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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?
(An article by the New York State Bar Association)
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 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?
- 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.
- 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.
- 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 can not 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 is planned for
the property by the buyer be done lawfully? What happens if a buyer has an
engineer or architect inspect the property who finds termites, asbestos, radon
or lead based paint? What if the property is proximate to a hazardous waste
dump site? 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.
- 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 institution. The contract should contain
a carefully worded provision that it 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 is 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 mortgage 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.
- 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? Is the legal description 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
can avoid a very costly mistake.
- 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.
- 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 a mortgage with these
encroachments?
- 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.
- 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.
THAT'S WHY YOU NEED A LAWYER.
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 in cooperation with the Real Property Law Section.
Do
I Need a Lawyer?
An article by the New York State Bar Association.
Closing
Costs
Learn about closing costs associated with the purchase or sale of real estate.
Real
Estate Transaction Disputes
Our office handles disputes in connection with purchase/sale agreements, escrows,
fraud and real estate broker liability (including constructive fraud).
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