Before committing to purchase luxury real estate it’s essential to conduct a thorough due diligence audit. The stunning listing photos will tell you nothing about who actually owns the mortgage, whether the pool house has a permit, or whether the beach access the seller promised is legally enforceable. Skipping this essential step is like signing a corporate merger without reading the disclosure schedules. The price tag is bigger, so the paper trail needs to be longer.

Start with a true chain-of-title search, not just a title commitment

The process of buying a high-end home can be complex and time consuming. Even if your dream home appears clean on the market, it may not have a clean title. These homes often transfer through multiple trusts and LLCs, divorces and estates, and create a mountain of paperwork. Over the years and through these multiple transactions, mortgages have been paid off and never released, probate claims arise years later from estate sales, old judgments against prior owners may not get settled, and mechanic liens from contractors go unpaid. Over decades, homes listed in trusts may have had many trustees and important paperwork may have been misplaced.

To avoid these costly title defects, always ask for a title commitment from the closing company. Examine the exceptions page closely. You may want to ask for a more extensive chain-of-title search than is normally conducted. While it may cost a little more money upfront, finding title defects before closing on a seven-figure home can save you a lot more later!

Confirm who you’re actually buying from

In many cases, high-value homes aren’t owned by individuals. The home could be owned by an LLC, which is part of a family trust, which is owned by a holding company. It’s important before any money is wired to confirm who is authorized to sign documents on behalf of any of these entities. Ask for documentation (operating agreement, trust documents, corporate resolution, etc.) that outlines who is an authorized signatory, and verify their identity without relying on contact information provided by the seller’s side.

This is especially important because real-estate transactions are a prime area for wire fraud. In 2022, the FBI Internet Crime Complaint Center estimated that $396 million in rental and real-estate scams took place, many of which were related to compromised wiring instructions or scammers posing as property sellers. The big ticket prices associated with luxury real-estate make it an attractive scam.

Watch out for wire scams. Never trust wiring instructions received via e-mail. Independently verify the instructions with the title company (via a known phone number, not a number in the fraudulent e-mail). Consider retaining a local market professional who’s familiar with who’s who and what paperwork to expect, and who can walk you through the process and help you avoid scams. A broker such as https://realtorfarrukh.com/ can review your due-diligence documents, point out red flags in your purchase agreement and make sure you don’t sign or wire money without independent verification.

Order a new ALTA/NSPS survey and compare it against the legal description

An ALTA/NSPS survey will detail boundary lines as well as any gaps, encroachments, shared driveways, or easements for access. Unfortunately, these important details are not included in tax maps or listings photos. Even in an average suburban transaction, it’s wise to order an updated ALTA/NSPS survey. It’s not uncommon for boundaries to shift over time and for fences to be rebuilt in the wrong locations, and a survey ten years old may not even show your guest house! Any discrepancies between the legal description in a title commitment and an ALTA/NSPS survey must be resolved before the contract is solidified. Escalating liability issues are not uncommon in luxury transactions. For instance, hillside lots may have a neighbor’s retaining wall encroaching on the property, old agreements with unrecorded easements may exist for beach access among waterfront homes, and gated communities may have utility easements under what appear to be private gardens.

Verify zoning, entitlements, and whether the current use is even legal

If the buyer plans to do renovations, build on the home, or rent it out, it’s important to understand a home’s zoning and permitted uses. Some large, or “luxury,” homes may have been zoned to be that way through grandfathered permits, approvals, and variances that no longer reflect current zoning requirements. Maybe a guest house was approved through a formerly active, but now obsolete, zoning ordinance or perhaps a dock, short-term rental, or accessory building were approved. The distinction matters enormously if a buyer plans to renovate, build on the home, or rent it out. Prior approvals attached to a nonconforming use typically do not transfer automatically to a new owner, and in some jurisdictions, any significant renovation triggers a full re-review under current code. A house that looks like it has four legal bedrooms might actually be permitted for three, with the fourth added without inspection.

Zoning, permits, and other approvals are matters of public record. While most sellers and listing agents are unaware, if not reluctant, to share them, interested parties should check with the local planning office for the home’s zoning file as well as any additional restrictions that may come with it, including overlays such as those for environmental, coastal, or conservation purposes or historic districts and easements.

Commission a Phase I environmental site assessment

Before closing on the purchase of a high end property, be it a large estate, former farmland or waterfront location, ask your agent to arrange for a Phase I Environmental Site Assessment (Phase I ESA). Although traditionally done for commercial real estate transactions, these assessments are becoming more common in high end residential purchases, as buyers want to be sure the land they’re purchasing is free from contamination and not liable for remediation.

If any concerning findings arise as a result of the Phase I ESA, more targeted and specific testing will need to be done. Regardless of the outcome of the Phase I ESA, you’ll want to have mold and radon testing performed. Because properties on larger lots tend to have septic systems, it might be prudent to have these checked as well, instead of a cursory visual inspection.

Luxury real estate purchases on hillside or waterfront lots should also consider a soil stability or geotechnical report. These locations are desirable because of the great views and terrain, but the soil on these lots might be less stable with potential foundation settling, drainage issues, and slope failure. These types of concerns might be missed in a general home inspection, but a geotechnical engineer would be able to pinpoint any potential problems.

Match every renovation against its permit history

One of the best ways to protect yourself when buying a newly renovated home is asking the seller for the building permits from the municipal building department and comparing these to the renovation work performed. This includes items like pools, finished basements, separate living quarters, wine cellars and outbuildings.

A finished basement without a certificate of occupancy may not count as livable square footage in your tax assessment and resale value. A pool without a final sign-off may be your responsibility to bring up to code, at considerable expense.

Make sure to ask the seller for certificates of occupancy for the home and any outbuildings. If the renovated portions of the home do not have them, this could be a negotiation point and suggests other corners were cut.

Budget for the carrying costs, not just the purchase price

Doing the math can be a rude awakening for first-time buyers of high-end homes.

Between the HOA fees, special assessments, tax bill (the value of the home will be reassessed at the sale price for many locales), insurance premiums (high-value homes require custom policies covering full replacement cost, art and other collections, higher liability limits, and wildfire and flood riders depending on location), and the cost of maintaining staff quarters, grounds and seasonal amenities like pools, docks and equestrian facilities, the additional costs can be staggering. In fact, they may dwarf the monthly payments on the home’s mortgage.

Do your due diligence before you tangle with a luxury property. Review HOA or condo association reserve fund statements and board meeting minutes from the last two years. With the age of many luxury communities come the growing pains of maintaining aging amenities like pools, elevators or private roads. A looming seven-figure capital expenditure may severely dent a seemingly solvent association; however, the expense may not be on the books yet, waiting for a homeowner vote.

Check flood zones and get real insurance quotes before closing

For waterfront and low-lying homes, buyer beware: few luxury properties are immune from the FEMA-designated flood zones, and many listings won’t admit it. Flood zone designations affect insurability and long-term value, so get this info before moving beyond the contract stage.

Flood insurance can be expensive, especially for homes in premier coastal locations. Estimates are a good starting point, but make sure you get a few solid quotes as part of your due diligence, as coverage can run into the tens of thousands of dollars a year for high-value homes. In the worst flood zones, insurance companies are unwilling to take on the risk, which means you may have to go to a higher-cost surplus-lines carrier, with different (and sometimes stricter) policy terms.

And don’t forget: in hurricane-prone areas, wind coverage usually requires a separate policy.

Time the title insurance and escrow correctly

The mechanics of a real estate transaction are as important as the results of a home inspection. Title insurance should be bound well in advance of wiring any funds. Never wire money without first confirming the escrow instructions over the phone with a known contact.

Contract terms should include conditions precedent based on due-diligence relating to the final survey, permits and title, instead of a broad “as-is” provision waiving all recourse.

Prior to executing documents, confirm:

•   All title commitment reservations/special notes/and exceptions are acceptable and cleared
•   Final ALTA/NSPS applies to the property and matches the legal description
•   Zoning and land-use entitlements with the local planning office
•   Phase I environmental site assessment completed and necessary follow-up work
•   All permits and occupancy certificate consistent with the improvements on the property
•   HOA financials and history of special assessments
•   Insurance quotes, including appropriate wind/flood coverage
•   Seller’s authority to sell verified by the seller’s attorney
•   Escrow instructions confirmed over the phone by a known contact

Pay attention to these details and you won’t hear of multi-million dollar transactions lost to bad easements, dubiously-ordered title work or worse, bad-wire instructions.