Buying A Home
You want to buy a home and have found the one of your dreams. After talking to the owner, you have agreed on a fair price. To make this hypothetical easy, let's assume that you have all the cash you need for the down payment.
Why can't you simply write a check for the agreed amount and have the seller give you a deed to the property? Why do you have to sign a contract and then wait a couple of months for settlement? Why does the transaction have to be so complicated?
The short answer is that you could simply exchange money for the deed, but it is not very wise. Shortcuts can lead to a host of problems. A few questions and answers will help explain the point:
- How do you know for sure that the seller is in fact the legal owner? The occupant may only be a tenant, or one of several joint owners. Perhaps the property is tied up in an estate or partnership, or is the subject of some legal dispute? For you to get clear title, the deed must be signed by all legal owners. An examination of the title, an important part of every settlement, will reveal the record owners of the property.
- What liens or mortgages does the seller have on the property? These will need to be paid off and released; if not, they remain encumbrances on the title--even if you knew nothing about them. Have all real estate taxes and assessments been paid? Are there judgment or tax liens against the seller--or a previous owner--which might affect title? Again, a title examination will provide the answer to these questions.
- What is the extent of the property that you are buying? In other words, what does the seller have to sell? Does the lot being purchased go all the way to that clump of bushes in the rear of the lot or is it smaller than it appears? Is the neighbor's privacy fence actually on the property line or does it angle over onto your lot? Are there utility easements, rights of way, restrictive covenants, or other legally binding limitations on your use and enjoyment of the property? The survey required in most contracts will give you an accurate description of the property and show what encroachments by fences, sheds, or other structures there may be.
- Although the house looks to be in good shape, do you really know what its condition is? Is it structurally sound? How old is the roof, and how long before it will need replacement? Even if "working," are the plumbing, heating, and air conditioning systems adequate for your needs, or will they need replacement sooner than you think? The inclusion of a home inspection agreement in a sales contract will allow the purchaser the opportunity to have a professional home inspector examine the house for deficiencies that may affect your willingness to purchase the property at the price offered. In addition, beginning July 1, 1993, sellers must give purchasers either a disclosure statement or a disclaimer statement. This law, and the way it will be interpreted and applied by the courts when disputes arise, is untested. You will probably get a disclaimer statement rather than disclosure, which is all the more reason to insist on a home inspection "contingency" provision in the sales contract. (A "contingency" is a contract provision that makes the agreement non-binding unless a certain condition or "contingency"--such as a satisfactory home inspection--is met. Boilerplate home inspection contingency clauses are widely available from your realtor or attorney.)
- Since it is unlikely that will be able to pay all cash for your new home, you will probably need a commercial loan for a large part of the purchase price. Your mortgage lender will take every precaution to ensure the repayment of its loan. The lender will not only check your credit history, it will also have the property appraised to make sure it has enough value to justify the purchase price and loan amount.
All of these various activities make the purchase of a home complicated, and they certainly require time for investigation. It would be nice if it could all be done with a handshake, a check and a deed on a Saturday afternoon; but that would leave too many uncertainties for the purchaser.
The purchase of a home is one of the largest and most important investments that you can make. Prudence dictates that care and time be taken in home selection, contract formation, and settlement. Most people rely on real estate agents to help them find a home. Realtors not only have access to the Multiple Listing Service (MLS) so that you get a wide selection of home that fit your desires, but realtors also provide valuable assistance in obtaining a loan.
Traditionally, real estate agents (both listing and selling agents) represent the seller, who pays the real estate commission. Recently, selling agents (who go with and assist the buyer and are believed by most buyers to represent them), are engaged as "buyer brokers" who are usually still paid by seller, but who are responsible for representing only the purchaser. One reason for a purchaser to have a buyer broker is to ensure that your discussions (e.g., how much you are really willing to pay above your initial contract offer) with the agent are confidential and not disclosed to the seller.
Once you and your agent have found a home that you want to purchase, it will be time to make an offer to purchase the property. Although most people rely on their real estate agents to provide a form contract to purchase a home, you may want to consult an attorney before you finalize the contract. Although you can provide that the contract is contingent on consultation with your attorney, it is usually better to have the attorney review prior to the offer to avoid having a contingency to which the seller may object.
Sometimes the seller will be asked to pay "closing costs" or a specified portion of such costs. The question may then arise as to what "costs" are included--all charges on page 2 of the HUD-1 settlement sheet; just lender charges, but including or excluding escrows and prepaid interest and premiums? Precise drafting by an attorney can reduce the likelihood of disputes.
As discussed above, one contingency that you should include in your contract is a home inspection contingency. Other contingencies may include the sale of your current home or a radon inspection. Most contracts call for settlement within about 60 days after the contract is signed by all parties. This much time is required for lenders to process your loan application and for settlement attorneys to obtain surveys, title reports, and payoff information and other requirements for settlement.
Taking the time required for these details will make the purchase of a home a wise decision, instead of a potential disaster. The idea is to get what you think you have paid for without any surprises. Avoid shortcuts. Happy home buying.