At Hamilton and Hamilton we have concentrated in residential real estate matters since 1998, helping clients buy and sell thousands of homes over the years. We also dedicate ourselves to continuing legal education to ensure we are at the cutting edge of developments in real estate law. The following article is a summary of several aspects of the real estate buying and selling process including:
THE OFFER TO PURCHASE
What is the offer to purchase?
The Offer to Purchase is completed by the buyer, typically with the help of a real estate broker or attorney, and presented to the seller.
A buyer provides a small good faith deposit ("earnest money") at the time of the Offer.
- This deposit should be made payable to a broker or an attorney and is held in an escrow account by the broker or attorney pending acceptance.
- It should never be made payable to the seller directly.
If the offer is accepted, the money counts toward the buyers' down payment. If the offer is not accepted, the money should be returned to the buyer.
What is included in the Offer to Purchase?
The Offer to Purchase must contain:
- Property address.
- The price you are offering (and the amount of earnest money).
- A timeline for acceptance of the offer. This is the period of time (typically 24 hours, but could be longer if the buyer or seller is out of town or hard to reach) in which the seller must accept, reject or respond with a counteroffer.
- A date for signing the Purchase and Sale Agreement ("P & S"), and a closing date.
What to look for in the Offer to Purchase?
The seller and a seller's broker will want a short time period for the Purchase and Sale Agreement to be signed.
The buyers' attorney should make sure that the time period is adequate to negotiate the P&S, satisfy all contingencies and apply for a mortgage. If the buyer can't get it all accomplished during the specified period, and the seller does not agree to an extension, it is considered a breach of contract and you may lose the deposit if the agreement is not terminated properly.
Any request to have the seller contribute to the buyer's closing costs should be included in the Offer.
Any appliances included in the sale should be itemized in the offer.
What are the Offer to Purchase Contingencies?
Most Offers may also contain standard conditions, known as contingencies, including:
- Professional home inspection and pest inspection
- The sale is subject to a professional home inspection and pest inspection conducted on the house within a specified period of time (generally ten days).
- Radon Test
- The sale is subject to a satisfactory radon test.
- Lead Paint Inspection
- The sale is subject to a lead paint inspection within a specified period of time. This is particularly important if you are purchasing a multi-family home and will become a landlord and/or if you have young children. There are very strong and specific laws regarding the responsibility of the owner in dealing with lead paint issues.
- A financing clause.
- This means that the sale is subject to you receiving mortgage financing by a certain date ("date of commitment"). You should be as specific as possible when describing the type of financing, interest rate and any down payment assistance programs for which you are applying. Note as well that this clause should specify how many lenders you must apply to and the date by which applications must be submitted.
- An appraisal contingency.
- This can specify that the appraisal must equal or exceed the sales price.
- Title V inspection contingency.
- This pertains to houses not connected to town /city sewerage. The inspection certifies that the private septic system is in proper working condition, and meets state and local board of health requirements.
- Well water contingency.
- This would allow for inspection of the private water source to the property to ensure that the water quality is within acceptable standards.
THE PURCHASE & SALE AGREEMENT
We highly recommend you hire a real estate lawyer to review your Purchase and Sale Agreement. It is a very important legal document.
What is the Purchase & Sale Agreement?
The Purchase & Sale Agreement ("P&S") must include everything that is verbally negotiated between the buyer and the seller, even if they are already contained in the Offer. It is typically the final binding agreement between the buyer and the seller prior to the closing.
The Purchase and Sale Agreement includes:
- A legal description of the property
- The agreed upon sales price
- The amount of earnest money and down payment
- Items of personal property to be included in the sale
- The price confirmed by an acceptable appraisal. The appraisal report should support the sales price of the home with three recent comparable sales.
- The date, time and place of the closing.
- There should also be a mortgage contingency concerning buyers' ability to obtain mortgage financing by a specific date so that buyer does not lose the deposit on the house if the loan is not approved. The contingency can include how many lenders to which buyer must apply.
What to look for in the Purchase and Sale Agreement?
It is important that you have completed any inspections prior to signing the P&S. Any repairs to be made to the property, price changes or agreements that are negotiated between the buyer and seller should be included in the P&S.
The buyer typically increases the amount of the deposit when the P&S is executed. Sellers will generally want the buyer to make a large deposit. Buyers should put down as little as possible. A 5% deposit is typical.
BEFORE THE CLOSING TO DO LIST
Once the P&S is signed, you need to meet the deadlines that have been established.
The biggest timing issue is often when you expect to have a letter from the lender approving the mortgage. If the lender does not provide a commitment letter by the date specified in the contract, you risk losing your deposit unless a written request for an extension is given to the seller by the established date (per the financing contingency). If the lender needs more time, you and the seller can sign a written extension of the commitment date as an addendum to the P&S.
ALL EXTENSIONS OR MODIFICATIONS TO THE ORIGINAL CONTRACT MUST BE IN WRITING!
Before the closing, the buyer should:
- Double-check that the seller will be out of the house before the closing date (if a multi-family, that other units are vacant)
- Confirm the moving date with his/her moving company
- Give his/her landlord 30 day's notice, or whatever legal notice is required as specified in the lease
- Notify the gas, electric and telephone companies of the move, so they can shut off service in the present home and turn it on in the new home
- Check with the lender's attorney to get the exact amount of money needed for the closing. Bring funds to the closing with picture identification. Bring your check book, too, just in case.
- Obtain a paid insurance policy (or binder) for the house. Bring it to the closing.
- Walk through the house to ensure that it is in proper condition as described in the Purchase and Sale Agreement.
THE CLOSING
What is the closing
The closing is a meeting between the buyer, seller, their attorneys, lender representatives and real estate brokers for the purpose of both conveying title (ownership) of the property from the seller to the buyer and completing the loan transaction between the borrower and lender. The financial transactions for both the buyer and the seller are identified on a form referred to as the HUD-1 Settlement Statement.
The P&S specifies the date, time and place of the closing. The buyer's attorney should confirm the closing date with the lender's attorney when the commitment is received.
The lender's attorney or the bank will prepare the closing documents, which include the Note. Mortgage, and HUD Settlement Statement. The lender's attorney will review the seller's deed, obtain documents necessary to clear the title and pay off the seller's mortgage(s).
Documents signed at the closing
The documents to be signed at the closing include:
- HUD-1 Settlement Statement.
- This form, required by federal law, itemizes the services provided and lists the charges to the buyer and the seller. Both the buyer and seller must sign it. The buyer should request a copy a day before closing to review.
- Truth-in-Lending Disclosure Statement.
- This form, also required by federal law, discloses, among other things, the annual percentage rate (APR), which reflects the cost of the mortgage at a yearly rate. This rate may be higher than the interest rate stated in the mortgage because it includes any points, fees and other costs of credit. The buyer should have received an estimate of this within three business days of the application date. Since the actual APR at closing will always differ (even if by a small amount) from the lender's initial estimate, a new statement is required to be issued at the closing. The Statement will also disclose certain loan terms, such as any prepayment penalty.
- The Note.
- The note represents the buyer's promise to pay the lender according to the agreed terms. The terms of the loan are set forth, including the date on which payments must be made as well as the location to which they must be sent. The note also details any penalties that will be assessed if the buyer falls behind in paying the loan. It also explains that the lender has the right to require full payment of the loan before the end of the term (called "call" in a loan), if the buyer fails to make the required payments.
- The Mortgage.
- The mortgage is the legal document that secures the Note and gives the lender a claim against the home if the buyer defaults on the note's terms. The buyer has possession of the property, but the lender has partial ownership (called "encumbrance") until the loan has been fully repaid. The Mortgage also gives the lender certain contractual rights such as the right to escrow for taxes and insurance, to enter the property if it is abandoned and to require that the borrower actually live in the property. The borrower's failure to do any of these things will give the lender just as much right to repossess the house (called "foreclosure" in a mortgage transaction) as if the borrower had failed to make the monthly payments.
- Affidavits and Disclosures.
- The buyer may be required to sign numerous affidavits (for example, that it is your intention to occupy the property) and disclosures (for example, how the escrow account will be administered throughout the year). They may be required by the lender, state law or by secondary marketing agencies. If the buyer provides false information, he/she can face criminal penalties and run the risk that the lender may call in the loan. You are also required to sign an agreement that absolves the bank from any future liability with regard to lead paint.
- The Deed.
- The seller must bring the deed to the closing, properly signed and notarized. It is the document that transfers ownership from the seller to the buyer.
- The lender's attorney will require that the buyer present a paid insurance policy (binder) on the house and certified funds for all closing costs.
- At closing, after all the papers have been signed and all the fees have been paid, the lender's attorney will record the Deed and Mortgage and any other title-related documents at the Registry of Deeds to finalize the closing. After the sale is "on record" the buyer can get the keys to their new home! The lender's attorney will also take care of paying off the seller's mortgage.
- Title insurance/ Insuring Title
- The lender requires that you purchase a lender's insurance policy at the time of the closing that protects the lender in the unlikely event that any liens on the property or title defects (issues that can affect your ownership rights) are discovered in the future.
- You also have the option of purchasing an owner's policy that protects your ownership interest in the property. You are given the opportunity to purchase an owner's title insurance policy at the time of the closing. The insurance is not expensive and we encouraged our buyers to purchase it if possible. Shortly before the closing, you should tell the closing attorney if you wish to purchase the policy. This insurance is purchased once, and provides coverage for the duration of ownership.
- Homestead declaration
- In Massachusetts, homeowners may protect $500,000.00 of the equity in their principal residence against the claim of unsecured creditors by filing a Homestead Declaration at the Registry of Deeds. The attorney performing the closing can do this, for a fee. As in purchasing title insurance, you should inform the closing attorney of your wishes to file a Homestead Declaration shortly before the closing. It is an inexpensive method to protect your equity and we highly recommend it to our clients.
WHY A LENDER'S ATTORNEY/BANK COUNSEL
Did you know that in the vast majority of matters, Hamilton & Hamilton can represent both the buyer and the buyers' lender? We have closed loans for hundreds of different banks from all over the country. Chances are very good that we have represented your chosen lender in the past. In Massachusetts, except in rare cases, there will always be an attorney involved in the purchase of a house. The attorneys at Hamilton and Hamilton are hired by hundreds of lenders to handle the legal aspects of the purchase, including:
- Title examination to ensure clear title
- Checking that there are no liens on the property at the time of the sale (e.g. property taxes, income taxes, mechanics liens, or municipal liens)
- Checking for any attachments, easements, restrictions, mortgages, bankruptcies, deaths or probates affecting the lender's interest in the property; and
- Handling the funds and closing for the lender
Hamilton & Hamilton will trace the chain of ownership of the property back 50 years or more and will issue a certification of title. The lender's attorney also hosts the closing and handles the transfer of funds. Although the attorney represents the lender rather than the buyer, the buyer typically pays for the services of the lender's attorney as part of his/her closing costs.
EXPERTISE, RESPONSIVENESS, RESULTS
Buying or selling a house is most likely the largest investment a person will make in their life. Having experienced and knowledgeable attorneys to help you through the process is always money well spent. Call us today for a free consultation on your matter. We hope you found the information in this article helpful. For additional information about frequently asked questions about the home buying process please our FAQ brochure.
