The Benefits of an Attorney in Real Estate Transaction
When a law firm represents a party in a real estate transaction, it performs many separate functions. These are usually either administrative or legal in nature.
Some examples of administrative tasks are: making arrangements for the closing, preparing financial summaries of the transactions, gathering information on taxes, ordering releases and similar tasks. These duties are often delegated to our law firm’s professional staff of paralegals and secretaries who carry out these responsibilities capably.
However, in a real estate transaction there are a series of functions which require an attorney’s professional expertise. An attorney can have a significant role in advising you in the following areas:
The Brokerage Contract or Listing Agreement. If you are selling your home, an attorney can provide advise on the terms, meaning and items included in these contracts. It is also important for buyers to be aware of the description and contents of the structure being purchased.
The Preliminary Negotiations. While price is often paramount in the minds of the parties, there are a number of other issues to consider such as terms of payment, mortgage contingency clauses, the status of fixtures or personal property, the risk of loss by casualty pending the closing.
The Purchase Contract. Once the parties enter into a written contract, their rights and obligations become fixed. It is the most important document in the entire transaction and will be scrutinized by the attorney.
The Mortgage and Financing Commitment. Interest rate and term (or length of the mortgage), while important, are not the only issues involved in mortgage financing. Points, commitment, service charges, prepayment penalties and host of other influences are worthy of consideration and advise.
Determining the Status of Title. This is generally the most crucial legal work in the transaction. Even if a title insurance policy is to be issued, it is critical that any limitations in the title be determined and explained.
Eliminating Title Problems. In some instances, if a problem exists in the title, some type of action will be available to cure the problem. Your attorney can initiate or review any such action.
Survey. If a survey of the property is required, we can advise you on the legal implications of the surveyor’s findings and the scope and extent of the surveyor’s certification.
Inspections. In some instances, one or more inspections, e.g., for termites, radon, water quality, smoke detectors, may be required or desirable. An attorneys advice can be useful in determining the scope of such inspections and the methods of dealing with any problems that might be discovered.
Drafting of Instruments. It is the attorney’s responsibility to draft or review the necessary instruments of conveyance. In some cases, a lender will retain its own counsel to prepare the mortgage and note but your attorney, of course, will be responsible for reviewing these when you are the borrower.
The Closing. This is the stage at which the parties execute and exchange documents, make required payments and conclude the formal transaction. The law firm will attend to virtually all of the details surrounding this aspect of the transaction, including alerting you in advance of the items you will need to provide, many of which are discussed elsewhere in this booklet.
Since some of the customs surrounding real property transactions vary in different areas, an attorney may not be performing a particular function in your case. For example, if you have already executed a contract for the sale or purchase of a home before retaining our firm, an attorney may be unable to subsequently change the terms of the contract.
The Listing Agreement
A listing agreement is a contract between the sellers and their broker wherein the sellers agree to compensate the broker for services performed in offering the property for sale and procuring a buyer. In addition, the listing agreement contains a general description of the real property to be sold and a specific description of the contents of the home, e.g. range, washer and dryer, etc., which are or are not included in the sale. It is therefore important that both prospective sellers and purchasers be clear about what is or is not included in the sale.
The Purchase Contract
In many states, in order to be a valid and enforceable contract, an agreement to purchase real property need only describe the property generally, contain the terms of sale, e.g., price and payment, provide for the specific closing date and be signed by both buyer and sellers execute these agreements without the aid of attorneys, using forms provided by real estate brokers. In other areas, it is the custom to execute a “binder” designed to hold the property from sale to another pending the preparation by attorneys of a formal contract. Where a party executes a contract before consulting with an attorney’s power to change or modify the terms of the contract except by mutual consent of the parties. Therefore, whenever possible, it is desirable to consult with an attorney prior to entering into any contract.
Finally, certain types of contracts, such as those involving the purchase of a unit in a condominium or other common interest community, are governed by laws requiring the disclosure of specific information and the rights of such purchasers.
Among the items to be negotiated in a purchase contract, in addition to the price, are the type of mortgage (e.g. conventional VA, FHA, etc.) the buyers will need as a condition of purchasing (i.e., the “contingency clause”) and how long they will have to obtain a commitment from a lender to provide such a mortgage. Other items include date of occupancy, the type and effect of inspection to be done, and the responsibility for loss in the event of catastrophic damage to the property.
The commitment or approval letter is the most important document a borrower receives from the lender prior to closing. It informs the borrower that the loan application has been approved and that the book has committed itself to lending the requested funds. However, this obligation is often conditioned upon certain requirements that must be met before or at the time of closing. Some of the typical requirements are: (a) explanation of any unfavorable item in a credit report; (b) verification of the borrower’s employment; (c) provision of a survey: (d) homeowner’s insurance; (e) termite or other inspections; and (f) proof of necessary cash funds to close the transaction.
The commitment also sets forth the basic terms of the loan (fixed or variable rate, etc.), and the loan associated fees (e.g., points) to be charged by the lender. The lender may require that the borrower sign and return a copy of the commitment or approval letter wi5hin a specified period in order for the loan commitment to be binding.
Since most purchase contracts are contingent upon the buyers’ obtaining financing by a specific date, it is essential that the attorney be informed as soon the commitment is received. At that point, the contract becomes unconditional, and all parties and their attorneys can begin the necessary preparations for the closing. Of course, the attorney should be notified immediately if the lender declines or rejects the loan, since this can affect the buyers’ liability under the sales contract.
Determining the Status of Title
A purchaser of a parcel of real property acquires the legal right to own and use that property. These legal rights, known as “title”, may be subject to certain rights that were established by previous owners of the property. Only a thorough title search will reveal these rights, restrictions or other interests and permit the attorney to show how they might affect the use and ownership of the property. The title search is accomplished by reviewing prior deeds and other documents recorded in the land records where the property is located for a specific period back in time. A title search discloses the previous owners of record and those burdens, benefits or other interests each has subjected the property to during their respective periods of ownership.
The attorney will report the outcome of this search to the client and explain any outstanding interests or encumbrances. In some instances, encumbrances of record act to benefit rather than burden the property. Such items might include easements for public utilities. Restrictive covenants which protect the character of the area and zoning regulations. Outstanding financial interests of record such as mortgages or liens will have to be released at the time the new buyer acquires title, unless some other arrangement has been agreed to by all parties concerned.
In the event that any title problems are discovered, the attorney will attempt to cure the problem or to work with you to help reach an equitable solution with the other party prior to the transfer of the title at the closing.
Lenders often have specific rules regarding whether or not a survey of the property will be required as a condition of the load and, if so, the type of survey that is acceptable. These requirements may or may not be sufficient to protect the new owner’s interests. Buyers or current owners may want to obtain a survey in order to clarify their interests. Therefore, it is important that property owners be made aware of the various types of surveys and their costs. Attorneys can assist clients in making such decisions by comparing the price of each type of survey to the protection afforded.
A current survey is usually required in order to include “survey coverage” in an owner’s title insurance policy. Information on title insurance and its function in the transaction is provided elsewhere in this booklet.
Prior to closing, it is common for lenders to require inspections of the premises for various types of conditions in order to ensure that the structure in sound and that its systems are in good working order. Buyers may also request inspections to make certain that the structure and its operating systems and appliances do not have any critical defects that were not known at the time they decided to purchase the property.
Some of the many inspections that can be performed are as follows: Septic Inspections – The waste system is inspected by an engineer to verify the good working order of waste disposal; Well water – Tests can be performed by engineers to ascertain the quality of the water servicing the premises; Engineering – An engineer examines structural soundness and describes electrical, plumbing and similar systems; Pest Inspections – Private contractors inspect the premises for infestation and possible damage caused by termites and other pests.
Lenders often require additional inspection when making particular types of loans. Construction Mortgage – When lending funds for new construction, the lender will require an inspection upon the completion of each phase of construction before disbursing funds for the next phase. New Construction/Permanent Financing – If recently constructed, the lender may require verification that the construction is complete and that the premises are suitable for occupancy.
It is advisable for the buyer to reinspect the premises immediately prior to the closing to be certain that it is essentially in the same condition as it was at the time the contract was executed, that no significant damage has been done to the premises in the intervening time and that the fixtures and items to be included in the sale have not been removed from the premises.
There are various types of insurance which are frequently purchased in connection with the acquisition of real estate, some of which are often required by lenders as a condition of the loan. You may also wish to purchase insurance to protect your interests. Below is a list of some of the most common types of insurance and a discussion of their proposes.
Homeowner’s Insurance: This can protect both the lender’s interest and your interest. The coverage afforded by the homeowner’s policy included personal liability, theft, and hazard protection other than flood. The lender will usually require coverage equal to the amount of the loan. To protect your interest, coverage should at least be equal to the replacement value of the house. Inmost instances, the lender will require proof of payment of the first year’s premium, along with a copy of the policy at the time of closing.
Title Insurance: Separate policies are available to protect the lender’s interest and your interest. Coverage afforded by title insurance is different to each of the insureds based upon their interests in the title. The lender will receive coverage based upon its mortgage interest in the property. The amount of coverage is based upon the amount of the loan.
You, as the owner, can also receive coverage based upon your interest in the property. A complete discussion of an owner title insurance policy is covered elsewhere in this booklet.
The one-time premium for title insurance is paid at the time of closing. The lender will require a policy to cover the amount of the loan and, if the loan involves negative amortization, may also ask to be insured for a specific amount over the initial amount of the loan.
Virtually every lender requires title insurance in connection with first mortgage loans. The expense is borne by the borrower.
Private Mortgage Insurance (PMI): This type of insurance protects the lender against loss due to default by the borrower. It is generally required whenever the loan amount exceeds 80% of the fair market value of the property being purchased and may also be required in other instances. The requirement for this insurance is usually waived after the loan has been reduced to a specific level. The first year’s premium may be required to be paid on the day of closing. In some instances, the lender may require that you purchase additional insurance to protect against specific hazards.
Flood Insurance: If the property being purchased has a building or other structure located in an area subject to flooding, federal law prohibits the lender from making any loan secured by a mortgage on the property unless the borrower purchases flood insurance. This insurance must be renewed annually (but can be paid up to three years in advance) and is usually purchased in an amount equal to the loan. The program for flood insurance is sponsored by the federal government.
There are many miscellaneous, ongoing expenses associated with home ownership. Such expenses may include one or more of the following: real property taxes, sewer assessments, fire district taxes, water, heading oil and common expense assessment (for condominiums). It is likely that a seller will have paid some of these items in advance, covering a period of time that extends past the date of closing, i.e., the date of transfer of title. Therefore, adjustments will be made to reimburse the seller for expenses paid in advance that will relate to a period of the buyers’ ownership of the property. Many of these items have different payment periods.
There will also be instances when items are not payable until after the period of use or service has passed. In that event, the seller will reimburse the buyers for expenses the buyers will incur after the closing which relate back to the period of the seller’s ownership. There may also be adjustments for miscellaneous expenses that may have been negotiated between the parties during the pre-closing period. For instance, the seller may agree to do some repair on the house or substitute an additional item (such as a fixture) in lieu of having to do repairs, or there may be an agreement to reimburse the buyers for the cost of having the repairs completed after the buyers take ownership. All of these arrangements or agreements should be reported to us prior to the closing in order that they can be included in the financial calculations and adjustments that we prepare prior to the closing.
Title insurance provides projection against financial loss which could result from title defects or claims against your property. There are two types of policies: the owner policy, which provides protection to the homeowner and the homeowner’s heirs, and the mortgagee policy which offers protection to the mortgagee (lender) and its assigns. There two policies are separate and distinct. If the lender requires title insurance (which is usually paid for by the buyer), it is the lender who is insured and not the owner. If the owner wishes title insurance, a separate policy must be purchased. The new owner can, however, reduce the cost by purchasing the two policies simultaneously. For example, when an owner policy is purchased from CATIC, there is no additional charge for a standard policy insuring the lender’s interest provided it does not exceed the amount of the owner’s coverage.
Title insurance offers two types of coverage. First, it will pay to defend the insured’s title in a court of law, and secondly, it will pay the cost to remove a defect in title on behalf of the insured to the extent of the policy limits.
Purchasers of property are correct when they assume that their attorney’s examination of the title to the premises and receipt of a warranty deed from the seller are generally sufficient to assure that they will have good title to the property.
However, title insurance provides two additional protections. First, if there is a problem, it is the title insurance company and not the new owner who will have to assume the financial burden of making a claim against the prior owner. Second, there are a number of “hidden defects’ which neither the seller nor the attorney examining the title is responsible for but which could affect your title. Examples of these are lost or forged deeds, deeds executed by incompetents, incorrectly indexed deeds, or improperly probated wills. Title insurance covers all such potential problems and does so without respect to the financial resources of the attorney or the prior owner.
The title insurance policy or policies are issued at the time of closing. There is a one-time premium payable at closing by the buyer. Protection begins immediately upon the recording of the appropriate documents and works backward in time. This is to say that, loss resulting from any defects which occurred prior to your closing will be insured by the policy. Those things affecting title which occur after the time of your closing would generally not be covered by the standard policy, unless, of course, they were based on some defect in the title which existed prior to the time the insured lender or owner acquired an interest in the property. There are specific exceptions from the coverage of the policy, but they will be set forth on the policy as items not being covered. Normally, those items found of record during the title search will not be covered, and these will be listed as “exceptions” to coverage. For instance, most properties have one or more easements in favor of utility companies to permit the location of gas, electric, water or sewer lines, and these will be set out in the title insurance policy. However, the policy insures that there are no easements other than those listed. We will be able to explain these items to you in more detail at the closing.
The owner policy protects you, the insured, so long as you have an interest in the property. It protects your heirs’ interests in the property if the property is transferred to them, and it protects the warranties you give when you transfer the property. The mortgagee (lender) policy lasts only so long as the loan is outstanding, which means that you may be required to purchase a new mortgagee policy in the event you refinance your loan at a later time.
Owners usually purchase coverage in an amount equal to the purchase price of the property. The owner policy may include a provision that automatically increases the amount of coverage by a percentage of the original amount each year for the first five years without additional cost. The amount of coverage on a mortgagee policy is the amount of the unpaid portion of the loan including interest. (Premiums are charged based upon the fair market value of the property and the total amount of the loan.) Expanded coverage policies are also available in many states at higher premiums.
In today’s economic market, lenders require title insurance to secure the interest they have in the property, and to assure the marketability of their mortgages on the secondary market. As an owner of the property, you should consider obtaining an owner policy to secure the interest and marketability of your investment.. . . your new home.
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