Residential Land Survey Needed in Wholesaling – Oil and Water?

As wholesalers we seldom think about getting a residential land survey for a property that we technically own for a few minutes or hours. However, recently I encountered a couple of situations where a simple residential land survey could have saved a huge potential loss for an investor.

In the first case the house was situated on an over sized lot and the far left side had what appeared to be a well-used tire path leading through the road access to the property and into the area of electrical poles and lines. This “road” had been used as an access road for the power company for many years.

The investor purchased the property and found a buyer immediately. The buyer was using a hard money lender who required a residential land survey of the property. When the residential land survey came in just before closing it indicated that not only was the power company right-of-way on the property but part of the house had been built on it. The investor decided to fence off the front of the property which caught the wire of the electric company who brought a law suit against him requesting removal of the fence and demolition of the part of his property on their land.

One exception to all title policies is right-of-ways for utility companies. The investor essentially didn’t bother to be concerned about the access of utility trucks until it was too late. He filed a title policy claim to get his money back but was told that the right-of-way was an exception to the title policy which is correct. Had he gotten a survey when he noticed the well-worn path on the property leading to the electric company’s property, he wouldn’t have had the problem. I’m hoping he works out a settlement with the electric company and next time doesn’t rush to judgment about his right to all of his property.

The second case is interesting because it is fairly common. In the “good-old-days” many homeowners who had large or long lots decided to build another house on their lot. It could be a mother-in-law apartment or simply a rental unit. As time passed so did the mother-in-law and these units became rental units. Whether or not the structures are legal varies greatly. However, one distinct thing to watch out for is the back unit often has no electric or water meter. It doesn’t even make the back unit legal if the property owner divided the property and got another folio number!

Fast forward to today and these rental units are lurking in the back yards and the property owner decides to sell it. A buyer checks comps and finds it is a killer deal – but fails to take into account it is in the back yard of another home. In this recent case, the investor purchased a home that sat in the back yard of the front house.

The “back yard” house was legal at the time it was built because it shared the utilities and in those days, permits were not necessarily required and it was later issued another folio number, so everything seemed legal. After the investor closed he wanted to rehab and sell the property to a retail buyer but he decided to do a simple rehab when he first noticed the missing electric and water meter. He went to the city to inquire about adding a water meter and got the bad news that the property could not get a water meter of its own but even worse, the city would not issue construction permits because the structure was illegal.

I got the investor’s panicked call late at night and after listening to his dilemma, I suggested he talk to the owner of the front property and get him to sell his house and the investor’s house at the same time to a single end-buyer. These situations are the dreams of attorneys who love to litigate but nightmares for the investors and property owners. As almost always, the only winners are the attorneys. It’s often easy, especially when you know you are right, to sue another party. Usually the winner is the one with the most money for attorneys, not the righteous party.

A saving grace that didn’t seem like it at the time because it was an error was that the closing agent deeded ½ of the entire lot to the investor, which meant he was entitled to ½ of the proceeds of the sale of the front property as well as ½ of the rental income from the front house. Likewise the investor’s property was now owned ½ by the front property owner. It took months to get the front owner to get on board but currently the properties are being sold as one property and the proceeds will be divided between the investor and the front-property owner.

In summary, if you are buying a property ALWAYS get title insurance and look carefully at the perimeter of your intended purchase to see if it has possible right-of-ways on either side or in the back. If you have any suspicion that anything is wrong, especially “offsets” between any structure (main building, sheds, added rental units, etc.) and the property line (6’+) get a residential land survey! Too many times we see what looks like legal room additions within a couple feet of the property line that are ILLEGAL and will have to be torn down or get a special variance from the city. You could be stuck in a property that can’t be sold with conventional financing and that the city wants torn down!

To your limitless success,

Dave Dinkel

Real Estate Mentoring Program Founder