Buying a Home
By: Source: AARP.org Date Posted: 2004-02-18 16:26:00-05:00
National Edition
A home is the most expensive single item most people ever buy. Only you can decide on the type of home and location you want. This Guide is not designed to advise you on the pros or cons of different types of housing or other matters like location, taxes or the condition of the roof. Once you make those decisions and start looking for a home, it is important to have some basic information about legal matters before you sign any contracts or pay out any money.
The purpose of this Guide is to provide that information. In addition, it is important to emphasize that the legal issues involved in buying a home can be complicated. The cost of hiring an attorney experienced in real estate transactions is small compared to the price you will spend for your new home.
Real Estate Agents
Most people use real estate agents to buy and sell their homes. As a buyer, the first thing you need to understand is that the agent generally works for the seller! The seller hired the agent and is responsible to pay the agent. Agents who are licensed real estate brokers do have legal obligations to deal honestly and fairly with buyers. When you consult an agent to find a home for you, the agent will commonly treat you as a client. Agents will show you homes they think will interest you, and provide all sorts of advice and suggestions. This is often very helpful. But don't forget! Generally, the agent works for the seller and the bottom line is to get the highest price in the shortest amount of time! In many states, they do have agents that will act as buyer's agents.
What kind of home are you looking for?
Different types of properties present different issues. Buying a condominium involves different issues than an unattached single family home. There are matters about which you need to question the realtor (or owner) when you look at a property that interests you. However, some issues are basic to any real estate purchase.
Basic Issue: Clear Title
The single most important concern you have as a buyer is to be certain that you are receiving a "clear" title from the seller. This means that there are no existing liens on the property and no defects in the title.
"Liens" are legal claims by a creditor of the seller. Liens are the result of the unpaid balance of a mortgage or other loan to the owner where the home was used as collateral, from judgments issued against the owner by a court or from governmental bodies for unpaid taxes or utility assessments. A lien stays with the property. The holder of the lien can collect on the lien by selling the home even if it has been sold to a new owner. A buyer is protected by the requirement that a lien must be formally recorded in the public records of the courts and/or local office where deeds are registered in the county where the property is located. This provides notice to a buyer that the seller has to settle the lien before or at the sale.
Other problems with a title can involve defects in the "chain of title". The chain of title is the history of transfers of the title to a particular property. Defects in a title can be caused by many different problems. A classic example of this problem is where a property turns out to be titled in the name of a deceased ancestor of the person occupying the property who wants to sell. Other issues can come up over property boundaries or rights-of-way through a property.
Basic Issue: Title search
Title defects are discovered by examining the municipal records where deeds, liens and judgments are recorded. (Procedures and terminology may vary from state to state and even among localities within states. This is a general description of the process. The realtor, lender, or your attorney will advise you as to specifics.) This is a job requiring some knowledge and experience. If you are financing your purchase, the lender will normally require the search, and in most instances make arrangements to perform it. The cost will be charged to you as part of the loan fees. Part of the cost will be for title insurance. Most lenders require title insurance to protect their security interest in the property. Problems with title are not common, but if one does arise it can be expensive to resolve. The title insurance coverage will provide legal representation and pay any expenses required to settle the issue. It is a one-time fee and is not that expensive. Even if you are not financing your purchase and are not required to buy title insurance, you will want to have a title search and you should purchase title insurance.
Special Issue: Single-family home
If you are buying a detached single-family home, make certain to ask about zoning, not only for the specific property, but the neighborhood. If zoning allows for uses other than residences you could be faced with nearby development which may be undesirable. If you are looking in an area being developed or undergoing renewal, what might happen nearby may be of concern. You also need to be aware of local laws concerning issues such as construction of additions, fences, walls, etc. If you are thinking about making improvements, this is essential. Even if you are not, could a neighbor build a 10 foot tall concrete wall next to your house? These are important matters to know about and consider.
Special Issue: Multi-family
If you are looking for a condominium, co-op, town (row) house, duplex or any type of unit in a planned community, it is important to find out how common areas are managed. Common areas are roofs, walls, halls, driveways, utility lines, or any area or structure which is shared by unit owners. If you are looking for any of these types of homes you will need to know how these areas are managed. Condominiums, co-ops and planned communities will have written rules and regulations. You need to get copies and check them thoroughly. Things to consider: Who enforces the rules? The developer, an association of the unit-owners, or a manager hired for that purpose? What input into decision-making do unit owners have? What part of the physical premises is the responsibility of the group and where does unit owner responsibility begin? Are there any rules restricting use of your unit? Can you rent out your unit if you want? How much are the taxes, utilities, insurance and maintenance and the breakdown of what the owner pays and what the association pays. You should ask to see copies of budgets for the past several years and a projected one for the next year, if available. How are finances handled? There are a lot of complicated issues involved and the documents are often written in "legalese". It is essential for most people to have a lawyer review and clarify the information before putting down any money.
Row houses and duplexes may not be part of any association. Each owner has a deed for his/her property. The description on the deed defines the boundaries of each owner's property and each maintains his own. But there are some common areas, for example the roof. There may also be common sidewalks, driveways and walls. These can be problems when maintenance must be done if another owner doesn't cooperate. It is important for you to get accurate information about these issues and how state and local laws may apply. Again, this is best provided by your own attorney.
Agreement of Sale
What happens when you find a property you like, make a bid, and the seller accepts your bid? At this point you and the seller will sign an agreement of sale. This means you, as the buyer, will pay a deposit, often called "earnest" money to secure the deal by demonstrating your intention to follow through with the purchase. In return for your deposit, the seller cannot accept any subsequent offer from another buyer. (This is NOT a down-payment. A down-payment is the money you must come up with on your own to get a mortgage from your lender.) The amount of the deposit can vary widely depending on the price of the home and will be credited to you at the closing.
The agreement of sale is the key to the entire transaction. Every detail should be included. Is it refundable and under what circumstances? What is included with the home? Rugs, appliances, window treatments, decorative items or furniture that is to be included must be specified, in the agreement itself or by a separate written agreement. Are there any contingencies? An example would be that your purchase is contingent on you selling your current home by a specified date, or having a loan approved by a certain date. These details must be negotiated before you sign an agreement of sale. The wise buyer will have an attorney review the agreement carefully before signing it and paying the deposit. Failure to do so can set you up for some potentially expensive problems.
In addition to the title search mentioned above, a physical inspection of the property is important. There are professional consultants who do this. Look for one who guarantees his work. If you are financing your property, it will probably be required in order to get loan approval. The scope of the inspection can vary depending on the property. An inspection of an older home will be more comprehensive than one for a newly built condominium unit. The inspection is to check the condition of the basic structure, the wiring, plumbing and roof as well as for insect or water damage. Usually, the inspection is at the buyer's expense and is not done until after the agreement of sale has been signed. This means that the agreement of sale, in addition to what is described above, must state what happens if the inspection turns up a serious problem. There are a number of options that have to be agreed on by the parties and they may vary depending on the nature of the problem and cost of repairs.
Another important consideration that requires some investigation on your part is a check to see if the property you want to buy is in a flood zone, earthquake area, fire prone area, over an area where extensive underground mining has taken place or where landslides are frequent. All of these problems can be catastrophic in terms of damage to your property. Know the risks, and be sure that you either avoid them or insure against them. State or local environmental agencies should be able to provide this type of information.
Closing the Purchase
The closing is the formal proceeding where the transaction is made final. The parties, including the buyer and seller and their attorneys, the realtor, and a bank representative (if you are getting a mortgage) meet to exchange the deed for the money. A settlement statement, a financial document detailing the transaction, is prepared at the closing. It details all of the costs and credits to buyer, seller, realtor, attorneys, deed recording fees, municipal taxes and utilities which are involved in finalizing the sale. Once again, you should have your attorney present to represent you. On occasion, problems arise and normally need to be resolved on the spot in order to avoid a delay in the closing. Don't be "penny wise and pound foolish". You are going to spend tens of thousands of dollars on a new home. The cost of hiring an attorney to advise you is small in comparison, and could save you thousands in costly mistakes.
Note: While we strive to keep this legal information up to date, the law is constantly changing, and we do not guarantee the accuracy of any information contained herein.
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