Buying a home can seem like a daunting task to many. This transaction
is the largest investment in most peoples lives and requires both financial
and legal expertise. Although many residential real estate transactions
are relatively straightforward, it is a good idea to have a basic familiarity
with the legal issues involved to avoid problems.
The Offer
After finding a house you want to buy, usually with the help of a broker,
you will be asked to sign a document called an offer to purchase. The offer
you sign is a legally binding contract. When it is accepted and signed
by both parties, the seller is obligated to deliver the deed and the buyer
is obligated to deliver the purchase price. This document contains several
important provisions:
1) Price: Most obviously it contains an offer to pay a certain price
for the property.
2) Deposit: the offer states the amount of a deposit that will be included
to validate the offer. The deposit is usually between $1000 and $5000.
3) Home Inspection: the offer states that it is contingent on the outcome
of a home inspection. In the event it is discovered the house has issues,
such as septic problems or termite damage, the offer will be revoked and
the deposit returned.
4) Purchase and sale agreement: the offer usually states that it is
conditioned on a satisfactory purchase and sale agreement. However, this
clause isn't enough to terminate the agreement if problems do arise in
negotiating the purchase and sale agreement.
5) Mortgage/financing: the offer states it is contingent on the buyer
obtaining a mortgage even after they sign the purchase and sale agreement.
It specifies the amount you intend to borrow, the deadline for applying
for the loan and the deadline for getting approval from the bank.
Purchase and Sale Agreement
After both the buyer and seller sign the offer, another document called
the purchase and sale agreement is drafted. This agreement is a long document
which fully defines the rights and obligations of the parties. This is
where the action takes place and it is a good idea to have a lawyer read
it over and advise you before signing it. In general the purchase and sale
agreement contains:
1) Parties: all of the people who hold title must be included. Your
attorney and the bank attorney will do a title search to ensure no one
else has a claim to the property. A common problem involves people who
have died but are still in the chain of title as an owner of the property.
The bank will buy title insurance to cover the amount of the loan, you
may buy insurance for the remainder. For example, if the bank loan is $150,000
on a $200,000 home, the bank will only have insurance on $150,000 and you
may buy insurance for the remaining $50,000.
2) Description of the Property: The property should be fully described.
This includes not only the house and the lot size, but also everything
included with the house; items such as refrigerators, shrubs, and chandeliers.
Many deals have fallen apart because someone thought the garbage compacter
was included. The seller should be aware that anything attached to the
property such as lighting fixtures and washing machines are part of the
property unless the purchase and sale agreement specifically gives the
seller a right to those items.
3) Insurance: make sure the home is adequately insured in case it is
struck by lightning before the deed is delivered.
4) Mortgage Contingency: This clause is in both the offer and purchase
and sale agreement. Make sure it is clear how long the buyer has to secure
a loan. Make sure it is spelled out what constitutes a denial by a lender.
Since banks are increasingly stringent in requiring documentation, it is
a good idea to prepare for delays and clearly articulate procedures for
extending the period the buyer has to get financing. Fortunately, many
buyers are prequalified or preapproved when they sign the purchase and
sale agreement.
5) Deposit: a second deposit is due when the purchase and sale agreement
is signed. This deposit is usually 10% of the purchase price.
The Closing
The closing, also called a passing, is where the deed is delivered and
the purchase price is paid. The buyer brings a certified check for the
down payment. The buyer is also responsible for a number of closing costs.
These costs include the points on the loan which are fees charged by the
bank for lending you money. A point equals one percent of the loan amount,
thus on a $200,000 loan, one point would be $2000. You will also be responsible
for paying legal fees to your own attorney and to the banks. Other costs
include taxes and insurance.
There are a large number of forms at the closing including truth-in-lending
statement from the bank, the terms of the note and the mortgage, the certification
of title, as well as the plot plan and the deed description. Your attorney
should be able to explain these documents if you have any questions.
