Purchasing Your Home
Reprinted from The Washington Post
Pamphlet authored by James C. “Beau” Brincefield, Jr.
and distributed by the Virginia State Bar
For most people, purchasing a home is the largest single investment of their lives. Extreme care should be taken in selecting a home, entering into a contract for purchase, obtaining financing and, finally, closing the transaction (sometimes called the “settlement”). This process is complicated and full of hidden risks, both legally and financially, and the prospective purchaser should seek the advice of a competent real estate attorney. Just a few of the many important questions the prospective purchaser must ask include the following:
- Exactly what real and personal property is included in the purchase?
- How should I take title?
- What financing and terms of payment can be arranged?
- Are any liens against the property?
- How can I evaluate the physical condition of the property?
- Are real estate taxes paid to date?
- Do any easements or covenants restrict the use of the property?
- Are the utilities adequate?
- What happens if a builder fails to deliver as promised/when promised?
- What local land use regulations affect the property?
- Exactly what are my rights and responsibilities under the proposed contract?
For the best protection in one of the most significant transactions that a person enters into in his lifetime, he or she should retain an attorney from the very beginning, certainly before entering into a binding contract of purchase. But, even if the attorney is not involved before contract signing, it would be most foolish to risk settlement without the advice of competent counsel.
The Real Estate Sales Contract
The purchase/sales contract or agreement is the document by which the purchasers commit themselves to purchase the home and the sellers commit to sell. Although many real estate brokers and agents provide printed “form contracts,” there is no such thing as a “typical” form contract. Almost every contract of every different firm has its own peculiar provisions which have an important effect upon the rights and obligations of both the purchaser and the seller. Although the 1 or 2 page contract provided by a real estate broker or agent may seem innocuous, it usually is not; and great care should be taken by the purchaser to read and understand every provision in the contract presented. It is at this stage that the purchasers should retain an attorney, either to review the contract presented to them or to draft a contract with the purchaser’s interest in mind. Remember, by law, the real estate agent or broker owes his or her primary duty to the seller who pays their commission.
A contract to purchase a home must be in writing to be enforceable. An oral agreement not evidenced in writing is not binding. The contract must constitute an offer, an acceptance, and consideration must pass between the purchaser and the seller. in an ordinary residential sale, moreover, the purchaser should take care that if the present owners are husband and wife, both husband and wife must sign the contract. A contract signed by one owner when the home is held by more than one, may not be legally binding. The sales contract should contain all the terms of the sale including, at least, the following provisions:
- The names and addresses of the sellers and the purchasers
- The purchase price, and how it is to be paid, including the amount of down payment and deposit
- Arrangements for financing, especially the purchaser’s right to cancel the contract if he or she cannot secure financing The legal description of the property, including a provision that title to such property shall be good and marketable of record, subject to reasonable easements, conditions and restrictions that may exist
- Condition of the property at the time of sale
- The dates of settlement and possession
- A list of settlement costs and which party is responsible for paying them
- Provision that the terms of the contract, particularly any warranties on the condition of the property, should survive the execution and delivery of the deed
- Who bears the risk of loss if something should happen to the house before settlement
- The name and commission due the sales agent, if any
- Signatures of the parties
- If the property is a condominium, additional written disclosures are required by law
The purchaser’s attorney should review these provisions of the contract and add any others he or she determines should be included to protect your interests in your own unique situation.
Most people do not have the personal economic resources to pay cash for their home and, therefore, must secure financing from some lending institution, such as a bank, a savings and loan association, or other mortgage lender. In some cases, the seller will take back a mortgage for part of the purchase price or let the purchaser assume an existing mortgage.
Since the contract will usually include provisions with respect to the purchaser’s responsibility to apply for and obtain new financing, the purchaser is obligated to adhere to these terms of the contract. Usually the real estate broker or agent will assist the purchaser in making application for a loan to purchase the house. However, even at this stage, it is best for the purchaser to seek advice from his or her attorney to insure that the terms of the contract are being followed and that the contractual arrangements with a lending institution are legal and fair. Some loans which are insured by the Federal Government, either the Federal Housing Administration or Veterans Administration, call for lower interest charges or extended terms of repayment. However, such loans may entail additional fees required by the lender to account for the below market interest rates.
If your application is approved, the lending institution will provide a commitment to make the loan. The commitment will set forth the conditions under which the loan will be made, including, for example, a requirement that you must purchase mortgage insurance to insure the lender against potential loss in making the loan, (if the loan is 80% or more of the sales price), payment of a loan discount and/or loan origination fee (usually 1 % or more of the loan amount thereby increasing the total finance charge for the term of the loan) and, of course, the interest rate of the loan.
Once the commitment is signed with provisions to the satisfaction of both the lending institution and the purchaser, the final papers will be drawn up and a date for settlement of the transaction set.
Prior to closing the transaction, the purchaser and the lending institution will want to be assured as to the quality of the title the purchaser is obtaining. First and foremost, of course, the purchaser and the lender want to be assured that the seller owns the property and has the power to convey it. But, also, there may be other matters affecting the title that would seriously impair the use and enjoyment of the property by the new purchaser. Thus, while financing is being arranged, the purchaser will usually also arrange to have a title search performed among the land records of the county or city in which the home is located and order an examination of the title documents. (The title search involves only an investigation of the land records to identify documents bearing on the title in question. The title examination involves a review and evaluation of those documents.) The title search may be performed by your attorney or a title insurance company, which may then agree to insure the title against certain challenges in the future (subject to such exceptions as may be included in the title policy). But even if a title insurance company performs a title search and offers a title insurance policy, your title should be examined by an attorney who is qualified to examine titles in Virginia. The attorney will examine the documents and form an opinion as to the quality of the title and explain any potential problems to you. In examining the title, your attorney will make sure that the sellers actually have good title and that they have the right to transfer title to the home and will review covenants, easements or restrictions on the use of the property, as well as any real estate tax obligations which have gone unpaid. In addition, there may be special assessments for public improvements, or covenants established by the developer or a homeowners’ association setting restrictions on the use of your property. The purchasers’ attorney will review all of these documents and explain the status of the title and the purchasers’ rights should they acquire an ownership interest in the property.
If the attorney provides the purchasers with a written title opinion based upon an examination of the title documents among the land records, they may rely upon this for the marketability of title; that is, that the title would be readily accepted by a future purchaser or lender. In most cases in Virginia, lending institutions will require that the purchasers pay for a lender’s title insurance policy covering the lender in case future title problems may arise. The purchasers should seek counsel from their attorney as to the advisability of also obtaining an owners’ title insurance policy to cover their interests as owners of record.
In Virginia, title is usually transferred by a general warranty deed. Through such a general warranty deed, the sellers guaranty the title against the claims of any other persons. The purchaser should, of course, have the attorney review the deed to insure that it is properly drafted and conveys marketable title.
In certain circumstances, title to homes is conveyed by special warranty deed. By this type of deed, the sellers are only warranting title against the claims of themselves and those claiming to hold title under them, but not against the claims of other persons.
Purchasers should also consult with their attorney on the best method of taking title. For example, a husband and wife may wish to take title as “tenants by the entirety with the common law right of survivorship,” which means that if one should die, the survivor will take full title by operation of law. Two unrelated persons may wish to take title as “tenants in common,” by which each person would own a percentage share in the property and may convey his or her share independent of the other owner or owners. Questions as to the form of taking title may be complicated and the language used must be precise. Only an attorney can properly assist purchasers in making such decisions.
Once the purchasers have been assured of marketable title and have obtained financing, it is time to hold settlement of the transaction.
Before settlement, all of the settlement papers should be carefully drafted. These documents include (1) the deed, (2) the note which evidences your loan, (3) the deed of trust securing the loan with your property, (4) the settlement statements by which an accounting is made of the transaction, (5) any deeds of release or certificates of satisfaction releasing the property from loans held by previous owners, (6) the Truth In Lending statement by which the lending institution discloses all of the finance charges, (7) the survey of the property showing any building restriction lines, easements or other encumbrances on the land, and (8) any other documents required by the lending institution or by the particular requirements of that settlement. The purchasers’ attorney should, of course, be responsible for drafting or reviewing all of these documents to assure that they are in proper order. At settlement, the documents will be executed by the proper parties, and several of them will require notarization. Also, at settlement, the settling of the financial accounts among the buyers, sellers, lender, sales agents and others will be explained by the settlement attorney and the transaction will be completed.
Following settlement, the attorney is responsible for disbursing all of the proceeds of the transaction to the proper parties and recording the legal documents among the land records of the county or city in which the home is located. In Virginia, the Wet Settlement Act requires, among other things, that all the funds collected at settlement be disbursed to the proper persons by the settlement attorney within three days after all the funds are collected and in the settlement attorney’s escrow account.
A word should also be said about settlement costs. It is at settlement that the attorney’s fees, recording fees, broker’s commission and all other fees agreed to in either the real estate sales contract or the finance documents will be paid.
The attorney’s charges in representing the purchasers will be estimated in advance. The expense will be modest in comparison to all the other essential costs of the transaction and in relation to the responsibility of the attorney for examination of title, preparation of documentation and holding settlement.
An important point to remember is that purchasing a home is a significant event in anyone’s life and will affect both one’s family life and financial position for years to come. Over a lifetime, it will be more economical to retain the services of an attorney from the outset so that the process of purchasing a home, including contracting, obtaining financing and settling, may be done precisely and properly. If done properly, home buying can be one of he greatest satisfactions in a lifetime.