Real Estate Closings
Buying real estate is a complicated business. The answer to why you need an attorney is easy to understand by asking yourself a simple question: “Who at the closing table is loyal to you?” Many people are surprised to learn that real estate agents have no duty of loyalty to put the buyer's or seller's best interests ahead of their own. This is called fiduciary duty. A fiduciary duty is the highest standard of care. In a real estate closing only an attorney has a fiduciary duty to protect the interests of his client.
Likewise, a title company has no fiduciary duty either. A title company's duty is to write insurance policies without exposing their underwriter to any risk. This may result in your closing falling through, rather than any problem with title being solved. Another risk, is that the title company will simply exclude any identified title problems from coverage, leaving the buyer with liability.
Did you know that code enforcement violations and open permits are not even covered by title insurance? So they would not even be listed as an exception even though they exist.
Title insurance provided by your attorney would protect you from all of these risks. Out of everyone at the closing table, only your attorney is legally obligated to protect and advance your interests, and no one else’s. Attorneys not only represent you, but they keep your business confidential.
Alexander Patrick Johnson PLLC stands ready to represent you in your Florida real estate closing. Attorney Johnson has over twenty years of experience working with real estate investors in closing complex real estate closings, forming business entities and land trusts, and even serving as trustee of your land trust. Alexander Patrick Johnson PLLC is a title agent of Old Republic National Title Insurance Company (ORNTIC), which has been serving the real estate and mortgage industry for more than a century. Founded in 1907, it has a solid reputation and is an industry leader in many aspects.
The real estate sales transaction begins with the offer. The offer is generally made in the form of a real estate purchase and sale contract signed by the party presenting it for the other's consideration. A real estate purchase and sales transaction must be in writing to be enforceable. Any document that names the parties to the transaction, identifies the property, and states the price will suffice as a real estate purchase and sales contract. There are, however, two contracts that are widely used. The first is the FAR/BAR contract which is created jointly by the Florida Bar and the Florida Association of Realtors.The FAR/BAR contact should bear a blue imprint of the state of Florida. The second contract, more widely used in Broward County, Florida is created by the Realtors Association of Greater Fort Lauderdale and the Broward County Bar Association. This contract should bear the names of the aforesaid associations in red ink diagonally across the front. Review the legends for authenticity before assuming that the contract you are signing is a "standard" contract. There has been at least one instance in the author's experience of persons attempting to use contracts "forged" to look like these contracts, but with very different terms. The best practice is to review any contract word for word. If you do not care to do this, you may assign the task to your real estate attorney.
Two important points to be aware of at this stage are first that every term of the contract is negotiable and second that once the contract is signed by both parties its terms generally will be enforced no matter how unfair. So have your attorney review the terms before the contact is fully executed. One way to allow for this is to add to a contract "subject to attorney review."
Note that if the other party makes a change to the "contract," signs it and returns it to you, it is still an "offer " and not a contract. You may accept the offer by signing it without alteration, or make additional changes and return your "counter-offer" back to the other party. It only becomes a contract when the party receiving the offer signs without making any changes.
Be sure to date and initial all changes, and if the "contract" becomes confusing because of numerous changes, start over with a fresh one.
The contract controls how the transaction occurs so it is very important that there is no confusion as to what the parties agreed to.
- Seller: all of the owners of the property must be listed and sign the contract.
- Buyer: The parties listed are the ones liable on the contract. If the buyer adds "and/or Assigns" after his name the buyer may then have the right to sell the purchase contract to another buyer. Contracts are considered assignable unless they specifically provide otherwise.
- Conveyance: Standard contracts provide for the seller to convey the property to the buyer by warranty deed. There are, however, three types of deeds.
- Warranty Deed: the seller warrants (guarantees) that he is conveying full title to the buyer. The buyer should usually insist upon this.
- Special Warranty Deed: the seller warrants that he is conveying title in the state that he received it to the buyer. This is usually used when the seller obtained title through foreclosure and does not want to guarantee that the foreclosure itself was free from defects,
- which it often is not.
- Quit Claim Deed: the seller releases his interest in the property to the buyer. This does not state that the seller had any interest to begin with, however, just that he doesn't anymore. This is considered to be an officially "suspicious" source of title in south Florida. Note that quit claim deeds are legitimately used to extinguish potential interests such heirs when purchasing from an estate. The buyer should also note that if he gets title insurance, the type of deed is more the title insurer's problem then his.
- Agreement for Deed: There is no such thing in Florida, which is why it says there are three types of deeds above. The idea of an agreement for deed is that the buyer pays for the property in installments but does not get a deed from the seller until the last payment is made. In Florida, the courts will reform any such attempted arrangement into a deed with a seller mortgage, and direct the seller to the foreclosure clerk. Seller's seeking to do this are relying on the buyer's gullibility, and might consider a lease-option instead.
- Property Description: the contract must describe the property so that it can be positively identified. The legal description is preferable to just a street address. Most legal descriptions follow this form Lot ___, Block _____, Plat Name, Plat Book ___, Page ____. The plat book and page are often presented together separated by a dash. If you are not sure of the legal description, have your real estate attorney look it up for you rather than have a potentially unenforceable contract. The other type of legal description is called "metes and bounds" and consists of a surveyors description of the property. It is very likely that you will not be able to copy such a description with out making a mistake, so make a copy if it and attach it as an addendum.
- Purchase Price: In the purchase price section of the contract the buyer usually specifies his financing contingencies. Possible options are: new financing, cash contract, seller financing, assuming an existing mortgage, and taking subject to an existing mortgage.
- New Financing: the buyer states not only the amount of the mortgage he seeks but may also specify the minimum terms. If the buyer does not obtain a mortgage commitment in the amount and terms on the contract, he may rescind the contract and be entitled to the return of his entire deposit. The paragraph providing for this is often titled "Mortgage Application and Qualification," and is one of the biggest "escape clauses in the contract. This provision typically states that if the buyer hasn't obtained a written loan commitment, which a pre-qualification is not, within a certain period of time, either party may rescind the contract, and the buyer recover his entire deposit.
To eliminate the mortgage contingency the parties could execute a "cash contract" in which there is no reference to buyer financing and the mortgage clauses are deleted. Note that a "cash contract" does not require the buyer to pay all cash, it just means that the buyer is not entitled to the return of his deposit if he doesn't obtain a mortgage commitment.
Seller Financing: can make a property especially appealing to a buyer as there is no qualification process and the closing costs are usually less. The seller is entitled to act as the buyer's mortgage company and loan the buyer any part of the purchase price. The seller's attorney then prepares a note and a mortgage, which is recorded, in the same manner as a conventional loan. Some contracts require the seller to use a "conventional" mortgage. The seller should not use a conventional mortgage unless the seller is a bank. The seller should not use a form mortgage. The seller should use a mortgage specifically drafted for the needs of an individual acting as a lender. Your real estate attorney can provide you with a suitable one.
If the buyer subsequently fails to make the required payments, the Seller can foreclose the mortgage in the same manner as a conventional mortgage company and recover title to the property. The seller should be sure that the buyer pays enough cash to cover the costs of a foreclosure action plus nine months of carry. Sellers should note that if the buyer declares bankruptcy it does not prevent a foreclosure, it only delays it.
Assuming an existing mortgage: if the seller already has a mortgage on the property, the buyer might be able to assume it. In this case the buyer contacts the existing mortgage company which will state the conditions and cost of assuming the loan. The buyer will then execute an "assumption" which will be recorded and make the buyer liable on the note. The seller is usually relived of further liability on the note. The buyer should remember to add himself as a loss payee on the property insurance and delete the seller.
Subject to an existing mortgage: means the buyer purchases the property from the seller and does not pay off the seller's mortgage and does not assume it either. Many mistakenly believe this is illegal. The resulting status is as follows: the seller is still personally liable on the note, the mortgage still shows on the seller's credit, the mortgage is still a lien against the property, the lender has the option of declaring the note to be immediately due in full.
Wrap Around Mortgage: the existing mortgage remains and the seller lends the buyer an additional amount the total amount secured by a mortgage from the buyer to the seller. The buyer's entire payment is made to the seller, who makes the payment to the pre-existing mortgage. This protects the seller who is personally liable under the first mortgage. The buyer is at risk to the seller not paying the underlying mortgage. If the parties have not obtained the consent of the underlying mortgage to do a wrap around mortgager, then the underlying mortgages will probably have the right to declare that note immediately due in full.
The deposit is generally the seller's sole relief if the buyer breaches the contract. As the seller, be sure the deposit will cover your carrying costs until the closing date plus time to re-market the property. Back up contracts can reduce your exposure to a buyer's default. Some sellers even use "first to close contracts" in which the property is sold to the first buyer to make it to the closing table. Note: that if a seller executes multiple "first to close" contracts be sure the buyers are well aware of it.
As the buyer, never pay a deposit directly to the seller, as it will not legally be in escrow, and you are much less likely to ever recover it. Also realize that your recovery of your deposit, even if legally justified is often objected to by the seller, requiring expensive arbitration's and litigation - paid for out of your deposit. So the buyer should attempt to minimize the size of the deposit. The initial deposit made at the time of contract should be minimal. Only after the buyer has performed his professional inspection of the property, which may authorized him to rescind the contract, should the buyer make a substantial deposit.
You may see "deposit by note" on a contract. This is very much the same as no deposit at all.
Time Period: The contract will provide for a period during which the buyer may inspect the property. When the time period is up, the buyer is barred from raising any repair issues. If the buyer has not satisfied himself as to the condition of the premises by the expiration of the repair period, modify the contract to extend the inspection period, or consider using your right under the inspection provision to rescind the contract and start over.
Deductions: the default provisions of most "standard" contracts provide for a deduction for repairs identified as needed, of 2 or 3 % of the purchase price. This means the buyer can reduce the purchase price by up to 3% for all of the defects he can identify, but may not rescind the contract unless repairs exceed this allowance. Even new construction will have some of these, and older homes many. Consequently many sellers consider contracting for a "zero" repair deduction. This means that the buyer may rescind the contract after the inspection, but if he does not, there will be reduction in purchase price. With a zero repair allowance though, the seller is still warranting the house to be in habitable condition, where as in an "AS-IS" contract there is no repair deduction, and the seller is NOT warranting the condition of the property. Note that selling "as-is" does not permit the seller to intentionally conceal a defect from the buyer.
Closing Date: the date on which the buyer must perform by purchasing the property. Note that if the contract does not say "time is of the essence" the buyer has not lost his deposit by failure to close by the closing date. The seller must then "demand performance."
Closing Place: Should be at the office of the entity insuring title in case any last minute changes need to be made at the closing table.
A recent trend has been for real estate brokers to add fees for themselves in addition to their commission to the contract. These are often described as "processing" or "handling fees" and are assessed by the listing broker against the seller, and even against the buyer! Because many brokers print up their own contracts with these fees included in the "boiler plate," the parties may not be aware of them. But when they sign the purchase and sale contract they are also contracting to pay these fees. The parties should carefully review the contract, and if you do not agree to pay these additional amounts, delete them from the contract.
Closing Costs: are your title insurance related expenses of closing. They are :
Title Search: theoretically, the cost of generating the search of the county records.
Title Examination: theoretically, the cost of labor to review the title search.
Tile Insurance: the premium for insuring the property and the mortgage lender against title defects. The State of Florida has established the minimum rate for title insurance, which is called the "promulgated rate." This is $5.75 per $1,000.00 of insured value up to $100,000.00, $5.00 per thousand up to a million, $2.50 per thousand up to five million, and $2.25 per thousand up to ten million.
The contract often allocates these costs by stating for example seller shall furnish buyer a title abstract, which means the buyer pays for the other two, title exam and title insurance, and that the buyer's title company will bill the seller for the cost of the search. If the contract states that the seller shall provide a title insurance commitment, then the seller hires the title company and pays the search, exam, and owner's policy, and the buyer pays for the lender's title insurance and post closing title update.
In general it makes more sense for the buyer to assume the responsibility for the title insurance, as the title insurer has to work with the buyer's mortgage company. Consider factoring the additional share of the closing costs into the purchase price. The advantage of choosing the title agent yourself is to keep control of the closing, rather than risk the other party retaining an incompetent title company and jeopardize the transaction. Secondly, the party being billed by the other party's title company rarely gets a competitive price. I.e. if you are a seller responsible for the costs of a search, get a quote in advance.
Breach of Contract: as noted above, if the buyer breaches the seller may claim the deposit. If the seller breaches the buyer may sue for specific performance to force the seller to sell the property or get his deposit back. Note the comments on the effect of a Lis Pendens in the next paragraph if you are a seller contemplating breaching your sales contract.
In a breach of contract, the broker may also claim his commission. Review the contract to see if it provides for a portion of or all or the deposit to be used for the broker's commission. Florida law provides that brokers may not file a law suit against the subject property to collect their commission. You may, however, waive this right. Do not be surprised if the broker has saved you the trouble of having to waive it manually, it may already have been inserted into your "form" contract. Sellers should be aware that if a suit is filed against their property (known by the recording of a Lis Pendens, Latin for pending suit) they will not be able to sell it until the law suit is over. That will be many months at best. If you had a mortgage about to balloon, you may never get to sell your house. The broker's Lis Pendens will not stop a foreclosure.
In a breach of contract law suit, the contract usually provides that the loser pays the winner's legal fees. This is thought to act as a deterrent to filing frivolous law suits.
If the buyer is getting an FHA or VA mortgage the parties must execute an FHA\VA addendum to the contract. These mortgages substantially alter the rights of the parties and require the seller to pay many of the buyer's closing costs. The parties should thoroughly understand the consequences of this contingency before signing a contract calling for this type of mortgage.
Florida Law gives the purchaser of a condominium unit the right to cancel the purchase agreement and obtain a full refund of any deposits within fifteen (15) days of receipt of the condominium documents from the seller. Do not neglect to do this, as failure to do so will give a reluctant buyer an escape clause right up to the closing day.
In addition to the requirements for the purchase of real property generally, the buyer of a condominium must get a certificate of approval from the condominium association. This generally involves filling out an application for consent to transfer and appearing before the Board of Directors for a personal interview. The Board of Directors will then issue a Certificate of Approval, which must be recorded in the public records along with the Deed in order for the purchaser of a condominium to obtain title to the condominium unit. Increasingly, however, condominium associations have enacted extremely restrictive requirements obstensively to protect them from purchasers being unable to pay their assessments. Restrictions to look out for are limits on the amount of the buyer's mortgage, payments of assessments a year in advance, and extensive financial documentation. Your real estate attorney can assist you in complying with such requirements and in determining if the requirements imposed on you are in fact legal
Most real estate transactions involve one of, if not the most valuable asset you own. Surely, protecting your and your family's piece of mind is on the utmost importance. With this in mind, before you close, you must be sure that "title" (or record ownership) to the property will be free and clear of all defects and encumbrances. Much like other types of insurance protect your property against claims such as fire, wind and flood, Title Insurance protects your property from claims against it, such as:
· Others claiming ownership after you purchase
· Forged documents
· Challenges to past sales transactions in the chain of title
· Interests of spouses
· Clerical error at the courthouse when earlier documents were recorded
· Incorrect legal descriptions
· Instruments signed by minors or mentally incompetent persons
· Title taken as a result of an improperly probated will
A Florida attorney can provide title insurance to the purchaser of real estate, providing a guarantee by way of the title insurance policy that you will obtain free and clear title to the correct property. If such an encumbrance is identified, your title insurance will pay for it, up to the purchase price of the property, and/or provide your with a free attorney to eliminate the encumbrance from your property.
Mr. Johnson is an authorized agent for the Attorney's Title Insurance Fund, the most widely recognized and accepted title insurance company in Florida. Unlike many underwriters, Attorney's Title Insurance Fund, Inc. maintains a computer data base of all title insurance policies, which any Fund Agent can access. This way you can easily get a copy of your title insurance policy even if your original closing agent cant be located, or you have lost your closing documents.