Buying & Selling
Real Estate: A Client's Guide
CHARLES A. MORGAN
(Board Certified-Residential Real Estate Law, Texas Board of Legal Specialization)
Psychologists tell us that along with marriage, divorce and the death of a loved one, buying or selling a house is one of the most traumatic experiences of a lifetime. With professional guidance you can avoid this trauma simply by understanding what to do and how to approach each phase of the buying or selling process. In addition to the Buyer and the Seller, there are three other players in a real estate transaction who are important in closing the sale or purchase of a home or real estate. The first player is the real estate lawyer, the second is the title company; and the third is the real estate broker.
The Real Estate Lawyer
Each party to the purchase of the home should engage a lawyer who specializes in real estate transactions to make sure that all legal papers, including the title, agreements and closing documents are in order.
The Title Company
In both Texas and Arkansas the title company is usually called upon to research the title (legal ownership) to the property. This research is needed to establish that there is no flaw in the chain of ownership and that there is no claim that would interfere with the present owner's ability to pass good title (ownership) to the buyer. The seller customarily pays for the title insurance premium although this expense may be shifted to the buyer, or the seller may elect to furnish the buyer an abstract of title in lieu of title insurance. It is then the buyer's responsibility to have this abstract of title examined by the real estate lawyer of his choice.
Real Estate Brokers
Hired and paid for by the seller, it is the job of the Real Estate Broker or Real Estate Agent to bring the potential buyer to see the property the seller has for sale. The Real Estate Broker, sometimes called a realtor, should have two qualities: (1) experience, and (2) a reputation for professionalism.
The Advantages of Ownership
The decision to buy a house is probably the biggest economic decision most individuals will ever make. The advantages of ownership are exciting, the pride of owning your own property, of knowing that every improvement you make is for your own benefit, and the security of knowing that as long as you make your monthly payments on time, you can live in your house for as long as you like. In addition, the privacy and security of a house, and the inability of others to intrude on your lifestyle are all arguments in favor of ownership.
A house is an attractive financial investment, you can take federal income tax deductions for your mortgage interest and for your real estate tax payments. Finally, real estate is an investment that in the vast majority of cases appreciates over time.
The Disadvantages of Ownership
The primary disadvantage of home ownership is that you are tying up your money in a non-liquid asset for a long period of time. Of course you can always sell a home, but it can take time. In a bad market you may not be able to sell for quite a while or for your desired price. In addition to the regular costs of taxes, mortgage payments and utilities, you will also have periodic costs of repairs, maintenance and upkeep of your property. This can be costly and, if several problems arise at the same time, it could spell economic disaster.
Submitting an Offer
Once you have made the decision to purchase a home, the next step is to submit an offer. The time has come to negotiate price. If you are going to submit an offer, the time to consult with your attorney is before the offer is submitted. In the real estate market, deals are flexible and the range of possibilities is very wide, so that a good negotiator is an essential key. Also remember that the seller's asking price is just that, an asking price. You don't know how much the seller actually expects to get and you can bid as far below the asking price as you think reasonable, so make a bid. The worst that can happen is that it will be turned down. Once that happens you can always make another higher bid.
Escrow
Escrow, or earnest money, is the holding by an impartial party of money deposited under the conditions of sale until certain conditions are met. If you are represented by an attorney, the escrow agent could be your attorney. If you are not represented by an attorney, the escrow agent could be the title company. However, it is always best to have your representative in charge of the escrow money because the person in charge is the one who releases the money once all the conditions are met.
Mortgages
The Mortgage itself is not a loan but a pledge. This makes sense once you understand how a mortgage actually works. When we speak about getting a mortgage we actually mean the mortgage loan. A bank or other lender lends you the money for your purchase and in return you give the lender a mortgage (pledge). You have pledged your property as security for repayment of the loan plus any interest that has accrued on it. Once the loan plus interest has been paid off, the lien is removed (released) and the pledged property is yours free and clear. In Texas the loan instrument is customarily referred to as a Deed of Trust, and in Arkansas the security document may be either a Mortgage or Deed of Trust depending upon the preference of the lender.
The holder of the mortgage could come from many sources, the seller, banking institutions, savings and loan associations, credit unions, and mortgage service companies. Every bank, every savings and loan and every other mortgage institution has its own set of rules and criteria. The best thing to remember is that while a deal may sound great, you have to take the time to check the actual numbers before you sign on the dotted line.
Types of Mortgages
Mortgages can be classified in several ways. One important distinction is between conventional mortgages and federally sponsored mortgages. A conventional mortgage is any type of mortgage loan that is not insured by an agency of the federal government. A conventional mortgage may either be the standard fixed rate loan or the new adjustable rate variety. Conventional loans usually require a larger down payment than the federally backed ones. If you can't afford the large (20% or so) down payment you may have to purchase a type of mortgage insurance. Conventional mortgages are often not assumable by future buyers of your house. Federally backed mortgages include loans that are secured by the Federal Housing Authority (FHA), the Veterans Administration (VA) and the Farmer's Home Administration (FmHA).
Title
Title to a property signifies possession of the property and conveys with it absolute control and ownership over the land and everything that is on the land including houses, trees, air, etc. When buying a house from someone, you are purchasing the seller's title to the property. It is vital to you that the seller have good and marketable title. A marketable title is one that is reasonably free from defects and conveys the right to use, sell and enjoy the property without unreasonable restrictions on the purchaser. All sorts of defects can exist in a title, that is why you need a title company or a real estate attorney to search or examine the title for you.
Title Defects
Title defects come in different forms such as tax liens or judgment liens which could cloud the title of the seller or the person that owned the property before the seller purchased it. A cloud on title means that when you go to purchase the property, the person who registered the lien can claim a portion of the purchase price to satisfy his or her obligation. If the seller refuses to pay the debt and the lien is not satisfied, and you purchase the property, the obligation to pay the creditor is then yours. This is because the obligation to pay runs with the land and the land now belongs to you.
Title Insurance
It is important for the buyer of any residential or commercial property to purchase or be furnished title insurance. Title insurance is readily available and it insures that the title is good, clear and marketable and that if any covered problems arise the title insurer will pay to have them cleared.
Using a Broker
Using the services of a Real Estate Broker is both a convenience and an expense. It is a convenience because the broker takes care of advertising the house, screening customers and showing it to a potential buyer. The broker will also usually be instrumental in helping the buyer obtain the required financing. In exchange for a realtor's services, the seller must pay the broker's commission, typically six to seven percent of the sales price. Using a broker may not really cost as much as it initially appears. The broker will pay some of the cost that you would have to pay if you were selling the house, such as newspaper advertising and a sign for your front porch or lawn. Using a broker makes your life easier, since you are spared the time and aggravation of speaking to many callers on the phone, and with a broker there are no surprise visits by strangers to see your house at odd hours. Brokers can make appointments at your convenience.
Closing Costs
Points
There are a number of charges that the mortgage lender may require the buyer or seller to pay at settlement (closing). These can include points. Each point represents a one time charge of one percent of the total amount of the mortgage loan.
Escrow Fees
The settlement or closing fee charge by the escrow agent, whether it be a real estate attorney or a title company, is a fee to cover the preparation of the closing statement and the disbursement of checks required to pay for the expenses incidental to the transaction, such as the realtors commission, title insurance premium, lender's points, taxes, repairs, termite letters, etc. This closing fee can run as little as $50.00 to as much as several hundred dollars depending on the size of the transaction and the services required of the escrow agent. It may also include the costs of reporting the sale to the Internal Revenue Service which is now required for all residential and commercial property where a corporation or governmental entity is not involved.
Attorney's Fees
The attorney's fees to be paid by the Buyer and Seller are usually covered by the Agreement of Sale. Most agreements provide that it is the Seller's responsibility to pay for the preparation of the Deed and any other instruments required to convey good title. The Buyer customarily pays for the Note, Deed of Trust, and any other instruments required by the buyer's lender. The Agreement of Sale may provide that its preparation is to be shared equally by each party or it may place that cost on the party who requested their attorney to draft it. If the Seller is furnishing an abstract of title rather than title insurance, it is customarily the Buyer's expense to have his attorney examine the title to make sure that there are no title defects. It is important to note that the allocation of all expenses in the purchase and sale of land is a matter of negotiation. Hence, the drafting and preparation of the Agreement of Sale is the most critical step in the purchase and sale of real property.
The Settlement Statement
The Settlement, also called the closing, is the time when the buyer becomes the actual owner of the property. This is when the Deed, Deed of Trust, Mortgage, Promissory Note, and other instruments are signed and the money changes hand.
A federally related lender is required under federal law to furnish a borrower with a good faith estimate of settlement charges. This is required by the Real Estate Settlement Procedures Act (RESPA). The settlement sheet or RESPA form is a document prepared at the settlement of a real estate purchase which details all of the various charges paid to and by each party to the transaction. Many times there are extra charges that do not show up on the good faith estimate, such as advanced payment of taxes, repairs, or other charges required to clear title. The settlement agent can usually furnish these charges to you in advance of the actual closing so that you can make arrangements to have the necessary funds available at closing.
Agreement of Sale
The Agreement of Sale is a legal document that binds the buyer to purchase and the seller to sell a particular house. The Agreement of Sale is sometimes referred to as an Ernest Money Contract or an Offer & Acceptance. Because it is a legal document and full of potential pit falls, you should engage a competent real estate attorney to draft the document for you. Remember, the Agreement of Sale which defines the rights and obligations of the parties is the most critical document in any real estate transaction. Each and every word in the Agreement of Sale is important and negotiable. Remember that once you sign the Agreement of Sale you are stuck with whatever it says and doesn't say about the transaction.
Some of the items that should be covered by the agreement are as follows: All of the buyers and sellers should be listed, and their spouses, the agreement should have a correct legal description; the purchase price should be properly identified and the payment terms; is the sale for cash; the amount of earnest money; and the amount of any first or second liens carried by the seller should be clearly stated. If the agreement is subject to the buyer being able to obtain financing, the terms of that financing should be clearly stated. Is the sale dependent upon zoning classification or reclassification? Is a termite inspection required? Is a building inspection required? Is an appraisal required to determine value? Will a survey be furnished? Is an environmental audit or inspection of the land appropriate? Is the seller obligated to make repairs if the property is in need of repair? Who bears the risk of loss in the event the property is damaged prior to closing? What title warranties and assurances is the buyer to receive from the seller at closing?
Other items that should be considered are contents, fixtures, the allocation of closing costs, possession, escrow and the amount of the broker's commission.
Each of these questions and concerns should be reviewed by you and your real estate attorney before signing any documents to purchase or sell any interest in any tract of land. You should also review with your attorney the income tax consequences of the transaction and plan accordingly.
Refinancing Your Mortgage
Refinancing is very common and there are many reasons why you may want to refinance your mortgage. You may feel that you can save money by getting a new mortgage at a lower interest rate or you may wish to stretch out the payment scheduled. You may also have built up your equity in the house, and now wish to borrow more so that you can use the additionally cash for other purposes. Recent federal legislation would permit homeowners to refinance their home in Arkansas, A constitutional amendment that became effective on January 1, 1998 permits Texas residents to obtain "home equity" loans in addition to the traditional homestead loans that were obtained to finance or refinance the purchase money used to acquire the homestead, to pay taxes due on the homestead, or to construct improvements on homestead property.
It is difficult to say as to how much refinancing will cost because the charges vary depending upon your individual situation. The cost, however could be substantial. A general rule to follow when considering refinancing is that it will only be worthwhile if the difference in interest rate is at least two percent and you will be living in the house and paying off the new mortgage for at least five years.
If no new money is being advanced a conventional lender such as a bank or savings and loan association may be willing to permit you to merely execute a new note at a reduced rate. This generally does not require an additional title search and the costs of such arrangements would be fairly insignificant. Your present lender could furnish you an estimate of the costs of refinancing.
SUMMARY
In summary, the buying and selling of a home is a complex transaction. The attorneys of our firm can assist you in buying or selling your home or real estate to insure that you receive all that you bargained for with the least amount of trouble. Remember, the time to talk with an attorney is before you sign any agreement or contract.
DUNN, NUTTER, & MORGAN, L.L.P.
-- ATTORNEYS AT LAW--
Practicing in Texas & Arkansas
3601 Richmond Road
Texarkana, TX 75503-0716
Phone (903) 793-5651
Fax (903) 794-5651
http://www.dnmlawfirm.com
lawfirm@dnmlawfirm.com
Continuing the tradition of service to clients that began in 1926.
© 1998
