What are some key issues for me to consider when reviewing a contract to purchase a home?
Few people realize that the purchase contract is the most important step in purchasing a home. The details of this agreement determine what you buy or sell and how you buy it or sell it. Before signing, read the agreement carefully and consider the following (not a complete list of issues but intended to give the reader a good start on things to consider):
1. What is a title examination or abstract? A title examination is a study of the records related to the ownership history of the property and sometimes of other matters related to ownership interests in the property. An abstract of title is a collection of public records relating to the ownership of a parcel of real estate. During the examination a title examiner reviews the applicable title information to determine who owns the lands, whether there are any defects in or claims against the ownership and whether any action is needed to make sure the purchaser obtains good record title to the property at closing.
2. What is title insurance, and why is it needed? A title insurance policy insures the status of title in the name of the owner of the policy. Title insurance policies are issued by title insurance companies. The title company contracts with the insured person named in the policy to protect against financial loss related to the title, as well as the cost of defending the title in court. The title company searches and examines documents related to the ownership of and items affecting the property prior to issuing a policy. It provides a source of indemnification to the named insured if he or she is damaged by a negligent or bad title search or examination and also from hidden defects that would not be discovered in a title search. For instance, a title defect resulting from a forgery would not be revealed in a search or examination of the public records but would be covered by the title insurance policy.
Prior to issuance of the title insurance policy at closing, a title commitment will be prepared. You may or may not be afforded the opportunity to see this document prior to closing, but you should make every effort to review it prior to closing. You should make sure to have your attorney (if you have one) review it as well. While there are many important parts to a title commitment, at a minimum you should be familiar with the following: (i) Schedule A identifies the type of policy being issued, the names of the proposed insureds and the current owners, and the legal description of the property; and (ii) Schedule B contains a list of items that must be satisfied in order for the title company to issue the policy of insurance and also contains a list of title matters (called "exceptions") that will be excluded from coverage, such as statutory real estate taxes and easements for utilities servicing the property unless deleted from the title commitment at the time of closing. If there are objectionable items in the commitment, you need to try to have them removed by the title insurance company before closing.
How should title be held? Make sure you carefully identify all parties taking title and how title is to be held. The following are examples of typical methods of holding title:
What is the difference between a General Warranty Deed, Special (Limited) Warranty Deed, and Quit Claim Deed?
What is a survey, and why should I pay for one?
A survey is a drawing of the property which should show any improvements to the property (such as buildings, driveways and the like), the boundary lines of the property, and any encroachments affecting the property (whether items encroaching on the property by third parties or encroachments by the property against a neighboring property). What details are included in a survey depends entirely on what was required of the surveyor in the contract hiring the surveyor, and what is implied by the certification the surveyor gives on the face of the survey. Surveyors have the ability, if asked, to certify many things, such as: (i) whether the improvements are all located within the boundary lines; (ii) in which flood zone the property is located; (iii) whether the structures are in compliance with applicable setback and height laws; or (iv) whether the property has access to a public right of way. Encroachments on the property may include: (i) utilities (such as water, cable, electricity, and telephone lines) and easements for them; (ii) another party’s right to enter upon your property (such as a common driveway that the property may share with a neighboring property); or (iii) structures not being conveyed with the purchase of the property that are on the property and should not be (such as the fence belonging to a neighboring property owner). Residential lenders usually require that a survey be obtained prior to closing, because a survey is the only document in a closing which confirms that the legal description in the deed matches the piece of property the buyer expects to receive with that deed. In some instances, if the current owner of the property has a recent survey of the property the lender will accept such survey (or perhaps a current recertification of the prior survey so long as there are no new substantial improvements to the property) and new survey costs may be reduced.
What is an easement? What are my rights and obligations under an easement?
What is an escrow and an escrow agent? What does it mean to have funds or documents in escrow?
An escrow agent is typically a third party designated to hold an item (usually funds, but sometimes certain documents, such as a deed and/or mortgages) for a certain time or until the occurrence of a condition, at which time the escrow agent is to hand over the item to another party. Typically the escrow agent will be the title company, and the funds and documents that they are holding include any deposits made under the contract to purchase the property, as well as the deed and the mortgage instruments. In many home purchase contracts, the initial deposit or earnest money will be held by an escrow agent until the closing. In some states, the entire closing happens through an escrow agent, with all funds and documents being collected and distributed in the manner required by specific and detailed written escrow instructions.
How does the buyer know how the land surrounding the property will be used?
Typically, the seller does not guarantee how the area surrounding the property will be used. Some purchase agreements ask the seller to warrant what the seller knows about surrounding property uses that might interfere with the use of the home, but many do not. If a buyer is concerned, he or she should contact the property appraiser or tax collector for the county in which the property is located and determine who owns the surrounding land, or speak to the zoning or planning department of your local municipality prior to purchasing the property to understand how surrounding uses may affect you. The title commitment only discloses information about the property being purchased and does not attempt to inform the buyer about surrounding uses. Sometimes a survey will identify the owners of any immediately adjacent parcels. The purchaser needs to take responsibility for finding out what uses may affect him or her. The buyer can ask the neighboring property owners if they know of plans to develop land surrounding the property. The buyer may also wish to talk with the building or zoning office of the local municipality to confirm the zoning of surrounding property so as to know what kinds of uses might be made in the future, although zoning can be changed.
The materials on this website are provided for informational purposes only, do not constitute legal advice, and do not necessarily reflect the opinions or views of the American Bar Association, the Section of Real Property, Trust and Estate Law or any member of the Section. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between any attorney and any other person, group or entity. No representations or warranties whatsoever, express or implied, are given as to the accuracy or applicability of the information contained herein. No one should rely upon the information contained herein as constituting legal advice. The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader’s facts and circumstances.