 days to review changes in Title, but there is a gray area there as to the buyer’s rights if the seller resolves the problem to the point where it “can” close, but the buyer is not happy with some of the new details created in order to resolve the matter and clear title. Reviewing “title” does not necessarily give the buyer the full right to review, and be HAPPY with, all of the documents that created that change in Title.

    This was a significant issue for me on behalf of my buyer client, as the contract and Title Contingency as worded in the boilerplate, does not give the buyer the time and right to review all of the paperwork, that does not yet exist to be reviewed, and will resolve the lis pendens. I reviewed this with Title and it is clear if something new is added to Title as an exception, that the Title Contingency kicks in. But not as clear if something is removed vs. added. The paperwork to remove the exception is another matter entirely. Not necessarily covered in the contingency is the buyer’s right to receive and not be happy with those documents that removed the Title exception, and right to cancel without losing their Earnest Money.

    To make matters more complex, the property was foreclosed on by the builder’s lender, making it “bank-owned” and subject to “no recourse” addenda. This makes the buyer’s “due diligence” without reliance on disclosures by the seller or the seller’s agents of tantamount importance.

    All buyers AND sellers need to be aware that because the contracts run down the middle of representing both buyers and sellers somewhat, they do not adequately cover either adequately in extreme scenarios. There are not enough buyer OR seller protections in boilerplate contracts to cover all of the extreme cases in today’s marketplace. Short Sales, Bank Owned Property, new construction that is 98% complete…but not quite complete. All of these “as-is” transactions require a greater degree of care. Simply saying “you should consult an attorney” and then turning a blind eye if and when they do not, is clearly not enough for many of today’s complex transactions.

  4. P.S. Further, expecting the buyer to know what they need to ask the attorney…simply saying “you should consult an attorney” generally, is not sufficient either. No attorney replaces a good agent and no agent replaces a good attorney. The attorney in his office can’t see the well house…heck the county didn’t even “see” it, and it was not a matter that was disclosed, given the well is not connected to anything and the house is on public water.

    I respectfully request that Craig change his bio from “Craig provides better representation than an agent” to “better representation than ‘many’ agents” πŸ™‚ I doubt Craig would have discovered that the County didn’t know there was a well on the property when it issued the CO. It takes a diligent buyer, a diligent agent and in some cases a diligent attorney advised adequately about the property specifics, to pull together a best result. Most often the “discovery” phase of due diligence happens in hip boots walking the property and studying the house itself, and not merely studying the papers on the desk. A blanket claim to be better than any and every agent on the planet, is likely not as credible as a qualifier of “many agents”.

    P.S.S. The Title Contingency likely covers a buyer better if they want to cancel…but not if they want to buy the house.

  5. I agree with you, Ardell. The situation you outlined is beyond a simple short-plat recording issue and may or may not be properly covered my a title contingency. However not having a short-plat recorded means you do not even have an accurate legal description for the property. Every attorney I’ve talked to in the past has insisted that not having an accurate legal description attached to the contract makes your purchase and sale agreement unenforceable (or voidable).

    But I should step back here. I’m not a licensed attorney and I don’t want to appear to be giving any legal advice. If any of my clients ran across an issue like this I would recommend they speak to attorney like Craig who can truly advise and represent them on these concerns.

  6. I’d add to Ardell’s and Jim’s comments that the Form 22T Title Contingency arguably provides only a limited ability to review and disapprove “title.” I put the term title in quotations because that term is rather amorphous and does not have a universal definition. Many people use it but here’s no telling what all of them actually think it means.

    As for the Form 22T, the line I find most troubling (from the buyer’s perspective) is at the end of the first paragraph: “Buyer may only disapprove exceptions that are contained in the preliminary commitment and may not object to matters not contained therein.”

    Ardell just gave a real world example of an issue that apparently did not appear in the preliminary [title] commitment but is a very significant matter that should concern a prospective buyer. Since it isn’t in the title commitment it’s unclear how much right (if any) the buyer has to object to the issue and to terminate the deal if it cannot be resolved to the buyer’s satisfaction. Situations like this are why we use the Form 22T but also add a provision that significantly expands the buyer’s alternatives in cases like this. Drafting that provision and then dealing with the underlying issue is the practice of law and is something that requires the help of an attorney.

  7. Jim,

    You’re on the right track regarding the lack of a legal description. In fact, our state’s courts take pride in the claim that Washington has the strictest rule in the nation in this regard. That rule is commonly known as the Statute of Frauds and has been codified at RCW 64.04.010.

    As you mentioned, my comments are not intended as legal advice and should not be relied on as such. Craig and I routinely provide such advice but only after we’ve been retained with a written fee agreement.

  8. “The bottom line: Be careful in buying property that legally does not exist when you sign the purchase and sale agreement.”

    Yes, and may I also stress the importance of watching your step when you exit the shower…….

  9. Ardell — your request is duly noted!

    I would add one more thought: The title contingency allows the buyer to disapprove of a noted exception, and then gives the seller the right to remove that exception. In the case discussed in the post, presumably the exception would reference the failure through the date of the committment to record the short plat. Jim is right that that exception would be removed at closing as a “cloud” on title rendering it unmarketable (“marketability” is a whole other issue but very probably would require recording of the short plat).

    So in this case buyer does have some degree of protection that the short plat will be recorded before closing. But that only addresses the first of my two concerns. The second remains: Does the title contingency give the buyer the right to review and approve of the short plat before it is recorded? The answer, of course, is no. As discussed above, the short plat may create legal interests or restrictions that the buyer would rather not convey or assume. If the buyer wants to approve of those prior to closing, buyer should not rely on the title contingency.

    Thus Jim’s analysis is ultimately off the mark. I think EVERY buyer should be keenly aware of ALL potential issues. Jim says, “The average buyer should not worry too much about this kind of issue when entering into a purchase and sale agreement if their agent is using a proper title contingency and having a title officer help review it.” I think thats way off the mark and indeed a very good indicator of why its essential to have either a very, very good agent (at least one of whom is a regular contributor to this site πŸ˜‰ ) or an attorney. If you don’t “worry” prior to closing, you may be unpleasantly surprised after.

    One other thought: the “title officer” has no obligation whatsoever to the buyer prior to closing. At closing the buyer becomes the insured, and there are lots of legal duties that then apply. But prior to closing, the title officer is essentially a neutral third party who works with escrow to effect the transaction per the terms of the PSA (i.e. render title marketable prior to closing).

  10. Ray, your comment says even more than Jim’s! I think its safe to say that everyone recognizes the chance for slipping on wet title. Is purchasing a home — including insuring that the parcel legally exists and you are aware of interests in/restrictions on the property — really analogous? I think not and to suggest that they are demonstrates a fundamental misunderstanding of the due diligence appropriate to purchasing real property.

    • I again question who is this blog topic directed towards? It must be Cash buyers which remains less then 4% of the total transactions that close.

      Who was the Buyer? Name me one Lender that would loan on this? You can’t… there are NONE–except private money who possibly went brain-dead and wrote a check. Even Chesterfield (Hard Money @ its finest) would never even look at this.

  11. Sorry for insulting your blog premise. Seattle Bubble is down today AGAIN and I was bored with the topic.

    I think your bottom line should state: Be careful in buying property and you should leave it at that.

    No Attorney or Agent in the world will look out for your best interests better then yourself.

  12. Ray — that’s a valid point. But what about the second concern? The lender needs the plat recorded, but it almost certainly does not care about the easements or restrictions CREATED by the short plat. The buyer, though, clearly DOES care but is not protected on this issue via the underwriting process.

    • “The lender needs the plat recorded, but it almost certainly does not care about the easements or restrictions CREATED by the short plat.”


      Just last month in fact our very own Boeing Credit Union would not fund without an easement issue resolved r/t a BLA. This BLA resulted in a loss of lot value due to the lot size diminishing for a driveway.

      Never assume a lender doesn’t care about anything. We are in 2010 and each and every transaction is scrutinized by Lenders going forward. Which they should be to protect the Buyers and more importantly themselves. They are lending in a declining asset environment and do not want to be bagholders anymore.

  13. Ray,

    If the title company misses this and doesn’t call out the lack of a recorded plat in the title commitment then virtually every lender out there would finance the property. You may say that it’s extremely unlikely for the title company to miss it and I would agree. However, we’ve got another client looking at a different property involving new construction where the title company could easily miss it. The builder is developing the property in phases and only phase 1 has been recorded. Our client wants a lot in phase 2 and there’s an extremely good chance that the builder plans to create this lot by amending the existing plat to add the second phase. The legal description included in the builder’s standard form addendum includes a legal description that refers to the existing plat. It would be very easy for a title officer in a rush to assume that the plat in question contains the referenced lot and to not bother to review it carefully to be certain. Unlikely, yes, but plausible nonetheless.

    More importantly, due to the statute of frauds, there’s a question of whether a contract containing a legal description that doesn’t actually exist is enforceable. This means the buyer is exposed to the risk that the builder can refuse to go through with the deal and the buyer would have no way of forcing the builder to complete the house and sell it to them at the contract price. This right (referred to as the right to specific performance) is one that buyers normally have unless they give it up or their contract is unenforceable for some reason.

    • Yes, Marc…………all that can happen. Getting back to my original statement quoted from Craig———–“The bottom line: Be careful in buying property PERIOD.

      You know even my friend who is a builder just took it on the chin. His partner’s wife is a real estate Agent and apparently found 1 lot in a foreclosed subdivision of 9. They bought the lot and began construction on a 2900 sq foot home. The other lots surrounding this one SOLD to another builder and the builder is building 1300 sq foot homes all around him. It looks like a Castle among Cabins..

      “Ray how can this happen?” “Ray, I need an Attorney” “Ray, can you sell it?” Ray…..Ray ….Ray….

      Good God!………………Its the same thing over and over and over….No due diligence results in financial losses. The Agents fault….Well of course! The Builders fault…. Absolutely! Was there misrepresentation……….Possibly Is there a case?…..Who the heck knows. I have not seen the P & S and I advise everyone before you write that check ON ANY REAL ESTATE you better do your DUE DILIGENCE and always ALWAYS get a second opinion.

  14. Craig,

    As to your bio change LOL! I just asked for a one word change from all agents to many or even most agents. You watered it down too much. You are clearly better than most agents, just not “ALL” πŸ™‚

    As to this comment: “One other thought: the β€œtitle officer

  15. Pingback: 5 new issues for title companies to beware of « Title Search

  16. I have had a situation on a new construction property where the city had two different addresses for the same home. This presented numerous problems for the buyers the most important being the potential for double property taxes. The cost and time involved in getting the situation straightened out was too much for them and they decided to pass on the home.

Leave a Reply