Buying or selling is a home is a major transaction and something most people only do once or twice in their lives. Aside from choosing where you want to live and how much you want to pay every month, the decision to buy or sell is nested in a whole web of economic and legal considerations.
To help you navigate this big decision the team at Jacobowitz & Gubits law firm answers 7 commonly asked questions about buying and selling a home.
1. When should I get a real estate attorney involved in the transaction?
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.
2. How do I “count the cost” of buying a home?
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.
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.
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 for 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.
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?
3. How do I “estimate the costs” when selling a home?
The first step is to determine whether, in the current market, you can afford to sell your home. Again, do not rely on others to make decisions that you will have to live with, but real estate agents can provide invaluable insight and information.
Another 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 question will help you determine the answer to the next, “what is your ‘bottom line’?”
To help you determine your “bottom line,” compare the estimated market value of your home to 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.
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?
4. Can I be held responsible for paying a real estate broker a commission if my house does not sell?
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 is “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.
5. Can I lose my down payment if I do not get financing?
Yes, it is possible to lose your down payment if you cannot obtain a loan to purchase the property. While many people think 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. In those circumstances, the downpayment could be at risk.
It is important for an attorney to carefully review the mortgage contingency clause in the contract to protect your down payment.
6. Are there any risks involved in buying title insurance?
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 ensure 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 includes compiling a detailed history of the property by examining a variety of deeds and other instruments recorded in the County Clerk’s Office, such as 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. It 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.
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.
7. Do I need a survey when I buy a house?
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.
A survey should also answer questions about road access, easements, water access, trees, etc. The exact size of the premises is important for certain intended uses of the property or if you intend to subdivide the property.
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.
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.”
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.
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.
Gearing up to buy your first house? Register for Jacobowitz and Gubits’ Home Buying Seminar in Walden on April 25, 2019 at 5:30pm.
This article is not intended to be legal advice. You should contact an attorney for advice regarding your specific situation.
Hudson River Homes