PURCHASES AND SALES
CONTRACT
The typical real estate purchase or sale involves an agreement that is reached between the owner of a home, condominium or cooperative apartment and a prospective buyer. And most situations a real estate broker is involved in the purchase price is negotiated by producing a contract of sale executed by the buyer with the purchase price the buyer is willing to pay and other terms relevant to the transaction. The seller can either agree, reject or counter offer the purchase price and terms. This goes on until either the offer is rejected, or the contract drafted by the realtor is agreed to by both buyer and seller.
Sometimes the purchase or sale is created without a real estate broker. In this situation the owner and the buyer agreed to terms and need to have a contract drafted. The unwritten tradition in New Jersey is that the seller’s attorney prepares to contract. However this is not always the situation. The contract is drafted and reviewed prior to signing by both parties.
The contract drafted by the attorneys in a situation where there is no real estate broker involved is finalized upon full signature by both parties. However, the contract drafted by the real estate broker is not finalized when it is fully signed, because it is subject to “attorney review”.
ATTORNEY REVIEW
New Jersey law provides that a fully signed contract prepared by a real estate broker is subject to a review commonly known as “the attorney review”. This gives both the buyer and seller the right to have an attorney review the contract and either accept it, reject it, or propose modifications to it. It guarantees that the buyer and seller will not enter into a binding contract without the benefit of input from an attorney representing them and providing proper advice on the terms that should be in the contract.
Many people and a lot of real estate brokers misinterpret the attorney review. The misinterpretation is that they believe the attorney review has to be completed within the three business day period after the contract is fully signed. The review does not have to be completed within this three-day period, and typically it does not. The only requirement is that one attorney makes an objection to the contract during this time period. Thereafter, changes to the contract are negotiated by both attorneys until the contract is either finalized or canceled.
You do not want the attorney review to drag on and on. On the other hand, you will make sure that the contract protects you the way it should. Together with my staff, I use the experience I have to make sure the attorney review is completed effectively and quickly.
HOME INSPECTION
The home inspection phase of the real estate closing is usually done upon completion of the attorney review. The buyer hires an engineer or a home inspection company to evaluate the condition of the home. The inspection focuses on the structural integrity of the home, the electrical, plumbing, heating and air-conditioning systems, and the overall condition of all aspects of each and every room in the house. Other common inspections and tests are usually done, including a termite and pest inspection, a radon test, and if applicable an inspection and test of well water and the septic system. Some buyers will do specialized tests for the presence of mold, lead based paint, asbestos, and urea formaldehyde.
I recommend that a buyer carefully research the inspection company that is chosen to do each and every inspection. I have found that some companies provide a very thorough inspection, while others are not as thorough. Recommendations can be given by an experienced realtor, other homeowners, and me.
The home inspection phase of the real estate closing needs to be addressed immediately and aggressively pursued by the attorneys representing the buyer and seller. Negotiation of these results is very important, and no one wants to see this drag on for any longer than it has to. Experience is important and negotiating problems identified in these reports. I have this experience, which gives me the capability of providing accurate advice and negotiation tactics to achieve the best results for my clients in the quickest amount of time.
MORTGAGE LOAN APPROVAL
Almost all real estate transactions involve the necessity of financing the purchase through a mortgage loan. The buyer typically begins this process before presenting an offer to the seller, as part of a preapproval. All parties involved in the transaction want to know if the buyer is qualified for a mortgage loan. In addition, it is important to know how much money can be borrowed, in determining whether the buyer can afford to buy a particular home.
The preapproval is often misleading. The preapproval is usually given by a mortgage company in the form of a letter, based upon rough information is given by the buyer. Not all letters are identical in content. Some state but the approval is specifically conditioned upon the verification of the buyer’s financial situation, while others are silent on the conditioning. In either case it is important to remember that the preapproval is not an absolute. However, it is the best way available to determine whether a buyer qualifies for the needed loan.
The actual mortgage loan application is processed after the end of attorney review. The attorneys representing the buyer and seller must follow-up of to make sure their clients are diligently pursuing approval of their mortgage loan. The contract provides for a deadline, and most often states that either party will have the right to cancel the contract at any time after this deadline passes. An array of scenarios can develop from the passing of this deadline, and experience is needed to anticipate whether problems can and will develop for the clients. An inexperienced real estate attorney may forget to follow up on this important matter, which can lead to disastrous results for the clients.
Upon approval of the mortgage loan is important for both attorneys to obtain and review the written mortgage loan commitment letter that is issued by the lender. Sometimes when there is not enough time, a more informal mortgage approval document is generated. The attorneys must make sure that the loan is not conditioned upon anything out of the ordinary. This again is a reason why the buyer and seller must use an experienced real estate attorney, who can anticipate whether problems may arise from conditions made with the loan approval.
CONTINGENCIES
Contingencies are present in virtually all residential real estate purchase transactions. A contingency is written in the contract, and gives either or both the buyer and seller the right to cancel the contract and end the transaction if something specific happens or does not happen. It is designed to protect the buyer or seller, who either may not be able or not willing to continue with the transaction. On the other side, the problem with contingencies is that the contract is not a firm and binding contract until the contingencies are satisfied. Transactions are often canceled by either the buyer or seller, when a contingency cannot be satisfied. Examples of typical contingencies are the mortgage loan contingency and home inspection contingency. Other contingencies can be written in the contract.
The mortgage loan contingency states that the buyer has a specific time period in which to obtain a firm written mortgage loan commitment. The contingency typically states that either party shall have the right to cancel the contract after the specific time period expires. This protects the buyer who cannot continue with the purchase if a mortgage loan is not available. The mortgage loan contingency can be written in other ways, an example of which is stating that the contract automatically becomes void upon the passing of a specific time period. It is always my recommendation when I represent either the buyer or the seller that this contingency language never results in the contract automatically becoming void. The contract must state that cancellation has to be specifically done by either the buyer or seller.
A second example of a contingency is the home inspection contingency, which really encompasses all the inspections permitted by the contract, as discussed in the Home Inspection section above. The typical language for this contingency states that if the inspection reports reveal structural problems, evidence of pest infestation or damage, or major problems with the roof, plumbing, heating, air conditioning or electrical systems, then both parties negotiate and have the right to cancel the contract if an agreement is not reached. There is a variety of different wordings that can be also used to define what problems are included in this contingency. It is always my recommendation when I represent either the buyer or the seller that the typical language controls in the contract. I have found that trying to write a language other than the typical language causes more problems and delays and rarely benefits my clients. Usually, if there is a legitimate problem with a home, the buyer and seller work together to try to develop a solution so that the purchase transaction is not canceled.
A house sale contingency is being used more and more in real estate contracts since the early 1990s. The most basic house sale contingency language is used by a buyer and states that closing is contingent upon the sale of buyers present home. Sometimes a seller will want to contingency to state that closing is contingent upon the seller purchasing a home. Experienced real estate attorneys do not like house sale contingencies because closing can be delayed for a significant period of time, and in fact may never happen. When I represent either the buyer or the seller I advise my clients of these possibilities. If the house sale contingency benefits my clients, I will try to get the most basic language, but prepare my clients for a compromise that will probably be insisted by the other attorney. If the house sale contingency does not benefit my client then I prepare my clients to accept a compromise in the event I cannot have the house sale or contingency removed. I recommend a variety of compromises which are each designed to make sure that closing cannot be delayed for any extended period of time. Experience has taught me how to deal with house sale contingencies, and I extend my experience to all my clients.
AS IS
Many sellers want prospective buyers to know that they will not agree to fix problems with their homes. Usually this comes seller is willing to accept a purchase price below what they think is a fair price for the sale of the property. As a result, the seller wants an understanding called an “as is” clause in the contract. The basic language of this clause states that the property is being sold in “as is” condition.
While this is comforting language to the seller, it is often misinterpreted to be a binding agreement between the buyer and seller. I advise my clients, whether buyer or seller, that the “as is” clause is only a statement of intention and is not binding on either party. The buyer usually still retains the right to have all the inspections done that are part of the home inspection phase of the transaction. Often and I have seen the buyer request the seller to fix problems with the home, even when the contract provides the “as is” language, and the seller agrees to cooperate to some extent with the buyer. I do not discourage this language in a contract. However, I make sure to advise my clients that this language is only a statement of the seller’s intention.
TITLE REVIEW
One of the most important aspects of a real estate transaction, particularly from the standpoint of the buyer, is the review of title. The buyers attorney traditionally orders a title insurance commitment (sometimes called a title binder). The commitment is issued by a licensed title insurance company and provides a report on the status of title to property. This includes a proposal to issue title insurance policies necessary for the purchase, both to the new owner (the buyer) and to the mortgage lender providing the financing. It identifies the present owner of the property, a legal description which is designated by the title insurance company to properly identify the property being purchased, a list of requirements necessary to complete the transaction, and those matters which will not be insured. Attached to the title insurance commitment are copies of documents affecting the title to the property. These documents are the results of searches which are done on the State, County and municipal levels of government.
The attorney for the buyer is ultimately responsible for a proper review of title to the property being purchased. The sellers’ attorney also reviews title, and assists the buyers attorney in disposing of potential problems in the title insurance commitment, prior to closing. An experienced real estate attorney can analyze a title insurance commitment and deal effectively with all types of potential problems. In many situations there are problems that need to be dealt with prior to closing. The more experienced the attorney is in handling real estate closings, the better the chance is that the purchase will close on time, and without problems.
There is a minority position in northern and central New Jersey that endorses the use of title insurance companies to perform closings on purchase transactions. This has led some real estate brokers and agents, mortgage companies, and prospective buyers to believe that an attorney is not necessary to close the purchase transaction. I strongly disagree with this minority position that exists in northern and central New Jersey. In my experience I have seen enough examples of problems with title that would not be addressed properly unless the buyer is represented fully by an experienced real estate attorney.
CLOSING
Closing on a real estate purchase for both the buyer and seller is the final part of the transaction. For most it is a happy occasion, because one of the most important financial transactions in a person’s life is almost complete. In addition, a new home is soon going to be available to a buyer, and this is a dramatic change in a family’s way of life. On the other side, some closings are not pleasant, due to a variety of circumstances that have occurred during the transaction. Usually this is the result of a problem during the transaction between the buyer and seller over one of many possible unpleasant situations that arose at some point during the transaction. An experienced real estate attorney cannot guarantee that his or her clients will have a pleasant closing experience, because an unpleasant situation is usually out of the control of the attorney. I offer my experience to my clients with the knowledge that I will not be the cause of the unpleasant closing experience.
Nevertheless, it is my experience that more closings are pleasant than our unpleasant for the buyer and seller. This is a stressful time because there is a disruption in the way of life for both the buyer and seller, but both are excited about the change. Arrangements for money transfer, moving, new jobs, new schools, new utility accounts, making new friends with neighbors, and many other things add to both the stress and excitement that is felt in the culmination of the transaction.
The attorneys for both the buyer and seller are responsible to make sure the transaction closes and both parties are properly protected. In addition the buyers attorney is responsible to make sure the title insurance commitment requirements are satisfied, and the mortgage documents are properly executed, and that there is compliance with the closing instructions from the mortgage lender.
An experienced real estate attorney has to realize that the closing involves a lot of parties, and that there has to be a balance to make sure that everyone involved becomes satisfied. I have always made it a priority to make my schedule in such a way so I do not delay the closing date. I have realized that my clients will be very upset if they do not close on their expected closing date, due to problems caused by my schedule. Therefore, I make sure that I am always available to perform closings when requested.
POST CLOSING
After the closing the buyer’s attorney is responsible for a number or tasks connected with the transaction. All checks written at closing have to be sent, mortgage payoffs have to be overnighted, the mortgage loan documents have to be returned to the lender, and the Deed and Mortgage have to be recorded in a county recording office. The file continues to remain open until the buyer’s attorney receives back the recorded Mortgage and Deed, and that all liens have been properly discharged at the county recording office. Once all this is completed title insurance policies are issued and forwarded to the buyer and the mortgage lender. The file is then closed.
The Post closing responsibilities of the buyers attorney is not a small task. It is done for the most part behind the view of the clients, the realtors, and the mortgage lender. My office has developed a system to immediately deal with all of these tasks, and follow-up on recorded documents, with the intent to complete this part of the transaction and obtained title insurance policies as soon as possible. Some attorneys neglect to some extent the follow-up work that is necessary. I do not do that.