Martin & Raynor, P.C. - The Purchase of Residential Real Estate

The Purchase of Residential Real Estate
July 1, 2003

Martin & Raynor, P.C.
1228 Cedars Court
Charlottesville, Virginia 22903-4801
Telephone: (434) 817-3100
Fax: (434) 817-3110

The purchase of a new residence is for most individuals the largest single investment of their lifetime, and extreme care is important in selecting the home, entering into a contract for the purchase of the home, obtaining financing for the purchase and closing the transaction.

The process is complicated, legally and financially, and prospective purchasers should seek the advice of a competent real estate attorney. When meeting with the real estate attorney, a prospective purchaser should be prepared to make the meeting meaningful, and the prospective purchaser must ask questions which include the following:

Exactly what real estate and personal property is included in the purchase?
How should title vest?
What financing and payment terms can be arranged?
What, if any, liens are filed against the property?
How can the physical condition of the property be evaluated?
What is the status of the real estate taxes on the property?
Are there any easements or restrictions which affect the use of the property?
Are the utilities adequate for my use?
What will the situation be if the seller or builder fails to deliver as promised, and when promised?
Are there any local land use regulations which affect the property?
What are my rights and responsibilities under the proposed contract?

In this most significant transaction, a prospective purchaser should retain an attorney before entering into a contract of purchase for the best protection available. Even if the attorney is not involved before the contract is executed, a prospective purchaser should meet with an attorney immediately to review the contract and prepare for closing. It would be foolhardy for a prospective purchaser to risk closing the purchase of a residence without the advice of competent counsel.

A. Residential Contract of Purchase

The residential contract of purchase is a document by which purchasers commit themselves to purchase a residence and the sellers commit themselves to sell a residence. Even though most real estate brokers and agents use a printed form contract, there is no such thing as a typical form contract. Almost every contract of every different real estate broker and agent has its own particular provisions, which have an important effect upon the rights and obligations of both purchaser and seller. 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 purchaser should retain an attorney, either to review the contract or to draft a contract, with the interest of the purchaser being paramount. The real estate agent, even though he may be a buyer’s agent, is not licensed to practice law and is not qualified to provide legal advice.

To be enforceable, a residential contract of purchase must be in writing and an oral agreement is not binding. Oral representations not included in the contract also are not binding. To be an enforceable contract, a residential contract of purchase must constitute an offer and an acceptance and consideration must pass between the purchaser and the seller. All of the present owners must sign the contract and a contract signed by one owner is not enforceable against the other, even if both are husband and wife.

The residential contract of purchase should contain all of the terms of the transaction, including the following:

The names and addresses of the sellers and purchasers.
The purchase price and how it is to be paid, including the amount of any downpayment at the time of the execution of the contract.
Arrangements for financing, including the right of the purchaser to terminate the contract if he cannot secure the specific financing set forth in the contract.
The legal description of the property, including the address and tax parcel number.
A provision that title to the property shall be good and marketable of record, subject to reasonable easements, conditions and restrictions that may exist.
The condition of the property at the time of sale.
Date of settlement and possession.
Statement of the settlement costs for which each party is responsible.
Provision that the terms of the contract, particularly any warranties as to the condition of the property, should survive the execution and delivery of the deed.
Provision as to who bears the risk of loss if the property should be damaged prior to settlement.
The names and commissions due the sales agents, if any such agents are involved in the transaction.
Statement of any loan fees to be paid by the seller.
Statement as to whether the property is in a development subject to the Virginia Property Owners’ Association Act, and setting forth the requirements of that Act.
Statement required by the Virginia Residential Property Disclosure Act.
Statement required by the Virginia Condominium Act.
Mechanics’ and Materialmens’ Liens statement as required by the Code of Virginia.
Statement as to any matters known to the seller affecting adjacent parcels.
Title insurance availability notification.
Lead –based paint disclosure notification.
Notification as to whether the purchaser intends to occupy the property as his principal residence.
Statement as to the obtaining of information concerning any sexual offenders registered under the Code of Virginia.
Notification regarding settlement agents and settlement services.
Statement as to inspection of the residence.
Statement as to the condition of systems and appliances.
Statement as to the condition of any well or septic system.
Statement as to the inspection of the property for pest infestation.

The attorney for the purchaser will review these provisions in the contract and add any additional provisions that he determines necessary to be included to protect the interest of the purchaser in the unique situation of the purchaser’s residential contract of purchase. The purchase price of residential real estate is usually paid in part by financing secured from a lending institution, such as a bank or a mortgage lender. Occasionally, the seller will finance a portion of the purchase price with deferred purchase money. On rare occasions, an existing loan will be assumable on the property.

The real estate purchase contract should include provisions with respect to the responsibility of the purchaser to apply for financing and to obtain financing, and the purchaser must adhere to the terms of the contract concerning the loan application and commitment types. If a real estate broker or agent is involved in the transaction, he may assist the purchaser in making application for a loan to purchase the residence.

Even though an agent is involved, the purchaser should seek advice from his attorney to ensure that the terms of the contract are met and that contractual arrangements with a lending institution are legal and fair. Some loans insured by the Federal government, either through the Federal Housing Administration or the Veterans Administration, may have a lower interest charge or extended terms of re-payment, but these loans may entail additional fees required by the lender to offset below-market interest rates.

Upon approval of the loan application, the lending institution will provide a commitment to make the loan. The commitment will be in the form of a letter that will set forth the conditions under which the loan will be made, including, for example, a requirement that the purchaser obtain mortgage insurance to insure the lender against a potential loss in making the loan (if the loan is 80% or more of the sales price), payment of the loan discount and/or loan origination fee, and the interest rate and terms of the loan.

After the commitment letter is signed, with the provisions to the satisfaction of both the lending institution and the purchaser, the final documents will be prepared, and a settlement date will be set.

B. Title

Prior to the closing, both the purchaser and the lending institution will want assurance as to the quality of the title of the real estate that the purchaser is obtaining. Primarily, the purchaser and the lending institution want to be assured that the seller owns the property and has the authority to convey title to it. Furthermore, there may be other matters affecting the title that would seriously impair the use and enjoyment of the property by the purchaser. During the period while financing is being arranged, the purchaser should arrange to have a title examination performed among the land records of the city or the county in which the residence is located, and order an examination of the title documents. This process includes not only an investigation of the land records to identify the documents affecting the title in question, but also a review and evaluation of those documents. The title examination may be performed by your attorney, or by a title insurance company selected by him. The title insurance company may then agree to insure the title against certain matters in the future (subject to such exceptions as may be included in the title policy). Even if the title insurance company performs the title examination and offers a title insurance policy, your attorney should examine the title and documents in order to form an opinion as to the quality of the title and to explain any potential problems to you.

In examining the title, your attorney will ascertain that the seller actually has good title, and that the seller has the right to transfer title to the real estate to you. Your attorney will review covenants, easements and restrictions on the use of the property, as well as any real estate tax obligations which are unpaid. Furthermore, there may be special assessments for public improvements, or covenants established by the developer or by a homeowners’ association, setting restrictions on the use of your property. Your attorney will review all of these documents and explain the status of the title and your rights, should you acquire an ownership interest in the property.

The purchaser should seek counsel from his attorney as to the advisability of obtaining an owner’s title insurance policy to cover his interest in the real property as the owner of record. Most lending institutions also will require that the purchaser pay for a lender’s title insurance policy covering the lender in case future title problems arise.

An attorney may also provide a written title opinion based upon an examination of the title documents among the land records, as to the marketability of the title.

In Virginia, title is usually transferred by a general warranty deed, and in such general warranty deed, the seller guarantees the title against the claims of any other persons. The attorney for the purchaser will review the deed to ensure that it is properly drafted and executed, and conveys marketable title.

In certain cases, title to real estate is conveyed by special warranty deed, and the seller is only warranting title against the claims of themselves and those claiming to hold title under them, but not against the claims of other persons.

The purchaser should also consult with his attorney as to the best method of taking title. For example, a husband and wife may wish to take title as “tenants by the entirety with full rights of survivorship as at common law, and not as tenants in common”. This means that if one spouse 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. A third method of taking title is jointly with survivorship.

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 purchaser has been assured of marketable title and has obtained financing, settlement of the transaction can occur.

C. Closing

Prior to closing, all of the documents relating to the closing should be carefully drafted by your attorney. These documents include the deed, the note which evidences the debt, the deed of trust securing the debt with the property which you are purchasing, the settlement statements setting forth an accounting of the transaction, any deeds of release or certificates of satisfaction releasing the property from liens held by previous owners or lenders, the truth in lending disclosure statement by which the lender discloses all of the finance charges, a physical survey of the property showing any building restriction lines, easements and other encumbrances upon the land, and any other documents required by the lender or by the particular requirements of the transaction.

The attorney for the purchaser should, of course, be responsible for drafting and reviewing all of these documents, to ensure that they are in proper legal order.

At the time of closing, all of the documents will be executed by the respective parties, and some documents will require that the signatures be notarized.

Lastly, at the time of closing, all of the financial accounting will be settled between the buyers, sellers, lenders and sales agents. The settlement attorney will explain the financial accounting, and the transaction will be completed.

After closing, the attorney for the purchaser will disburse all of the proceeds required for the transaction to the proper parties and will record the necessary legal documents in the Clerk’s Office of the Circuit Court of the city or county in which the residence is located.

All the funds collected at settlement must be disbursed to the proper persons within three days after the funds are collected and deposited in the attorney’s real estate settlement account.

The fee for the attorney representing the purchaser can be estimated in advance, and this expense will be modest in comparison to all of the other essential costs of the transaction, and in relation to the responsibility of the attorney for the examination of title, preparation of documentation and conducting the closing.

D. Conclusion

It is important to remember that the purchase of a residence is a significant event and will affect the family life and financial position of the purchaser for years to come. Over a lifetime, it is more economical to retain the services of an attorney from the beginning of a transaction, so that the process of purchasing a residence, including contracting, obtaining financing and closing, may be done precisely and properly. If done properly, buying a residence can be one of the greatest satisfactions in a lifetime.