Buying a home is a major decision for any individual or couple, and for first-time buyers, a range of financial and legal questions come along with this important milestone. If you have made the decision to buy a home, here are five legal issues to bear in mind as you approach the home-buying process.
"Contingencies" Contained in the Contract of Sale
The standard contract of sale on a home includes several conditions (or "contingencies") that must be satisfied after the contract is signed but before the transaction is closed. The contract will set forth a specified period of time (which can be up to several weeks) between the signing of the contract and the final closing on your home purchase. During this intervening time period, much of the focus is on meeting the various contingencies laid out in the contract. If a particular contingency is not satisfied, typically, and depending on the wording of the contract of sale, the party that is aggrieved by the failure of the contingency to be satisfied can call off the sale, or the parties can mutually elect to negotiate toward completing the purchase notwithstanding the initial failure of the contingency to be satisfied. Either a buyer or a seller can propose the inclusion of a particular contingency in the contract before it is signed.
Common contingencies are based on financing, inspections and insurance. A typical financing contingency conditions the final sale upon the criterion that you, the buyer, obtain adequate financing with which to buy the house. A buyer may wish to seek inclusion of an insurance contingency in the contract pertaining to specialized risks specific to the geographic location of the home, such as earthquakes or hurricanes. A standard appraisal contingency clause gives the buyer the opportunity to amend or cancel the contract if the home is independently appraised at a value below that of which is stated in the contract of sale.
Other less common contingencies pertain to specialized circumstances that affect the buyer or seller. For instance, a seller might seek to make the sale contingent upon the purchase of another place of residence. A prudent request by a buyer when faced with such a proposed contingency is to request a time limit on the amount of time that the seller has to line up their next home. Similarly, as a buyer, you can request that your purchase be made contingent on you selling your current home. However, unless you are operating in a uniquely buyer-friendly geographic environment (in an area with a glut of homes for sale), many sellers will balk at such a contingency or require that it be watered down with terms giving the seller flexibility if you get stuck selling your home for an extended period.
Inspection contingencies, also known as "riders", are important for buyers because they can protect the buyer against purchasing a home that has defects that are unnoticeable to the naked eye. Two types of inspection riders are typically used. The first gives the buyer the right to an inspection by an inspector selected and paid for by the buyer. If the inspector identifies defects, the buyer obtains a time-limited right to cancel the contract of sale. Because inspectors often find problems in homes, this type of inspection rider can give buyers additional time to decide whether they wish to follow through with the home purchase.
The second type is less draconian in its implications. As opposed to giving the buyer a right to cancel the sale, the second common inspection rider will give the seller time to cure, through repair, defects uncovered by the inspector, or to pay for the cost of making the repairs to the buyer.
Between these two types of inspection riders, the latter often gives rise to much more back-and-forth between the buyer and seller. Thus, while more draconian in its nature, giving the buyer the right of cancellation can be simpler and more efficient, and lead to a quicker closing process on the home (or quicker parting of the ways between the parties).
Although inspectors will typically charge a lower fee if the prospective buyer does not require that the inspection report be reduced to writing, a written report is typically required if the buyer wishes to cancel the contract of sale on account of defects revealed during inspection.
Ensuring That You Obtain Proper Title to the Property
Real estate, as a type of property, is different to personal property (property not touching or concerning land), in that the title to personal property may pass when the property itself changes hands. By contrast, the rights to the various components of real estate may be subject to ownership, leasing, or be otherwise affected by claims (or liens) that other people may hold on the property. The many possible claims on real estate include:
- Unpaid mortgages
- Outstanding court judgments
- Liens for unpaid taxes
- Liens of laborers who have performed work on the property (such as plumbers and persons supplying construction materials)
- Rights-of-way easements
All these potential claims can affect whether the seller can convey good title on the property. To determine who has actual title to the property, and whether there are any restrictive covenants that could limit use of the property, a title search should be conducted. A title search can be performed by an abstract company, a title company or an attorney. The search is conducted on public records of mortgages, deeds and other instruments that could affect the seller’s title to the property.
A title search can discover any breaks in the chain of title, dating to the ownership of the property by its original owner. Gaps in the chain of title may render any attempt by the person acting as seller to convey a good title void. Any defects in title should be corrected before closing. The seller is ordinarily responsible for remedying title defects.
Covenants and Government Regulations
Government regulations, such as occupancy or zoning laws, also affect the real estate you are about to purchase. As a buyer, you will want to understand the implications of these for your use of the property. There may also be common ownership association bylaws, or subdivision covenants, that restrict the use of the property. Such provisions could, for example prevent you from renting your home, or place architectural restrictions on your property. Older covenants may even contain restrictions that are unenforceable today (such as a purported restriction against selling your home to a member of a particular racial or ethnic group). Any such unenforceable covenant can be ignored.
Key Provisions of the Contract of Sale
Any contract of sale can have varying terms and may be drafted by either buyer or seller (or their respective agents or attorneys). The contract can include many provisions but could reasonably be expected to include many or all of the following items:
- The date of the contract
- The purchase price of the home
- The amount of the down payment
- The date when the deed will be transferred (the closing date)
- A legal description of the property
- A provision stating that the seller will provide good title to the home
- Any restriction or limitations that could affect title
- A provision for a walk-through inspection within a specified period before the date of closing
- All fixtures to be included in the sale (appliances, wall-to-wall carpeting, etc.)
- A discussion of any items seemingly attached to the property that the parties wish to be excluded from the sale
- A mortgage contingency clause (if the buyer intends to apply for a loan)
- An inspection rider
- An attorney-approval rider for both the buyer and the seller, if either or both parties are signing
- A provision for who is responsible for maintaining insurance until the closing
- A provision for paying utility bills, property taxes and similar expenses through the closing date
- A provision for return of the buyer's earnest money deposit if the sale is not completed
- The terms of any escrow agreement
- A provision for taking possession
- Signatures of the parties
The above list is not intended to be exhaustive and particular circumstances and conditions (as well as state law) may warrant inclusion of additional terms (or exclusion of one or more above terms).
The above information is neither legal advice nor a guide for buying a home nor a substitute for reference to applicable state law, and instead provides general information.