More Information for Consumers
A. Concerns with Buying a Home
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):
- Is the purchase contingent on matters such as the availability of financing on acceptable terms or the sale of the house which the buyer presently owns?
- Exactly what land, buildings and furnishings are included in the offer? Are appliances, certain fixtures and other personal property included in the purchase price?
- When can the buyer take possession?
- Is the seller required to provide good, marketable title? Marketable title is title that can be readily marketed (sold) to a reasonably prudent purchaser aware of the facts and their legal meaning concerning liens and encumbrances.
- Who pays for the examination of the title to the property in the event the offer is accepted? Who pays for the abstract of title or title insurance?
- Have utilities been installed if the property is new construction?
- Who pays for the cost of the survey of the property? Does the lender require a survey as a condition of the loan approval?
- What inspections are required by the municipality? Which party will pay for the inspection? Will there be a home warranty contract paid for by the seller? Should the purchaser conduct and pay for a separate home inspection? What kinds of disclosures is a seller required to provide to a purchaser, and what happens if those disclosures are not provided?
- If a mortgage is to be given, is there a tax or recording fee for the filing of the mortgage. If so, which party will pay that tax?
- If a loan is to be obtained from an outside lender, who will pay the loan closing costs?
- If termite damage is found, will the seller pay the cost of repairs?
- Are there any restrictions on the use of the property?
- If your offer is accepted, who bears the risk of loss if the property is damaged prior to closing?
- What persons (such as husbands or wives) are required to sign and accept the offer?
- Are any of the boundary lines in dispute?
- What are the remedies if the buyer or seller defaults under the contract?
- Are there Realtors® involved? If so, who pays the commission? Is the commission payable even if the sale does not close?
- Whose responsibility is it to pay for governmental special assessments that arise prior to closing?
- What type of deed will be conveyed? See D below.
B. Concerns with Title
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.
C. Manner in Which Title Is Taken and Held
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:
- Sole Owner. Under this approach, title is taken in the name of only one individual grantee and is freely transferable or subject to encumbrance by that grantee, subject to dower and/or homestead rights described below.
Example: John Doe, a single man, grantor, to Jane Smith, a single woman, grantee.
- Joint Ownership with Right of Survivorship. Title can be taken in multiple names under this approach. Each joint tenant owns an undivided interest in the entire property. The “survivorship” language means that if one joint tenant dies, that person’s interest automatically is transferred to the remaining joint tenants. Any joint tenant may freely transfer his or her fractional interest in the property during his or her lifetime, but any such transfer will terminate the survivorship aspects of the joint survivorship tenancy to the extent of the interest transferred. Equal ownership shares are presumed unless the deed states otherwise. For example, if there are two grantees, each grantee will own a one-half interest unless the deed specifies otherwise.
A joint tenancy is created and exists only if four essential characteristics exist: (1) unity of joint ownership and control; (2) the interests held must be the same; (3) the interests must originate in the same instrument; and (4) the interests must commence at the same time. If all or any of these characteristics do not exist, the owners will own the property as tenants in common.
Example: John Doe, a single man, grantor, to Able Smith, Jane Baker and Charles Jones as joint tenants with right of survivorship.
- Tenants by the Entirety. Title can be taken as tenants by the entireties only by a validly married husband and wife. This form of ownership does not exist in all states. The words “husband and wife” in the grantee’s name makes this choice. If a transfer of this type is attempted but the grantees are not validly married, or if they become divorced, the title reverts to tenants in common. As tenants by the entirety, neither tenant may transfer his or her interest to a third party or encumber the property without both parties joining in the deed or mortgage. Upon the death of one party, the property automatically becomes the sole property of the surviving spouse. This is a common form of ownership among married couples, except in community property states. In community property states, the husband and wife presumptively acquire the property as community property and hold it as tenants in common or as joint tenants with right of survivorship.
Example: John Doe, a single man, grantor, to John Jones and Jane Jones, husband and wife.
- Tenants in Common. Title held as tenants in common, like joint tenants, allows title of the entire property to be held in multiple names. Title is also freely transferable or subject to encumbrance (as to the transferring tenant’s own interest) by each tenant. However, there is no right of survivorship in the surviving tenants upon one tenant’s death. Also, note that equal percentage ownership is presumed unless the deed specifically states otherwise. For example, unless the deed states otherwise, if there are three grantees, each grantee will own a one-third interest. It is always best to state each co-owner’s percentage ownership interest in the deed to avoid any uncertainty or misunderstandings.
Example: John Doe, a single man, grantor, to Jane Smith, Sam Wilson and Tom Baker, in equal shares as tenants in common.
Or John Doe, a single man, grantor, to Jane Smith as to ½ interest, Sam Wilson as to ¼ interest and Tom Baker as to ¼ interest, as tenants in common.
- Title Conveyed in Trust for the Benefit of the Purchasers. Under this approach, legal (record) title is transferred to a trustee (for example, the grantee would be "John Doe, as trustee under agreement dated June 1, 2005"). Care should be taken in using this approach since there are more complex concerns involved.
- Special Marital Property Issues. This is one issue where you must find out if the state in which the property is located has special rules that will require a different statement of ownership or will automatically grant interests in ownership between spouses. California, Arizona and Wisconsin are examples of “marital property” or “community property” states, where statutes have an impact on the way in which title is held. The grantee’s interest must be accurately described with terms required by that state’s law.
D. Different Forms of Deeds
What is the difference between a General Warranty Deed, Special (Limited) Warranty Deed, and Quit Claim Deed?
- General Warranty Deed. A general warranty deed guarantees the grantor’s good title before the conveyance, and that warranty continues after the conveyance. The usual guarantees or warranties by the seller are: good title, freedom from encumbrance other than as specifically identified, and right of possession to the buyer as against all others. The warranty includes any claims arising during or prior to the grantor’s ownership.
- Special (or Limited) Warranty Deed. A special warranty deed, sometimes referred to as a limited warranty deed (and some states may have a different name for this form of deed), provides less extensive warranties than the grantee receives from a general warranty deed. Under a special warranty deed, the grantor warrants only against claims arising during the period of the grantor ownership but does not warrant against any claims arising prior to the grantor’s ownership of the property.
- Quit Claim Deed. A quit claim deed contains no warranties of any kind and conveys only the interest, if any, held by the grantor (for example, if the grantor actually had no interest to convey, the quitclaim deed would not vest any ownership in the grantee). The quit-claim deed is not typically used for residential real estate purchase transactions.
- Sheriff’s Deed. A sheriff’s deed is a deed granted at the end of a mortgage foreclosure, in which the sheriff, under the order of the court in the foreclosure case, grants ownership of the property to the successful bidder at the sheriff’s sale. These deeds are quitclaim deeds and carry no warranty because the bidder at the sheriff’s sale takes title “subject to all legal encumbrances” including any flaws in the foreclosure procedure.
- Fiduciary Deed. A fiduciary deed is a deed granted by a trustee or other fiduciary (often a court-appointed individual or entity) who conveys title to property pursuant to that grantor’s authority under a trust agreement or as the result of a court-supervised proceeding.
E. Survey Issues
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.
F. Easement Issues
What is an easement? What are my rights and obligations under an easement?
- Purpose of an Easement. An easement is an interest in land which is owned by a person who is not the owner of the whole parcel, such as the right to use or control a portion of the parcel, or an area above or below it, for a specific limited purpose (such as to cross it for access to a public road, to share a common drive with a neighboring property, or to install and maintain utility wires or lines). The land benefiting from an easement is called the dominant estate; the land burdened by an easement is called the servient estate. Unlike a lease or license, an easement may last forever, but it usually does not give the holder the right to exclusively possess, take from, improve, or sell the land. Some common easements may include: (i) a right-of-way; (ii) a right of entry; (iii) a right to the support of land and buildings; (iv) a right of light and air; or (v) a right to water. The owner of the servient estate is normally free to use his or her property as he or she chooses, provided that use does not impair the rights of the holder of the dominant estate to use the land covered by the easement.
- Easements Benefiting the Land. You may have an easement over someone else’s property for several reasons. One of the most common reasons may be for access to a public right of way for a property which otherwise might be landlocked. Check your survey or ask your title company if you are unsure of the purpose of any identified easement. Also, make sure that every easement benefiting your property over someone else’s property is reflected with the legal description included with Schedule A of your title insurance policy. One of the items insured by an owner’s policy of title insurance is legal access to the insured property.
- Easements Burdening the Land. If someone else has a properly recorded easement over my property, what are my obligations and rights with respect to that easement?
Your obligations to the party benefiting (dominant estate) from the easement over the property you are purchasing (servient estate) depend on the written agreement creating the easement.
If the survey of the property reflects a path labeled “easement” but no document is of record creating the easement, you will want to inquire as to where the surveyor obtained the information about this easement. If the unrecorded easement is shown on the survey, the title company will likely list this unrecorded easement on your title policy as an exception to coverage. That means that if someone were to claim the right to use this easement, your title insurance would not pay to resolve this issue.
G. Escrow Issues
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.
H. Zoning Issues
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.