Commonly Asked Questions When Buying or Selling Your Home
Q – When Should I Get a Real Estate Attorney Involved in the Transaction?
A – Whether buying or selling a home, you should get your attorney involved as soon as possible. You should explain to your attorney what you plan to do and ask how you can best accomplish your goal.
Unfortunately, many clients come to us after they have signed a listing agreement with a real estate broker or after they have an accepted offer on the home. At that time they may already have a binding contract that exposes them to serious unintended consequences.
With any transaction, especially a major transaction like the purchase or sale of a home, it is important to “count the costs” before committing to the purchase or sale. Your attorney can help you to determine what you may want to consider when counting the costs.
Q – How can I “Count the cost” when buying a home?
A – The first step with any purchase, large or small, is count the cost. Can you afford the new home? Do not rely on others to make decisions that you will have to live with. Commission sales people (real estate brokers and mortgage brokers/consultants) have an inherent conflict. The more you spend/borrow, the larger their commission. Attorneys can provide valuable counsel and insight, but they should not be asked to make decisions for you.
When things go wrong (the loan payments cannot be made), people tend to look for someone to blame. “The loan officer told me I could afford the loan.” There have been cases of people being approved for loans where the annual loan payments exceed the borrower’s yearly gross income. How could a reasonable person believe that they can afford such a loan?
For buyers, a good starting point is the amount of your current rent or mortgage payment. Does your budget allow for a larger monthly payment? Should you be making a smaller monthly payment? How much cash can you afford to pay toward the purchase price and closing costs? You will need to figure out how much of the purchase price you can pay in cash, while leaving yourself enough cash to pay your closing costs and leaving yourself a “rainy day” fund, and how much you can afford to pay on a monthly basis for a mortgage loan, property taxes, and insurance.
Once you have determined the monthly payment that you can afford and the amount of cash you will have available to pay toward the purchase price and closing costs, you can estimate how much you can afford to spend on a home. A real estate broker or mortgage broker/consultant can be helpful at this point.
Let’s go through a quick example of purchasing a $300,000.00 house with 90% financing. You will be paying 10% of the purchase price in cash or $30,000.00. Closing costs for title insurance, recording charges, mortgage recording tax, and attorney fees will average about $6,000.00. Real estate taxes will be adjusted at closing (reimbursing the seller for prepaid taxes) and the lender will start your escrow account, so figure on $7,500.00 (between the adjustments for prepaid taxes and funding the escrow account, you should plan on paying 100% of the yearly real estate taxes at closing). You will have to pay for the first year of your homeowners’ insurance policy in advance, so figure another $700.00. A survey and home inspection will each cost between $800.00 and $1,500.00 for an average single family home. The loan expenses will average around $2,500.00. A “rainy day” fund for unexpected repairs, maintenance, appliances and equipment of at least $10,000.00. While many buyers are tempted to skip the “rainy day” fund, the reality is that home ownership is expensive and you will be glad that you have budgeted for a “rainy day.” In other words, you should expect that the “unexpected” repairs, maintenance and replacements are going to happen. That is $59,700.00 in cash that you should have available. To avoid private mortgage insurance (“PMI”), which add .5% to 1% of the loan amount to your monthly mortgage loan payments you would need to put 20%, bring the total to $89,700.00 in cash needed to buy the house.
Your monthly payments of principal and interest on the $270,000.00 loan at 5% for 30 years ($1,445.00), escrows for taxes and insurance ($685.00) will be around $2,130.00. PMI at 1% will add another $225.00 per month.
Buyers must also consider their current living arrangements. Are you committed to a lease? If so, when does the lease expire? Can you terminate the lease prior to the end of its term? Do you have to sell your current house before you can purchase a new one?
Q – How can I “estimate the costs” when selling a home?
A – The first step with any sale is estimate the cost. In the current market, can you afford to sell your home? Do not rely on others to make decisions that you will have to live with. While commission sales people can provide invaluable insight and information, the bottom line is that they have an inherent conflict. When the home sells, they get their commission. Attorneys can provide valuable counsel and insight, but they should not be asked to make decisions for you.
The first question to be answered is “Why are you selling?” Do you have to sell (your job has been relocated to Texas) or are you just “testing the waters”? The answer to this first question will help you determine the answer to the second question, “What is your ‘bottom line’?”
A good starting point to determine your “bottom line” is a comparison of the estimated market value of your home and the amount owed on any mortgage(s). Are you “under water” (you owe more on your mortgage(s) than the house is worth)? To take it a step further and determine the net proceeds from the sale of your home, you will also need to consider the real estate agent’s commission, New York State Transfer Tax, judgments and liens against the property, and the Property Condition Disclosure Statement credit.
Real estate agent’s commission is generally negotiable and averages 5% to 6% of the gross sales price of your home. The New York State Transfer Tax is $2.00 per $500.00 ($4.00 per $1,000.00) of gross sales price. Any money judgments filed against you in the County where your home is located and liens for unpaid taxes, etc. attach to your home, so they must be paid at closing. A seller of a home in the State of New York is required to provide the purchaser with a Property Condition Disclosure Statement or a $500.00 credit at closing. I generally recommend that a seller give the $500.00 credit. Finally, assume that your attorney will charge you around $1,000.00.
As an example: Your real estate agent estimates that your house is worth $200,000.00 and will act as your agent for a 5% commission or $10,000.00. Your current mortgage balance is $165,000.00. Title companies generally charge about $150.00 to process your mortgage payoff and another $95.00 to record a mortgage satisfaction. The NYS Transfer tax on a $200,000.00 sales price will be $800.00. Your credit card company has filed a judgment against you for $6,500.00. The IRS has a Federal tax lien filed against you for $12,300.00. Finally, you elect to give the purchaser a $500.00 credit in lieu of the Property Condition Disclosure Statement. An attorney agrees to represent you for a fee of $1,000.00. Your estimated closing expenses are $196,545.00. In this example, you will only have an estimated cushion of $3,455.00 before you will have to come out-of-pocket (pay your own money) to close the transaction.
Finally, once you sell your home, where are you going to live? You generally will have to deliver your home vacant and broom clean at the time of closing (you and your belongings must be out of the home). Do you need to sell your home to buy a new one? Will you be renting? What happens if the sale of your home is delayed or terminated?
Q – Can I be responsible to pay a real estate broker a commission or pay multiple brokers a commission when my house does not sell?
A – Yes. The general rule in New York is that a licensed real estate broker earns a commission when the broker produces a buyer that is ready, willing, and able to buy the house on the terms set by the seller. As an example, the current standard Greater Hudson Valley Multiple Listing Service Exclusive Right to Sell Listing Agreement provides as follows: “If during the period of this agreement or any extension thereof, a transfer, sale or exchange of the property is made, effected or agreed upon with anyone, the Owner agrees to pay the Broker a commission of ___ of the selling price at the time the brokerage commission is earned by the broker but in no event, later than the date of closing.” Once the terms of the sale have been agreed upon in writing, the sale was “agreed upon.” If you as the seller cannot or will not close and the broker can prove that the buyer was financially able to buy your house, you are responsible to pay the commission. A modification to the Listing Agreement can be negotiated to provide that the commission is not earned until the closing occurs.
By getting your attorney involved early in the process and having them review and approve the listing agreement and any term sheets or binders prior to you signing and committing yourself, you can avoid these unintended consequences.
Q – Can I lose my down payment, if I do not get financing?
A – Yes, it is possible to lose your down payment if you cannot obtain a loan to purchase the property. While many people say that a contract has a “mortgage contingency,” most contracts for the purchase of a home are only contingent on the buyer receiving a “mortgage commitment.” A mortgage commitment is an agreement by a lender to provide the buyer with a loan in a specified amount to purchase the home once certain conditions are met.
Most contracts generally provide that once the mortgage loan commitment has been issued, the buyer assumes the risk that the conditions of the commitment will be met and that the lender will actually fund or close the loan. The lender may not fund or close the loan for a variety of reasons, such as the buyer losing a source of income, the property not appraising for the contract price, or the buyer accumulating more debt after issuance of the mortgage commitment.
It is important for an attorney to carefully review the mortgage contingency clause in the contract to protect your down payment.
Q – Are there any risks that I have to be concerned with, if I buy title insurance?
A – Yes. The biggest risk comes from buyers not understanding what title insurance covers. Unlike other types of insurance, title insurance covers buyers for things that happened before they bought the insurance.
Title insurance protects you against losses from defects in the title to your property that occurred prior to you buying the property. The title company will confirm and insure that the seller is the legal owner of the property and that there are no liens or other claims against the property. Basically, the title company will insure that after the closing you own the property free of liens and encumbrances that are not specified in the title insurance policy. Title insurance does not insure that you can use the property in the way you intend, that your property does not have environmental issues, or that no one else can use your property.
The first step in the title insurance process is the title search. The search is a compiling of a detailed history of the property by examining a variety of deeds, records, and files. The search will include deeds and other instruments recorded in the County Clerk’s Office, mortgage records, tax records, court records, probate files, and more. The search will confirm that the seller has the legal authority to transfer ownership and to uncover any errors in the chain of title and any claims, assessments, debts or other restrictions on the property. The search will result in a list of items that are accepted, or excluded from coverage. Exclusions and exceptions are gaps in the buyer’s coverage. You should have an attorney evaluate the effects of such exclusions and exceptions on your title.
The title policy will list as exceptions from coverage all of the covenants, conditions, restrictions, easements, or agreements found during the title search. These recorded documents will contain the limitations and obligations attached to the property. Obligations may include payment of fees to a homeowners association or for the maintenance of a private road.
Limitations vary greatly. You may intend to have a mother-daughter apartment in the house or to run your business from home, only to find out that there is a restrictive covenant that the house can only be used as a single family residence. The neighbor or the electric company may have an easement to put a driveway or power line across your yard. There may be a restriction against having a clothesline, fence, tennis court, pool, etc.
Additional exceptions from coverage will be made for your actual knowledge regarding the property and any facts a survey or personal inspection of the property will reveal. If a survey or personal inspection of the property would reveal that someone else may own a portion of the property, the title insurance will not cover you. Without a survey the title policy will not insure the size of the property. Similarly, if a survey or personal inspection would indicate that someone may have the right to use the property or that the neighbor’s fence, shed, house, garage, or other structure is partially or all on your property, the title insurance will not cover you. Title insurance policies usually except from coverage anything or any condition that you know about, even if not listed in the title policy.
Despite its limitations, title insurance is always recommended. It is a useful tool to help you know exactly what you are buying and the limitations and obligations that come with owning the property.
Q – Do I Need A Survey When I Buy a House?
A – The strictly legal answer is generally no. Whether or not you should get a survey is a different question. We normally recommend that our clients get a survey. Not all surveyors mark or stake the corners of the property as part of the survey process. You should consider asking the surveyor to install appropriate monumentation to help you locate the bounds of the property.
Title insurance policies generally contain the following exceptions to coverage: (1) “any state of facts a survey of the premises described in Schedule “A” would disclose” and (2) “the exact acreage of the premises are not insured.”
What would a survey of the premises disclose? There are different types of surveys. When buying a house, you will generally get a boundary survey. The boundary survey will show the boundaries of the property, acreage, access to the property, location of visible utility lines, well, structures (house, deck, pool, shed, etc.), stone walls, and fences on the property and near the boundary lines, if any.
Why are these items shown on a survey important? Say you buy a property that is shown on the Tax Map as five acres and the deed describes the same five acre parcel. Subsequently, you learn that the seller did not own 2 acres of the parcel that includes the road access. If you do not have a survey read into your title insurance policy, the title insurance policy will not cover the loss.
A survey should also answer the following questions:
- Is the driveway partially or wholly located on the neighboring property?
- While the property is located on a public road, is the access to the property (driveway) over an adjoining private driveway or private road?
- Is the property really on the waterfront or just water view?
- Are the well and septic field located within the property boundaries?
- Are there any utility easements and utility lines that cross the property?
- Are the shed, fence, and pool are located within the property boundaries?
- Who owns the tree that is shading the pool?
- Does the ATV trail or neighbor’s driveway cuts across a portion of the property?
The exact size of the premises is important for certain intended uses of the property or if you intend to subdivide the property.
While a survey inspection is a less expensive alternative, it provides less protection because you do not have privity (a legal relationship) with the surveyor.
It is in your best interest to get all survey matters resolved prior to closing when the hassle and expense of resolving the issues is someone else’s responsibility.
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William E. Duquette is Senior Counsel with the firm and practices Real Estate and Banking. He can be reached by phone at 866-303-9595 toll free or 845-764-9656 and by email.
