What to Know When Buying a House
- The Players
- The Process
- Before you look for a house
- The Offer and Contingencies
- The Inspection
- The Purchase and Sale Agreement
- Title Examination and Lender’s Diligence
- The Closing
Buying a house involves the signing of multiple contracts and legal documents. It is important to have a lawyer who can draft and review the important documents, explain them to you, and protect your interests.
Among other things, a lawyer will review the Offer to Purchase, prepare and/or negotiate the Purchase and Sale Agreement, review home inspection reports and title examination, arrange for title insurance, attend closing to review documents to be signed, and arrange for the recording of documents at the Registry of Deeds. In special situations, such as new construction and no-broker transactions, a lawyer will help you ask the right questions and negotiate important details to protect your interests.
Real estate brokers generally represent the seller, unless they have specific agreements to act as a buyer’s broker. Do not assume the broker is representing your interests unless you have a written contract with that broker. Bear in mind that, unlike your lawyer, even a “buyer’s broker” is ordinarily paid only when you close on a contemplated purchase, which may affect the broker’s perspective on issues that arise prior to closing.
Brokers and real estate agents can be very helpful because of their knowledge of the local market and such concerns as taxes, schools, and neighborhood amenities. They may also subscribe to multiple listing services which broaden the number of houses available for your consideration.
Whether working with a seller’s or a buyer’s broker, it’s important to keep in mind the terms of the relationship, and who is paying whom.
A lending agent represents the bank, mortgage broker, or other financial institution that will provide the loan for your home purchase. When you are ready to apply for a loan, the agent will review your financial situation and help you understand your various options, including variable and fixed rate loan products, “conforming” and “non-conforming” loans, etc. Your lawyer can also help you at this stage, especially if you feel confused or concerned about the way the lending agent has explained your options.
There are different kinds of lending agents – some, called “mortgage brokers” or “loan originators,” work with many lenders, and some work with a single lender. It is important to know which kind of lending agent you are talking to and to educate yourself beforehand (again, your lawyer is a good resource here) on the pluses and minuses of dealing with a mortgage broker versus a retail lending agent.
When thinking about buying a house, one of the first questions you will consider is what communities to search for listings. There are many resources on the Web to help you get started. A first step might be to look at one of the many online classified ad services to get an idea of what kind of properties are for sale in your target neighborhoods, and at what price. In Massachusetts, more in-depth research can be done at such sites as the community profile area of the Boston Globe’s real estate section (http://www.boston.com/realestate/community/), or at zillow.com. At both, you can see information on current listings and recent sales, as well as learn more about schools, community resources, access to highways and public transportation, and other matters to consider when looking for a home.
There are two ways to determine how much you can afford to spend on a house, and what kind of mortgage you will need. The first is to get “pre-qualified” by a lender, which is an easy, fast, back-of-the-envelope process, usually done over the phone, in which a lender will ask you about your assets, debts, expenses, and income, then come up with a written estimate of how much house you can afford to buy. “Pre-qualifying” with the assistance of a lending agent or real estate broker does not guarantee you a loan or commit you to working with that lender any further.
Getting “pre-approved” goes further in the mortgage-application process, though it also does not guarantee that a lender will make a specific loan. Rather, a pre-approval letter states that a lender has completed your preliminary loan application and, based on available information, is prepared to lend you a specific amount. Pre-qualification helps you understand how much you can spend – it is useful in the very beginning stages of looking for a house. Pre-approval shortens the formal mortgage-approval process and reduces uncertainty – attaching your pre-approval letter to an Offer to Purchase is considered routine in many communities and is designed to make offer more attractive to the seller.
A different kind of financing has become more popular as credit markets have tightened in the current economy – rich uncles (or aunts for that matter). Family and peer-to-peer lending is increasingly attractive as some traditional lenders have restricted lending requirements. Private mortgages can make sense for all involved – for the borrower, interest rates and other costs of borrowing are usually lower; for the lender, the loan can be a financially-sound investment that also enables a family or loved one to realize the dream of home ownership.
Though several companies now exist to help set up or facilitate private loans, a lawyer is indispensable in creating the documents that will match the parties’ expectations and protect both the lender’s and the borrower’s interests. Indeed, while private lending facilitators such as Virgin Money USA may be useful for individuals who want a company to “service” their loan (sending out monthly bills and tracking amortization), for most private lending arrangements, all the parties really need is a lawyer to prepare documents that are tailored to their specific agreement, which is ordinarily less expensive than paying a facilitator for one-size-fits-all loan and mortgage documents and loan servicing. An attorney can also review the loan documents to make sure they are appropriate to your needs and protect your interests.
When you have decided on the kind of house you want, and where you will be looking, the next (and most important) question is to figure out how much a house you may be thinking about buying is worth. Many factors go into determining the fair market value of a property – age, condition, size, and location, location, location. You can get a general idea of a house’s fair market value by using the research tools mentioned above – zillow.com, HouseValues.com, and trulia.com, and if you are working with a broker you can certainly ask him/her to search the multiple-listing service for “comparable” properties that have sold in the immediate area in the last few months. Your broker may also be able to give you an overview of trends in the local market – whether values are going up or down, what areas are “hot,” and what areas may be overlooked. But whatever methods you use to get a general sense of local values, when the time comes to make an offer there is really no substitute for your own personal experience – looking at houses, going to open houses, checking the listing sheets every week, and getting a personal sense of what kind of houses in your target community are worth X, Y, and $1.5M.
Some brokers may refer to an Offer to Purchase as a “standard” form, but it is an important contract and shouldn’t be treated like the liability waiver at Six Flags. In Massachusetts, there is some precedent for a buyer enforcing a sale of real estate based on the offer alone, without a purchase and sale agreement or other more formal agreement. You should review the Offer to Purchase with your lawyer to make sure your interests are protected.
The offer will include such basic information as the names and addresses of the parties, the address of the property, and the offer price. It will also include the amount of the “earnest money” deposit to be paid upon signing the Purchase and Sale Agreement and the dates by which the P&S will be signed and the closing completed. Often, the offer will specify what household fixtures and furnishings are to be included in the purchase, and which are excluded. Finally, the offer will contain certain contingencies protecting the buyer, as described in detail below.
Once you’ve been pre-approved and have done your research into a house’s fair market value, the question remains – how much should you offer? The answer to this question will depend on a number of factors as to which you are probably the greatest expert: how much you like the house, how long the property has been on the market, what similar properties in the area are selling for, how busy or slow the market is in that area, and how much work might be needed on the property.
A seller may accept your offered price, reject it, or make a counter-offer, which you as the buyer can accept, reject, or counter. The house remains on the market until an offer is accepted and signed. Negotiating a price can be a complex affair. An experienced real estate lawyer can help.
The inspection contingency is a very important protection. It allows you to withdraw your accepted offer if an inspection reveals unexpected problems with the property. Paying for the inspection is the buyer’s responsibility. See The Inspection.
The mortgage finance contingency establishes a deadline by which the buyer must secure financing to purchase the property. It allows you time to find the most suitable mortgage, and provides a way out of the deal if a mortgage can’t be obtained. Since sellers often want to finish the deal quickly, and buyers want time to explore financing options, this contingency is often a point for negotiation.
A word about waiving the mortgage financing contingency to make your offer more attractive: DON’T, unless you are paying “cash” for a property (buying it without a mortgage) or you personally have the funds to buy the property if your lender decides not to lend. Particularly in this lending climate, it is reckless to put your deposit at risk over factors entirely beyond your control – the lender’s underwriting process, the appraisal, unexpectedly losing your job, etc.
If you are buying a condominium, you will want an additional contingency clause allowing your lawyer to review the condominium documents and budget. Your lawyer will help you understand your rights and obligations as a prospective member of the condominium association – does the condo allow unit owners to rent out their units, what exclusive rights go with the unit you would like to buy, when are condo fees due, etc. – and will alert you to possible concerns. With this contingency, you can withdraw your offer if issues are found in the condominium documents.
The home inspection is not an appraisal – an appraisal is an estimate of a property’s value, an inspection is a thorough examination of the condition of a house, from foundation to roof. A professional home inspector will, often over the course of two to three hours, make notes and observations about every visible aspect of a house’s structural elements, plumbing and electrical systems, heating and cooling, windows and doors, as well as major appliances.
The home inspector will point out potential maintenance and repair issues with the house, and should give a sense of the severity of each problem – whether it is a health and safety issue that must be repaired immediately, an item that should be repaired or replaced within the first year of ownership, or just something to keep your eye on for potential future issues. One thing an inspector will ordinarily NOT give you is the cost to make a particular repair, though he or she may refer you to a contractor or tradesman who can give a more detailed assessment.
A problematic inspection report need not end a deal. The issues raised by an inspection can lead to a renegotiated offer and sometimes an adjustment in price. But if mutual agreement can not be reached, the purpose of the inspection contingency is to allow the buyer to walk away from the offer without losing their deposit. Your lawyer can advise you on your options and help with the negotiations.
The Purchase and Sale Agreement (P&S) is the full and final contract between the buyer and seller. It replaces (and restates) the agreements and contingencies that had been included in the offer. The P&S is a binding contract and should not be signed without consulting your lawyer.
Like the offer, the P&S includes information about the parties and the property being bought, the price and amount of the deposit, fixtures and furnishings that are included in the sale, contingencies, and closing date. The P&S also addresses such specifics about the transaction as the apportionment of property-related expenses (taxes, utilities, condo fees, etc); work to be completed by the seller or the establishment of escrow accounts to pay for the work; and important provisions related to the “quality of title” to be conveyed by the seller’s deed at closing.
The P&S defines rights and duties of the buyer and seller. These rights and duties are subject to negotiation – there is no such thing as a “standard” Purchase and Sale Agreement, though many lawyers start with an industry-recognized template that they will then customize to suit a particular transaction. Your lawyer will help you understand the detailed provisions of the P&S and will protect your interests by negotiating specific terms that are fair to you.
Most lenders require that a title examination be conducted prior to closing to confirm that the property being bought has good, clear, record and marketable title. The closing lawyer, who is often also the buyer’s lawyer, will work with a title examiner to do this research and assess the significance of any title issues that are discovered.
A title examination is simply a methodical review of the historical records at the Registry of Deeds that relate to the property, beginning with the current owners (the sellers) and working backward to a point that may be fifty or more years in the past. This examination may reveal a wealth of important information about the property, such as whether there are liens or encumbrances on the property, the extent of any easements of restrictions on the property, and even whether the current owners have the legal authority to sell the property.
Easements are legal agreements that allow someone other than the owner some use of a property.
Liens are financial claims against the property, and can range from a mortgage to a contractor’s lien (a so-called “mechanic’s or materialmen’s lien”), tax or utility liens, and liens for unpaid child support. It is ordinarily the seller’s obligation to remove any liens from a property prior to closing.
The closing is where and when the purchase and sale is completed. Papers are signed, money is exchanged, and title is transferred from the seller to the buyer. This can be stressful, but your lawyer can help you prepare.
The P&S will contain a provision allowing you to walk through the house within 24 hours before the closing. This “final walk-through” will give you a chance to take a close look at the property to make sure it is in the condition you had expected, with all of the seller’s personal items removed and any agreed-upon repair work completed.
The closing lawyer will, in consultation with your lender, prepare a document called a HUD-1 Settlement Statement. The “HUD Form” lists where every penny in the transaction comes from and where it goes. It will include an itemized accounting of all the “closing costs”, such as fees for recording documents at the Registry of Deeds, lender’s fees, and title examination. Additional common closing costs may include title insurance, prepaid interest for the month of the closing, a homeowner’s insurance binder, credit report, and appraisal. Your lawyer will tell you the exact amount of these costs and credits and will instruct you on the total amount that you will need to bring with you to closing.
You will need to bring a certified or bank check to the closing in the final amount specified on the “bottom line” of the HUD Form. Ordinarily, we advise clients to make this check payable to themselves, for security reasons, and then endorse it over to the office of the closing lawyer at closing. In addition to this final check, you will also need identification, such as a driver’s license or passport. It’s also a good idea to bring your checkbook in case any last-minute incidental expenses arise.
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