You may be looking to buy a new home. A common mistake many people make after finding a home they like, is to sign a purchase agreement, also called an offer to purchase, and then bring the signed agreement to their attorney for review.
Once you sign the offer to purchase and it is accepted and signed by the seller, it is real estate purchase agreement that is binding upon both you and the seller. There is little that an attorney can do to revise or amend the terms and conditions of the signed agreement to protect you, other than make sure that the purchase goes in accordance with the agreement you already made.
The real estate purchase agreement is the single most important document in the purchase of real estate. All of the terms and conditions that govern the purchase are in that agreement. The time to have a real estate purchase agreement reviewed by your attorney is before you sign it.
The following are some issues to address when considering the purchase of a home:
Know what you are buying.
Make sure you know exactly what you are buying. The address and/or legal description should be clearly marked in the purchase agreement. If it is not a condominium or a lot in a recorded plat, list the acreage on the agreement. It may be helpful to list the tax identification number of the parcel to help identify it.
All movable property such as appliances, window treatments, light fixtures, sheds, etc. that are being sold with the house should be specifically listed. You want to make sure that everything you expect to come with the house to actually come with the house
Have adequate contingencies.
With adequate contingencies in the purchase agreement, you do not have to go through the purchase of the property unless all of the conditions are met. If any of the conditions are not met, you can walk away from the deal and get your deposit back. In such circumstances, you could also have the seller fix or remedy the failed condition before you go through with the deal with the seller. Or you could use the failed condition to renegotiate the purchase price to cover the cost of the fix or remedy of the failed condition.
If you are going to have to finance the property, make the purchase agreement subject to a satisfactory mortgage loan on the property. You do not want to be stuck buying a property that you cannot afford. If financing falls through for any reason, you could cancel the real estate purchase agreement and get a return of your deposit.
For your protection, the purchase agreement should be subject to a favorable review of the title to the property, including deed restrictions, by an attorney experienced in real estate matters. If the seller cannot give you clear title to the property, you can walk away from the deal and get your deposit back.
The purchase also should be subject to a satisfactory review of a stake survey of the property. A mortgage survey is usually not enough to determine exact property lines. Make sure that you know where the four corners of the property are. I have seen discrepancies between fence lines and the surveyed property lines from nine feet on a forty foot lot to over one hundred and fifty feet on a ten acre parcel. Look for encroachments of the neighbors’ buildings or improvements onto the property. All buildings and improvements of the home you are buying should be within the boundaries of the surveyed lot. If there are problems with lot lines, encroachments or the property is not where you thought it was, you can walk away from the deal and get your deposit back or attempt to negotiate a reduction in the purchase price.
With most real estate purchase agreements, you are buying the property “as is”. An inspection of the home by a qualified inspector may uncover any problems, defects or other issues there may be with the home. A thorough review of the Seller’s Disclosure Statement would also be helpful in this matter. By having the purchase subject to an inspection, if there are problems with the home, you could avoid buying a money pit. Or you could have the seller make appropriate repairs. You could also negotiate a reduction in the purchase price and arrange for the repairs yourself. If the problems are bad enough, you could revoke the agreement and get your deposit back.
You may also want to do environmental testing, especially if you have concerns or a suspicion about any contamination. There are many farms that had above-ground fuel tanks for many years which were used to fuel farm machinery. There were a number of city homes which used underground metal tanks to hold furnace fuel oil. Occasionally, the tanks rusted and released fuel into the ground or there were spills during fuel transfers. In these situations, without the proper protections, you could end up with expensive environmental clean-up costs. However, with an appropriate contingency in place, when you discover environmental contamination, you would not be stuck with the clean-up costs. You could terminate the agreement and walk away from the real estate.
It is also a good idea to have the purchase contingent upon testing the home for the presence of radon, a naturally occurring cancer-causing radioactive gas that seeps into homes through basement or slab cracks or from crawl spaces. The Surgeon General has warned that radon is the second leading cause of lung cancer in the United States. If the home tests positive for radon, you could either have the seller install a radon reduction system, reduce the purchase price for you to have installed or get a return of your deposit and cancel the agreement.
If you are purchasing vacant land not serviced by sewer and/or water and plan on building a home on the parcel, the purchase agreement should be contingent upon a successful perk test for a septic field and the successful flow of water with a well. If you cannot put in a septic tank or cannot get water, you would not be stuck with a hunk of land which is not buildable.
Know how much it is going to cost you.
The purchase price is not the only cost in the purchase of a home. There are costs for the survey, inspections and testing. There are also many closing costs. Most closing costs can be paid either by the buyer or seller. If you are the buyer, you want most of these costs to be paid for by the seller. Title insurance and real estate transfer taxes are usually paid by the seller. You may want to put in the purchase agreement that the seller pay the title company and realtor closing fees and deed recording fees.
If you are the buyer, you may want the seller to pay all real estate taxes that are due and have no proration of taxes. If there is going to be a proration of taxes, make sure that the taxes are going to be prorated appropriately for the county in which the property is located. In some counties the taxes are deemed paid in advance and in others they are deemed paid in arrears. Also put in your agreement that all special assessments are to be paid in full by the seller at or before closing.
When you finance a home, there can be many costs associated with the loan and mortgage. These oftentimes may include fess for points, application, document preparation, broker/originator/lender, processing, tax service, underwriting, wire transfer, appraisal, attorney/closing/ settlement, credit report, flood certification, employment verification, inspections, postage/courier, mortgage survey, title search and title insurance. According to www.bankrate.com, the average total closing costs in Michigan in 2012 was $3,764. Get an estimate of these costs before you commit to a mortgage.
Make sure that you have appropriate advisors assisting you with the purchase of your home. Happy house hunting.
By: Matthew M. Wallace, CPA, JD
Published edited January 5, 2014 in The Times Herald newspaper, Port Huron, Michigan as: Avoid pitfalls when buying a home