The Role Of The Lawyer In Home Purchase Transactions
NEW YORK STATE BAR ASSOCIATION
This pamphlet, which is based on New York law, is intended to inform, not to advise. No one should attempt to interpret or apply any law without the aid of an attorney. Produced by the New York State Bar Association Committee on Public Relations.
Do I need a lawyer? I can buy an automobile or 100 shares of stock without a lawyer. Why not a one or two family home?
Buying a home
Buying a home may not only be the most significant and largest purchase you will make, it also involves the law of real property, which is unique and has special problems. A lawyer is trained to deal with these problems and often has the most experience to deal with them. This applies to people selling a home or buying a home.
In the typical home purchase transaction the seller enters into a brokerage contract with a real estate agent, which is usually in writing. When the broker finds a potential buyer, negotiations are conducted through the broker, most often acting as an intermediary. Once an informal agreement is reached, buyer and seller enter into a formal written agreement. The buyer then obtains a commitment for financing. Title is searched to satisfy the lender and the buyer. And finally, the property is transferred from the seller to the buyer and the seller receives the purchase price bargained for in the contract. Seems simple and uncomplicated, but, without a lawyer, the consequences may be even more disastrous than purchasing a car that turns out to be a lemon, or a stock investment that was unwise.
What are some of the reasons why you need a lawyer for a home purchase or sale?
1. Dealing with the Broker.
A seller without the advice of a lawyer may sign a brokerage agreement that does not deal with a number of legal problems. The seller may become liable to pay a brokerage commission even if a sale does not occur or to pay more than one brokerage commission. For example, does the agreement offer the seller the right to negotiate on his or her own behalf; what is the effect of multiple listings; what are the broker’s rights if the seller withdraws the property from the market, or can’t deliver good marketable title; how long should an exclusive listing last? The seller should have the advice and guidance of an attorney with respect to a brokerage agreement. Even if the agreement is a so-called “standard form”, its terms should be explained to the seller and revised, if necessary. An attorney is also necessary to determine if the agreement was properly signed.
2. Dealing with tax consequences and other issues.
Even though a lawyer may not be needed during the course of negotiations, the buyer and seller each may have to consult with a lawyer to answer important questions, such as the tax consequences of the purchase or sale. To a seller, the tax consequences may be of critical importance. For example, what are the income tax consequences of a sale, particularly if the seller has a large profit … will the seller be able to take advantage of the tax provisions allowing for exclusion of capital gains in certain circumstances?
Aside from the tax consequences, the buyer and seller may have questions about the date set for closing, the date of occupancy, the condition of the property, arranging for an inspection and what personal property is included in the sale. These are some of the many questions that may need to be considered during the negotiation stage in order to avoid disputes when a written contract is prepared.
3. Dealing with the contract of sale.
The formal written contract for the sale and purchase of a home is the single most important piece of paper in the transaction. Its importance cannot be overestimated. Although printed forms are useful, a lawyer is once again necessary to explain the form and make changes and additions for a particular transaction to reflect the understanding of the buyer and the seller. There are many issues that may need to be addressed in the written contract. For example, how should title be taken: individually, as tenants in common, joint tenants or tenants by the entirety. What happens if someone dies before title is transferred? The answers to these questions require the training and knowledge of a lawyer.
There are numerous other legal questions that must be addressed in the contract, including the following. If the property has been altered or there has been an addition to the property, was it done lawfully or may what the buyer plans for the property be done lawfully? What happens if a buyer has an engineer or architect inspects the property that finds termites, asbestos, radon or lead based paint? What is the property is proximate to a hazardous waste dumpsite? What are the legal consequences if the closing does not take place and what happens to the down payment? Will the down payment be held in escrow by a lawyer in accordance with appropriately worded escrow instructions? How is payment to be made? Is the closing appropriately conditioned upon the buyer obtaining financing? These are only a few of the many questions that arise with respect to a contract.
4. Arranging for financing.
Most buyers finance a substantial portion of the purchase price for a one or two family home with a mortgage loan from a bank or other lending institutions. The contract should contain a carefully worded provision that is subject to the buyer’s obtaining a commitment for financing. Printed contract forms are generally inadequate to incorporate the real understanding of the buyer and seller without changes being made. In addition, there in now an extensive and often confusing menu of mortgages that may be available. Fixed rate mortgages versus adjustable rate mortgages and the complexities of each require the knowledge of an attorney who is familiar with current mortgages lending practices. Mortgage loan commitments and mortgage loan documents are also complex. Lawyers are necessary to review and explain the importance of these various documents. Buyers should know when and if they can prepay their mortgages; what happens if they make a late payment; how is interest computed; how much insurance does the lender require; how are real estate tax payments computed and collected and the answers to a myriad of other questions that may arise. Moreover, when dealing with the lender, although there is little room for negotiation, there is a need for the general assistance of a lawyer at the very least to explain what is happening and its consequences.
5. Searching and insuring title.
After the contract is signed it is necessary to establish the state of the seller’s title to the property to the satisfaction of the buyer as spelled out in the contract. Generally, a title search is ordered from an acceptable abstract or title insurance company. However, in some areas of New York State, title insurance is not obtained. In such cases an attorney is essential to review the status of title and render an opinion of title in lieu of a title policy. Assuming you are in an area where title insurance is customary, who will review the title search and explain the title exceptions as to what is not insured? Are the legal descriptions correct? Are there problems with adjoining owners or prior owners? What is the effect of easements and agreements or restrictions imposed by a prior owner? Can I build a swimming pool or tennis court? Can I conduct a business in a spare room? Will there be any legal restrictions that will impair my ability to sell the property? Can the utility company build a high-tension transmitter in the back yard? It should be clear that the guidance and advice of a lawyer could avoid a very costly mistake.
6. Checking out the zoning.
The title search does not tell the buyer or seller anything about existing and prospective zoning. Does zoning prohibit a two family home? Does the deck you are planning violate zoning ordinances? There are invariably some questions that will require you to call upon a lawyer for the most direct and efficient response to your inquiry.
7. Reviewing the survey.
Finally, there is the necessity of having a survey map of the property, which is a necessary adjunct to a title search. A lawyer is trained to review this survey, which may give rise to future problems. For example, your neighbors’ fence or driveway may encroach upon your property or vice versa. A garage may have been built on a municipal street. Should you accept title? Will a lender give you mortgage with these encroachments?
8. Conducting the closing.
The closing is the event which is the “moment of truth” of the purchase and sale transaction. The deed and other closing papers must be prepared. Title passes from seller to buyer who pays the balance of the purchase price. Frequently, this balance is paid in part from the proceeds of a mortgage loan. A closing statement should be prepared prior to the closing indicating the debits and credits to buyer and seller. An attorney is helpful in explaining the nature and amount of closing costs. Final documents including the deed and mortgage instruments are signed. An attorney is necessary to assure that these documents are appropriately executed and explained to the various parties.
The closing process can be confusing and complex to the buyer and seller. Those present at the closing often include the buyer and seller, their respective attorneys, the title closer (representative of the title company), attorney for lending institution and real estate broker. Documents need to be recorded; various transfer taxes need to be paid, and provisions for insurance and other incidents of ownership need to be concluded. There may also be last minute disputes about delivering possession and personal property or the adjustment of various costs, such as fuel and taxes. Here a lawyer’s advice and guidance is essential.
9. Condominiums, cooperatives and HOAS.
Special mention needs to be made about condominiums, cooperatives and homeowners associations. These involve forms of ownership that are treated as securities under New York State law and require special documents that are complicated and should be reviewed by an attorney. Condominium declarations, proprietary leases, and by-laws are but a few of the complex documents confronting buyers of these forms of property ownership. The tax deductions and consequences with respect to the purchase of a condominium or cooperative also need to be explained by a professional that is familiar with these common ownership forms. It is obvious that throughout the process the interests of the buyer and seller will conflict. The broker generally serves the seller, and the lender is obtained by the buyer. The respective lawyers for buyer and seller will have no such conflicting loyalties and will serve only their clients’ best interests.
A lawyer’s advice and guidance is essential from the time you decide to sell or to buy a home until the actual closing.