The Home Buying Process—Advice for the Buyer
Buying a home can often produce a major Excedrin headache, but the more advice beforehand, the smoother the transaction will be. Here is a brief guide on terminology and procedures.
The Binder – Before anything else: DO NOT SIGN A BINDER! Now read on. When you are ready to tender an offer to purchase a home, your sales agent or broker may ask you to execute a Binder Agreement to present to the Seller. A Binder is a written offer to purchase a home at a given price with additional provisions regarding mortgage financing and personal property to be included in the sale. It is usually accompanied by a nominal earnest money deposit (between $100.00 and $500.00) to show the “serious” nature of your offer.
Once accepted by the Seller, a Binder has been interpreted to be a formal agreement. A Purchaser can risk the loss of his or her earnest money deposit if provisions are not made for a “change of heart.”
A Binder should be used by a Purchaser only as “an agreement to agree.” It should always be subject to review by an attorney and the execution of a formal contract containing the basic terms of the offer. In addition, if the offer is being made on an existing home, the Binder should also be subject to a satisfactory inspection of the dwelling by a licensed engineer. Bottom Line: Do not sign a Binder; tell the broker you are ready to go forward with the contract.
The Inspection – Generally, when a purchaser purchases an existing home, it is offered by the Seller in “AS IS” condition subject to the promise, or warranty, by the Seller that the major operating systems shall be in working order at the closing of title. An engineer’s inspection goes beyond the basic operating systems and reviews the entire structure. An engineer’s inspection is not a guaranty; it is an informational report to be used by a Purchaser as a guide to make the final decision to purchase a home. The cost of the inspection is borne by the Purchaser (see closing costs below). In New York, the seller of a single family home must give a Property Condition Disclosure Statement or give to purchaser a $500 credit.
The Contract – Once an offer is accepted and the purchaser has decided that the home is structurally sound, the Purchaser and Seller proceed to contract with the assistance of their respective attorneys. The Contract, usually drawn by the Seller’s attorney, states the responsibilities of the Purchaser and Seller. Your attorney should review these technical aspects of the contract with you; in particular, your responsibilities and the conditions under which you are agreeing to purchase the home. Once the contract is executed, the parties are bounded by the terms and conditions negotiated by the parties. It is the primary role of the Real Estate Attorney to ensure that Purchasers fully understand their obligations BEFORE they execute the contract
A basic real estate contract contains the essential terms of the transaction, names of the parties, purchase price, terms of financing the purchase (if a contract deal), the personal property to be included in the sale, and approximate closing date.
It is customary for a Purchaser to be prepared to deposit up to ten (10%) percent of the purchase price, in escrow, with Seller’s attorney, as a contract down payment can be negotiated between the parties on a case by case basis.
In addition, the contract should contain three (3) key contingencies:
a.) Good and Marketable Title – A Seller must be able to transfer “good and marketable” title to the property; basically, the Seller must transfer title free and clear of all judgments, mortgages and other liens which may exist against the property. In addition, the property must be free of violations of any ordinances of any local municipal attorney as part of the title search, which is obtained after the contract has been executed. If the Seller cannot convey title, the Purchaser may cancel the contract and the contract down payment shall be returned.
b.) Mortgages – Until recently, almost every real estate contract has been subject to the Purchaser being able to obtain a mortgage commitment from a lender. A Purchaser is usually given between 45 to 60 days to obtain a loan commitment by the Seller. A Purchaser must act in good faith, promptly apply for a mortgage loan, and fully cooperate with the request of this lender during this process. If the Purchaser cannot obtain a mortgage commitment, usually either party may cancel the contract, and the contract down payment shall be returned. Today, to clinch the deal, buyers are agreeing to waive this contingency. This should only be done if a buyer has the funds to close even if no mortgage is obtained or has obtained a clear commitment from a lender to fund the purchase (not just some vague “pre-qualification”).
c.) Termite – In most cases, the contract shall also be subject to the Purchaser obtaining a satisfactory inspection for termites, or other wood destroying insects, from a licensed exterminator. In some cases, the firm performing the Purchaser’s engineering inspection can also perform this inspection. In the event termites are found, it is usually the responsibility of the Seller to cure the termite infestation and to repair any damage. If the Seller refuses to comply, the Purchaser may cancel the contract.
d.) Preparation for Closing – Once all the contingencies are met, the Seller and Purchaser are prepared to proceed to closing. The setting of the closing is usually coordinated by the Purchaser’s attorney. The following parties must appear at a closing; the Seller, the Purchaser, their respective attorneys, the lenders attorney, a representative of the title company and real estate broker(s). In addition, the Purchaser must gather the required monies to pay the balance of their down payment plus their closing costs (discussed below).
e.) The Closing – A Real Estate Closing may appear to be a bewildering flurry of papers, but it boils down to three independent events occurring simultaneously. First, the Purchaser receives a title to his or her home. Second, the Bank closes its loan and issues its loan proceeds to the Purchaser, who in turn transfers them to the Seller as part of the balance of the purchase price. Third, the Title Company guarantees both the Bank and the Purchaser that the Purchaser is obtaining good and marketable title. After the closing, you will receive a Closing Statement from your attorney detailing the financial aspects of the closing and copies of the documents executed at the closing.
Please be reminded that each property is unique and each contract has its own characteristics and problems, which may be encountered. A good real estate attorney will assist you to avoid the pitfalls that may arise so that your home purchase will proceed smoothly from start to finish.
Closing Costs
Closing costs are those expenses associated with the purchase of a property other than the contract down payment. Closing costs fall into two major categories: Bank Related Expenses and Title Related Expenses.
Bank Related Expenses – These expenses are those incurred in obtaining the mortgage to complete your purchase. They include:
Points – A point, equal to one (1%) percent of the amount of the mortgage, is a fee paid to either the lender, or its designate (in the case where a mortgage broker has placed the loan), for the opportunity to obtain a mortgage loan from that lender. Points are 100% tax deductible when the mortgage is used to purchase a primary residence.
Mortgage Bank’s Attorney – Unfortunately, a Purchaser is customarily obligated to pay the Bank attorney’s fee, in addition to their own attorney’s fee, as a condition of obtaining the mortgage. This fee ranges from $500 to $1,000 depending on the lender.
Tax Escrow – Most lenders will undertake the payment of the real estate taxes on properties it grants mortgages against. In order to have sufficient monies to pay these taxes, a lender will require a Purchaser to deposit 1/12th of the annual real estate tax bill in an escrow account with the lender along with the monthly mortgage payment. In addition, a Purchaser will be required to make an initial deposit, usually equal to 50% of the annual tax bill, in order to have sufficient funds set aside to make the first tax payment after closing of title.
Private Mortgage Insurance (PMI) – Anytime a Purchaser borrows in excess of 80% of the purchase price from a lender, that lender will require that the Purchaser obtain private mortgage insurance from a third party provider. The Lender will arrange for this coverage and pass the cost through to the Purchaser. This coverage must remain in place until the principal balance of the mortgage falls below 80% of the value of the property. The first year’s premium must be paid at closing, and varies according to the amount of the mortgage.
Homeowners Insurance – A Lender will also require that a Purchaser maintain homeowners insurance in an amount necessary to replace the dwelling house. In addition, most lenders require that the first year’s premium be paid in advance of the closing.
Misc. Fees – Lenders shall also assess various fees depending upon their internal procedures. Some of these fees include: Tax Service Fees, Document Preparation Fees, and Application and credit Fees. These fees vary depending on the particular lender.
Title Related Expenses – These expenses are those required to complete the transfer of title and to record the necessary documents associated with the closing. They include:
Title Insurance – Required by all mortgage lenders, title insurance guarantees that the Purchaser is obtaining good and marketable title from the Seller. This one time expense, set by statute, varies according to the purchase price of the home and the amount of the mortgage. Typically, this expense runs approx. 0.5% – 0.8% of purchase price.
Departmental Searches – As part of the title search an abstract company will check the municipal records to ensure that the property is in compliance with the local ordinances affecting real property as well as the survey of the property. The fee for these reports varies depending on the municipality. In addition, if a new survey is required, a Purchaser can anticipate an additional expense of approximately $400 to have a new survey prepared by a licensed surveyor.
Mortgage Recording Tax (MRT) – Anytime a mortgage is recorded in the State of New York, there is a one time fee assessed against the Purchaser. In New York City, if the principal amount of the mortgage is less than $500,000, the tax rate is $2.05 for each $100 of the principal amount. However, if the mortgage provides that the property to be covered is a one- or two-family house, the tax is reduced by $0.30 for each $100 of the first $10,000 of the principal amount. This “tax” is not tax-deductible.
Recording fees – In addition to the MRT, the Purchaser is obligated to pay a nominal fee to the County Clerk to record the original mortgage and deed. This one time expense is approximately $100 to $150, which varies according to county. SEE below as to transfer taxes.
Mansion Tax – A NYS fee of 1% of the purchase price imposed on buyer where the price is $1,000,000 or more.
Transfer Taxes – Note: ordinarily imposed on the seller, however, the typical new condo project sales contract imposes these State and City taxes on the buyer. The amount of these taxes is $4 per $1,000 of price (NY State) and 1% on sales prices of under $500,000 and 1.425% on sales prices of $500,000 or more.
Miscellaneous fees: for condos, a common fund fee; move in, move–out fees, etc.
The only other closing cost not outlined above is the Purchaser attorney’s fee. While attorney fees vary, a reasonable fee charged by a skilled real estate attorney is always a wise investment.
The Home Selling Process
Real Estate Facts for Sellers
Home sellers often have more to worry about than buyers because in addition to the paperwork and questions surrounding the sale of their existing home, they must prepare for the purchase (and move to) a new home. Below is some helpful information to help facilitate the process, and make certain that you maximize your sale. For further explanations or additional information on New York residential real estate sales, contact us.
Be Prepared: Have your Paperwork Ready!
Before you start showing your home to potential buyers, you should be prepared to present the documents that you will need for your sale. They include:
The Deed – This is the legal document which transferred title to you when you purchased your home. It verifies that you are the rightful owner of your property, describes the legal bounds of your property, and defines the manner in which you may transfer your property to a third party.
The Survey – This is the map outlining the legal boundaries of your property and how your home is situated on your property. The recital of your property lines should match those contained in your deed.
Certificate of Occupancy (C.O.) – This is the document which verifies that your home met the requirements of your local building code at the time that it was built. Depending upon the age of your home, you should have a C.O. for each permanent structure on your property. This includes any additions or extensions as well as detached garages, in-ground pools, cabanas and certain decks and patios. You may not be able to close on your sale if you do not possess all of your C.O.s.
Mortgage and Note – In a high interest rate environment, a mortgage which may be assumed by a purchaser is a valuable asset. If your mortgage is not assumable, it will have to be satisfied at closing. A copy of your last mortgage statement will assist your attorney to obtain payoff figures to satisfy any outstanding mortgages or other obligations.
Tax / Utility Bills – Although these are not critical, an informed buyer may ask about the real estate taxes and fuel charges.
Seller’s Economics: How much are you really getting for your home?
No matter when you purchased your home, selling it for a profit is always a warm feeling. Before you throw a log on the fire, don’t forget there are costs in selling a home. They include:
Brokers Commission – If you are working with a real estate broker, you are responsible for the payment of the sales commission. The broker’s commission is usually negotiated at the time your home is listed with the broker on a case-by-case basis.
Transfer Fees – Resale by private seller: Whenever property is transferred in New York State, the State transfer tax is due from the Seller at the time the new deed is recorded. The State tax is $2.00 for every $500.00 of the selling price. If you are selling your home for $1,000,000.00, the Tax will be $4,000 (2000 x $2.00).
If the property is in New York City, the Seller must also pay NYC Real Property Transfer Tax (RPT). For most properties, the RPT is 1% of the sale price, for sales less than $500,000., and 1.425% for sale prices in excess of that amount.
Satisfaction of Mortgage(s) – Don’t forget that you may have a mortgage or other liens to satisfy from the proceeds of your sale.
Real Estate Taxes / Adjustments – Although you may have found a buyer for your home – it is still your home until you deliver a deed and move out. You are responsible for the payment of all taxes and utilities until you deliver possession to your buyer.
The above outlines most of the costs of selling a home – except legal fees. This is a sensitive issue that must be discussed between attorney and client before the contact is drawn – not at closing when it is too late.
The Margolis Law Firm can provide you with superior legal services at a reasonable cost. We state our fees and other costs, in writing, prior to taking any work on your behalf.
THE REAL ESTATE CONTRACT:
Paperwork = Control
In today’s market, you will be working harder than ever to sell your home. You want to know that once you accept a prospective buyer’s offer, the burden of selling your home has been lifted from your shoulders. This is why the drafting of your CONTRACT OF SALE is a top priority.
The Contract of Sale outlines the terms and conditions by which you have agreed to sell and the buyer have agreed to buy your home. In particular, it states the basic responsibilities of both the Seller and the Buyer. Once the contract is signed by both parties, you are bound to those terms and conditions. If a contract is not well written, it can lead to problems, delays, or even the cancellation of your closing!
The key to the smooth sale of your home is knowing that you have the documents necessary to close the deal before you sign the contract. If a document is not available or does not exist (as may be the case regarding a Certificate of Occupancy), the contract must be drafted to keep the seller in control by giving you enough time to obtain that document prior to closing. From the Seller’s perspective, if all the paperwork is in place, the contract should be subject only to the buyer obtaining the necessary financing to complete the sale.
Once the mortgage is approved, there should not be any open issues that the seller cannot control. Since the seller is totally prepared, the parties can proceed to a smooth closing!