In Connecticut |
© 1996, 1997, 1998 All Rights Reserved - John Benz Fentner, Jr.
Bear with me...this is a work in progress and it's probably going to take forever. It hasn't been proofed or edited yet so be prepared to be amazed by style and grammatical errors. If you have a question that I haven't gotten to yet, please feel free to drop me an Email and I'll try to jump ahead to that point.
Please don't forget to sign the
Caveat and Disclaimer
The material in this manual is for informational purposes only. It is not intended to be construed as legal advice or to create an attorney-client relationship. If you are contemplating a real estate transaction you should consult an attorney for specific legal advice on the specific transaction.
Note that this manual deals with Connecticut law and procedure which is very unusual as compared to most of the United States. Much of it won't apply to a transaction in another state. You will note that many times I will except Fairfield and Litchfield Counties from the general rule. That's because they border on New York State and much of the common procedure is more similar to New York than to what you would experience in the rest of Connecticut. It's not bad, in fact in some instances it's much better, but it is different.
There are only three rules to remember: First, there is no such thing as a standard deal and, second, it's always more complicated than you think. Somewhere along the line in every deal, someone will look you in the eye and say "Everything is wonderful, don't worry about it, it won't be a problem." That's usually just before they try to sell you the Brooklyn Bridge. (The Third Rule is TANSTAAFL...you'll find that in Appendix 3 below).
Table of Contents
Introduction
Chapter 1 - The Search
Chapter 2 - The Deal
Chapter 3 - The Bucks
Chapter 4 - The Table
Chapter 5 - Are We Done Yet?
Appendix 1 - Horror Stories
a. Dumb Things to Put in Contracts.
b. The Toxic Waste Dump.
c. The Skating Rink.
d. The Incredible Backward House
e. They took the WHAT??
f. The Bond for Deed - I thought it was MY house.
Appendix 2 - Myth and Legend
a. It's Cheaper to Close at the End of the Month.
b. The Quick Claim Deed.
c. Closing Costs.
d. The "Deed."
e. Deposit To Be Returned To Buyers At Closing.
Appendix 3 - TANSTAAFL
a. The "No Closing Costs" Mortgage
b. The Seller Pays....
c. The Seller Pays...Part Deux
d. Government Loans Are Cheaper
Introduction
Once upon a time, before the government decided to make it easier, cheaper and more understandable, the process of buying or selling a home was easy, cheap and understandable. In its simplest form a real estate transaction requires two things: real estate and money. It's nice to have something in writing of course (unless you have a big enough army to run off the trespassers) so the seller normally gives the buyer a deed which describes the land and says who is getting what so that ownership can be proved.
Back when land was a nickel an acre that was all it took, but these days most people have to borrow the money, which requires an IOU (promissory note) for whoever provides the funds. People who lend money usually aren't fools and, hence, they aren't easily parted from it. They want a little something extra like the right to take the land and sell it if the borrower doesn't pay them back. That's called a mortgage deed (or deed of trust in the hinterlands across the Hudson).
Last of all, since all people aren't as honest as thee and me (or have such excellent memories) there's usually some sort of settlement statement which shows all the money borrowed and paid, charges and fees (like the bank's fees and important stuff like the attorney's fee) and any adjustments (like taxes and down payment credits and the extra 10 bucks for the ugly sofa). Everybody gets to sign that so they can't come back later crying about how they were victimized.
Back in 1974 when we bought our home it was just that simple. We found the house (actually the broker found it but more about brokers anon), signed the contract (more about contracts anon too), applied for a loan (and sweated bullets for 29 days), went to the bank and signed five or six simple documents, had coffee and moved in. My lawyer charged me a hundred bucks (Thanks Fred), the bank fees came to another two hundred or so and the closing took fifteen minutes and would have been faster but the Seller was late. Thirty days from surly tenant to master of my own domain. And this was before I went to Law School and I didn't know a deed from a tree frog.
The times, however, they are a changin'...and it isn't quite that simple anymore. These days, the simple 2 page purchase contact is 4 or 5 pages, not counting all the addenda which run another 4 or 5 pages. The simple 2 page loan application is now 7 pages plus a dozen other forms the bank requires to keep the government and the financial industry happy, and that's not counting the pile generated by the mortgage broker if one is involved. There are still one or two brokers involved in the average transaction but now there are Seller's Brokers, Buyer's Brokers, Unaffiliated Brokers...you need a score card to keep track of who is who. And there are more lawyers than you can shake a stick at (if that's your idea of a good time).
In the chapters that follow we'll go through the process step by step. Real Estate Lawyers love to tell horror stories though, and you find those set off by links. You can skip over them if you choose but, unfortunately, you learn more from a disaster than you ever do from a book (or a Web site for that matter). Nothing is quite like the learning experience of discovering a toxic waste dump in the front yard the day before closing.
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Chapter 1 - The Search
The Buyer's Side
Well...you've finally decided to take the plunge. You've had it up to there with the screaming crazoids in the next apartment and you've been scrounging pennies for a down payment and reading real estate ads until you actually know what all those screwy abbreviations mean. Uncle Otto's bartender's brother-in-law the real estate agent is going to find your dream home and you're going to live happily ever after. Maybe.
Real Estate is a funny business. Otherwise sane, responsible consumers, who wouldn't buy an electric toothbrush without researching the product in Consumer Reports will happily drop a couple of hundred grand on the biggest purchase of their lives on nothing more than advertising and agent's puff. There's a sucker born every minute (as a local boy named Barnum never said) and there's a bad deal for every one of them.
This is not hard stuff folks...it's like buying that toothbrush. Take your time, shop around, read the label, do a little research, don't believe every happy story you hear from people who are making a buck off your deal. Most of all, remember that it's YOUR money and you are the one who will have to live with the purchase after the brokers and bankers and lawyers are long gone. Be a pain in the neck...you'll be surprised how much better people will treat you.
Want some good, free advice? Call an experienced real estate lawyer and get some advice before you start. Yes, of course, I'm biased. No, I won't be mad if you don't. I get to charge you a lot more later to fix the mess you could have avoided if you had asked first. There aren't a lot of crooks in the business but everybody in the deal has their own axe to grind and they aren't going to tell you anything that might scare you off if they can help it. And, believe it or not, there are actually people out there who aren't very good at what they do. Sign a sloppy, dumb or impossible contract, or apply for a mortgage with some sleazeball lender with a slick ad (or who has a side agreement with the real estate agency that you don't know about) and you'll get to learn some really neat, expensive lessons later.
Unless you are Bill Gates, there are three things you have to decide right away: How much you can afford, what kind of home you want and where you want to live. What you can afford is easy. It depends on how much cash you have for a down payment (5% to 25% depending on the type of financing) and closing costs, and how much income you have to make a mortgage payment (around 30% of your gross income). It's always going to cost more than you expect so underestimate a little.
What to buy is a little more complicated. There are single and multi-family homes, Condos and PUDs and really esoteric stuff (at least in Connecticut) like land lease planned communities and Cooperatives. For purposes of this discussion we'll stick to single family houses on a separate parcel of land. (I'll append some specific information on the other types eventually but the general rules are the same). Where to buy is purely personal...it depends on whether you want to live in the city or the suburbs or the country, how you feel about privacy, commuting, culture and government services, taxes and, most of all if you have kids, how the educational system is.
Once you've made the basic decisions, it's time to find a real estate agent. You don't have to do that, of course. You may find the home you want from the ads or by a referral from a friend, but most of the time, it will save you a lot of time and effort to have an agent beat the bushes and filter out the Multiple Listing Service to give you a range of choices. A good agent will also be able to look at your finances and give you an idea what you can afford and what kind of financing you can qualify for. A smart agent won't waste his or her time (or yours) showing you properties you can't afford. An agent in the area will also know about things like taxes, schools, services etc. Agents will also arrange for a multitude if things that would make you crazy, like home inspections, termite reports and water and septic system inspections. Good agents are worth their weight in gold, bad ones are...well...I digress...
Note: Traditionally, real estate agents are hired by the Seller to sell the property and the Seller pays the commission. In recent years the concept of Buyer's Agent has become more common. A Seller's agent owes a legal and ethical duty to the Seller, not to the Buyer, and cannot give advice on contract negotiations, prices etc. Buyer's agents supposedly give better service to Buyers although, in my experience, with mixed results. There's nothing wrong with the idea in principle, just remember that salespeople are salespeople no matter who they are working for. You do not have to deal with an agent at all if you choose and you certainly don't have to sign a representation agreement with a Buyer's agent. If you do choose to sign a representation agreement READ IT CAREFULLY and remove any language that requires YOU to pay the agent's commission if the deal blows up or the Seller won't pay. The absolute last thing you need as a Buyer is to get into a commission squabble and have your deposit money tied up for months or years. ALL AGENT AGREEMENTS ARE NEGOTIABLE.
There's only one way to find a good real estate agent and that's from personal referrals. Ask your friends, relatives and co-workers (or dare I say it? your lawyer) for the name of someone who did a good job for them. Ignore the ads, they are almost all canned puff pieces. Set up interviews. Go see their offices. You need to find someone you can be comfortable working with and you'll pick out the bozos quickly. ("Realtor" bye the bye, is not a generic term for agent. It's a trade marked term for agents and brokers who are members of the National Association of Realtors).
After that it's easy...you just spend the next month or so driving around looking at houses and arguing with your significant other over who likes which one better. When you finally agree on the house you want it's time to make the purchase.
The Seller's Side
Did you notice the paragraph in the Buyer's Side section above about contacting an experienced real estate attorney? It applies here too. Ask first or pay later...it's cheaper to ask first.
The Seller's side of the deal is comparatively simple. You want to sell. You want the best price. You don't want any hassles. You can sell yourself (and save the broker's commission) if you don't mind spending all your time showing the house to window shoppers who can't afford it. (And then get sued because you didn't comply with some obscure statute). You can sign up with a "For Sale By Owner" (FSBO) agency that will advise you and provide some forms and support. Or you can hire a real estate agent to find a Buyer which is the way most people go. Broker commissions in Connecticut are usually 5% or 6% of the sale price on residential properties but THEY ARE ALWAYS NEGOTIABLE. If an agent tells you that 6% is the standard commission, you need a new agent. Bear in mind that this works both ways. The less you pay, the less you get in the way of service. Although they are normally paid at closing, you are obligated to pay the commission when the agent brings you a ready, willing and able buyer. If you walk away at the last minute, you still get to pay.
When you hire a real estate agent you will have to sign a Listing Agreement (this is required by law). The Listing Agreement contains the time that the agent has to sell the house, how much the commission is and when you are obligated to pay it. All agents will present you with a Listing Agreement entitled "Exclusive Right To Sell". That means that the agent gets paid a commission if the house sells within the term of the agreement, no matter who sells it. If you sell it privately to Uncle Otto, the agent gets paid. Good deal for the agent and maybe for you if you don't have something else going.
There are two other types of Listing Agreements that you won't hear about unless you get pushy about it. One is the Exclusive Agency Agreement. Under this agreement, you agree that the agent is the only real estate agent you will deal with and, if another agent shows up with a Buyer you will still have to pay the agreed upon commission. Good deal for the Seller who can still sell on his own and save the commission. Bad deal for the agent because it means a lot of wasted work and expense if the Seller sells directly. This is the way to go if you have people who have expressed an interest in the property but haven't gotten around to making an offer yet. You can also except specific potential Buyers from the Exclusive Agency Agreement. Did I mention that THEY ARE NEGOTIABLE?
The third type of Listing Agreement is the Open Listing. This says that if the agent brings you a Buyer you pay the commission. You can still sell directly or deal with another agent if you want to. Most agents won't waste their time on these but they can be useful if you aren't in a hurry or don't trust the agent to do a good job.
Word to the wise: There are a zillion brilliant gimmicks to stiff the agent on the commission. The agent knows all of them (and so does his lawyer). Don't cheat at things you aren't good at. It doesn't pay. Cut the deal you want and stick to it. Did I mention that all of this is NEGOTIABLE?
Once you have retained the agent's services you can sit back and relax and let the agent do all the running. Well...not really. At this point you need to improve the product. Clean up, paint, wallpaper, carpet shampoo, etc., etc. Make it look nice. You can add thousands of dollars to a sale price by simply putting in some maintenance and minor repairs. Oh yes...send Rover and the Little Darlings to Grandma's House when the agent has an Open House.
Somewhere along the line, the agent will show up with an "Offer". Now it's time to make the sale.
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Chapter 2 - The Deal
The Buyer's Side
You've found the home you want. You've done the arithmetic and you're pretty sure you can afford it. You've looked around for financing and you're pretty sure you can qualify. It's time to make an offer to the Seller. In most of Connecticut (except Fairfield and parts of Litchfield Counties) this means that the real estate agent will prepare a contract form to be signed by the Buyer and presented to the Seller as an offer. If the Seller accepts, the contract is firm and you then go off to the mortgage lender to sign your life away.
(Note: People in the real estate business (and this includes bankers and lawyers) seem to have a genetic aversion to the term "contract". You will hear it called all kinds of things: "Offer", "Purchase Agreement". "Bond for Deed"...the variations are endless. It's a contract. Once you sign and the Seller signs, you are both locked in and you don't get to change it later unless both sides agree. Don't fall for the "We'll work that out later" line. )
A contract in its simplest form requires 3 things:
(1) A meeting of the minds. Both sides have to understand the deal and be legally and mentally competent to contract. Children under the age of 18 can sign valid contracts and enforce them but the contract cannot be enforced against them if they later choose to breach it. Mentally ill people who don't understand what they are doing cannot be held to their contracts.
By the way, make sure that everyone who owns the house signs the contract. You'd be amazed how many times people sign contracts to sell property that they don't own or that they own with someone else who they don't mention.
(2) Consideration. This usually means money but can also be something else of value. The Buyer can give the Seller a promissory note for a portion of the price, called "Seller Financing", or swap another piece of real estate.
(3) Legal purpose. You cannot legally contract to buy a crack cocaine factory no matter what you agree on with the Seller. More common is the situation where a home is sold with an In-Law apartment or home business office, only to find that the use is not permitted by the local municipality. If you are planning for Granny to have her own little apartment or to run a home business, check the local rules or plan on having an interesting conversation with the local zoning enforcement officer somewhere down the road.
The standard form Real Estate Contracts in use in Connecticut contain lots of other things though. They set out in great detail what sort of financing will be involved, when and where closing will take place, what other property will or will not go with the house, what kinds of inspections can be done and under what circumstances either side can get out of the deal. In preparing the contact to be submitted to the Seller you need to consider the following things.
(1) The price. (Big surprise huh?) The rules here are simple. You have to be able to afford it. Nobody ever offers (or expects to get) the listed price. Always offer at least 10% less than the asking price, or even less if the house has been on the market for a long time or if it is in lousy condition. Note that if you are dealing with a Seller's real estate agent he or she cannot advise you on price offers and they have to present any reasonable offer you make. Price gets negotiated. You may get lucky and have the Seller accept the first offer. More likely, the Seller will come back with a counter offer and you all get to squabble (politely!!) until you come to a firm figure.
(2) The Deposit. The deposit is paid in 2 parts: An initial deposit of $500.00 or so at the time you sign the contract (this is to weed out the window shoppers and show the Seller you are serious) and a further deposit after the Seller accepts. The total deposit will normally be anywhere from $1,000.00 to 10% of the purchase price. (It varies depending on the price range and what part of the state you are in.) The total deposit is to make sure you have an incentive to stay in the deal and to protect the Seller from loss if you walk away after he has incurred lots of pre-closing expenses.
Note on Deposits: The deposit money should always be held in escrow by one of the real estate agents or attorneys until closing. Deposit money should NEVER be given to the Seller ahead of time. The only possible exception to this rule is on new construction where the builder will use the deposit money to fund the construction of the home. There may be some justification for releasing a deposit if you are having a lot of options added that another buyer might not want, but, as a practical matter, if the deal falls apart or the Builder goes belly up, the chances of getting your money back are very slim. Don't do it without a fight.
For an interesting side issue see: Deposit To Be Returned To Buyers At Closing.
(3) The Mortgage Contingency. In simple terms, the mortgage contingency says that the Buyer is going to apply for a mortgage and, if the lender rejects the application, the Buyer can get out of the deal and get the deposit back (another good reason why it should be held in escrow). The contingency clause should state the amount of the loan, the interest rate and term and any points to be paid. It should also have a cut off date when the contingency expires so the Seller isn't left hanging indefinitely. Make sure the terms are for a loan you can afford and do not put in a 30 day contingency term and then go apply for a government insured loan that takes 3 months for approval. If the mortgage contingency date expires, get an extension or terminate the contract. Otherwise your deposit money is up for grabs if the lender rejects you later.
(4) The Closing Date. The closing date is when the mortgage and the purchase and sale are completed. The date depends on lots of things including whether there is another transaction involved (Seller Buying or Buyer Selling or both), whether there is lease term starting or ending, when the lender is ready to disburse the money, when the movers are going to show up etc., etc. People also commonly schedule closing for the end of the month in the mistaken belief that it is cheaper to close at the end of the month. Watch your dates...don't agree to do the impossible.
One of the most common misconceptions about closing is that the deal has to close on the closing date stated in the contract. All closing dates are subject to "reasonable variation" unless the contract contains the magic words "time is of the essence". Generally, such a provision is a bad idea as it is almost always used to beat up someone who has an unanticipated problem. In any event, the deal will not close until the lender is ready no matter what the Buyer and Seller may want. Closing dates are NEVER firm until the Lender agrees to close and the Buyer's, Seller's and Lender's attorneys agree on a date. Don't paint yourself into a corner by committing yourself to a tentative date. Murphy's Law is alive and well in the Real Estate business.
(5) The Extras. All form contracts have places to add in specific provisions. Common ones describe specific items that will go with the house or be removed by the Seller (appliances, furniture etc.), repairs to be completed or credited, inspections to be completed. The general rule is to be specific or have a problem later. See the Appendix I for "Dumb things to put in Contracts" for examples. The most important extras are for the various pre-closing inspections like well and septic, water quality, structural, radon and wood destroying insect. (Don't use the term "termite inspection" or you can plan on having a battle over whether carpenter ants are termites...they aren't). The inspection contingencies should specify when the inspections have to be completed and who pays for (and how much) the repairs.
(6) Tenants. If there are tenants (renters) in the property, the contract should include specific language making it the Seller's responsibility to see that they are out before closing. Sometimes that's not a big deal but a recalcitrant tenant who refuses to move can tie a property up for many months. There are probably dumber things to do than to buy a house with tenants because "they promise to be out this weekend" but I can't think of any off hand. Bear in mind also that it is not unheard of for angry tenants to thoroughly trash a property on their way out. See it empty before you pay for it.
(7)The Boilerplate. All contracts contain lots of fine print that set the customary details of the transaction, attempt to avoid common problems or comply with various governmental requirements. We'll hit on many of those as we go along through the rest of the transaction.
The Seller's Side
Most of the material in the "Buyer's Side" applies to the Seller although you won't much care about the terms of the Buyer's mortgage. You do want to make sure that the Buyer isn't applying for something impossible (like a 6% mortgage when the current rates are 8%). That just means that the house will be off the market for a month or two while until the Buyer backs out of the deal.
Watch out for provisions in a contract that require the Seller to pay bank charges like points, Buyer's closing costs or for inspections like termite or water tests. It is not uncommon for a Seller to be told that such charges have to be paid for by the Seller "because the Bank or the Government requires it". This is most likely to happen on VA or FHA loans insured by the Federal Government but it is absolutely untrue. The Seller has no contractual relationship with the lender (unless he is dumb enough to sign one which has been known to happen) and cannot be required to pay for anything. There are circumstances where you might want to pay something that is normally the Buyer's responsibility to sweeten the deal. Make sure to adjust your purchase price accordingly. See "The Seller Pays" in Appendix 3.
Beware of Inspection contingencies that don't set limits on the cost of repairs (you don't want to even think about what a new well or septic system costs) or allow you to back out of the deal if you don't want to spend the money. Be particularly wary of Radon inspections. The level of ignorance on this subject is incredible and the "remedial action" recommended by radon contractors is almost always grossly in excess of that recommended by the U. S. Environmental Protection Agency. Radon remediation can cost thousands of dollars to fix insignificant problems.
If there are tenants in the property it is the Seller's responsibility to see that they are out by closing. There is no legal way to do that quickly and inexpensively if the tenants can't or won't leave when you notify them that the property is being sold. Landlord Tenant Law is much too complicated to go into here but, if there is the slightest chance that the tenants may be a problem, get some legal advice right away. Don't wait for the "Gee...we were gonna move but...." sob story two days before closing.
If you are buying another house with the proceeds of the sale, make sure that the money will be available when you need it. Remember that you will have to deposit the proceeds check and have the money available to you to close the Buy. This is particularly important if you are going to another state and the funds have to be transferred to another bank. Avoid wire transfers at all costs. There are too many people involved in a wire transfer and one typo will send the money to Neptune for a week. (My record for a lost wire transfer is 9 days). If you must have a certified check for the sale proceeds, make sure to make your attorney aware of that well before closing. That is not the normal practice in Connecticut and arrangements have to be made well in advance.
While the Buyer is going bananas at the bank, make your arrangements to move, start packing and scheduling your tag sale and find a mover. Make sure that the house can be open for the various inspections that will be done. Watch the mortgage contingency date...if the Buyer isn't approved for the mortgage on time it could mean your deal is dying or will be substantially delayed.
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Chapter 3 - The Bucks
There is good news and bad news about mortgage financing. The bad news is that there is a huge amount of incredibly complicated paperwork, mostly generated by the government or by the financial industry. The good new is that most of it is worthless junk designed to fix problems that don't exist or to justify the jobs of superfluous bureaucrats. Some of it is important though and the trick is to know the difference.
The Important Stuff
The Loan Application. This is the form (usually five or six pages long) in which you give the lender all the personal and financial information they could ever possibly want. It is the basic document that the lender uses to determine whether or not you are qualified for the loan. You'll need to fill in all of your assets and liabilities, your income and investment status and basic information about the property you are buying. Be prepared. Dig out all of your bank statements, credit card bills, pay stubs and tax returns (the lender will almost always ask for copies of the returns). If you are self employed you may also have to provide a financial statement as well. Pay attention: Putting false information in an application to get a loan is a felony. It is called Bank Fraud. Don't do it.
Verifications. The people at the bank aren't stupid (well...not usually anyway) and they know that borrowers don't always give them complete or accurate information. You will also have to sign verification forms that give your employer and financial institutions permission to release information that will verify what you put in the application. You may also have to authorize the IRS to provide copies your tax returns. Once upon a time foreclosures were rare and many lenders did a sloppy of job of loan underwriting...then the industry collapsed in the late 80's and banks and the government ended up owning billions of dollars in real estate they didn't want due to bad loans. These days they check everything, often more than once.
The lender will also run a credit check on you and have the property appraised (that's what the application fee pays for). You generally won't see those unless you ask or unless there's a problem. They are interesting but of no great use to you. Connecticut law requires the lender to give you a copy of the appraisal if you ask for it. Bear in mind that the bank doesn't care how much the property is worth, only that it is worth enough to justify the loan amount. Consequently, it is not unusual for bank appraisals to come in at a value lower than what you think the property is really worth. Bear in mind also, that the appraiser is working for the bank, not for you, and you can't go back later and sue him if it turns out that the appraised value is wrong or if he missed some sort of defect in the property.
The Important If You Can Figure it Out Stuff.
When you apply for a loan from an institutional lender you will receive a pile of disclosure forms required by various government agencies. Being generated by the government, most of the material is (a) worthless and/or (b) totally incomprehensible. The lender will want you to sign the originals of all of the forms and give them back (you get copies). Go ahead and sign them. What you are doing is agreeing that you received the copies. No one (except maybe bureaucrats who live in a fantasy world anyway) seriously expects you to read, much less understand them. There is actually some valuable information buried in with all the junk but, unless you have spent a few years in the business you won't understand most of it.
Two common forms that you will receive are:
(1) The Truth in Lending Disclosure. This Federal Government form provides a series of numbers which you can use to compare various loan programs. They have little to do with your deal. In order they are: Annual Percentage Rate (APR) (which is not the interest rate), Amount Financed (which is not what you are borrowing), Finance Charge (which is not what the loan will cost you) and Total of Payments (which is not the total of your payments). The form actually does mean something and it actually does have a purpose but it's not what it looks like and it doesn't mean what you think. See "No Closing Cost Mortgages" in Appendix 3. Take it with a large grain of salt.
(2) The Good Faith Estimate of Settlement Charges. Another Federal form. This is exactly what it says: A Good Faith (we think it's right), Estimate (Guess) of Settlement Charges (what you have to pay the lender for the loan). The biggest problem with this form is that people like to add up the estimated charges and tell you "these are your closing costs". They aren't. Very often they aren't even close. See the Appendix II section on Closing Costs.
Worthless Stuff
Mortgage Lending is a very complicated business and, contrary to popular opinion, most mortgage lenders are not in business to make mortgage loans. They are in the business of manufacturing marketable financial instruments that they can sell to investors or other financial institutions (or of selling mortgage backed securities which is even more complicated). For your purposes the mortgage transaction is over (except for making the payments) when the loan closes. For the Lender, its less than half way complete.
In order to sell your mortgage, the lender has to comply with a vast array of investor requirements and a vaster array of government requirements (because no investor will buy a loan that doesn't comply with the law). Consequently, every loan package is crammed with forms and documents that mean absolutely nothing to you and that in some cases may be patently absurd. (My personal favorite is the "Name Affidavit" in which a husband and wife are required to swear under oath that they are the same person.) It's all in there for a reason, the reason has nothing to do with you (or even with reality) and you won't get the loan if the lender doesn't get the document. Yes, it's stupid that you have to give the lender your Social Security Number six different times on six different forms. Yes, it's stupid to sign three different Federal Government Forms for three different Federal Agencies that all say the same thing. No, you don't get to refuse just because it's stupid. It's the way the business works. (Are my biases showing yet?)
***
Once you have made your application, the lender runs it through a long involved process (which you don't need to know or care about). As the file is processed you will need to give the processors other documentation as it becomes available (like the various tests and inspections) You will also have to give them copies of everything they lose (and swear they never got). Anytime the lender asks you for something get it to them as soon as possible, even if it seems absurd. (Your file is sitting on somebody's desk with a "Missing Whatever" label and nobody is working on it.) Always keep copies of anything you give them and note on your copy the date and time and name of the person you gave it to. (My personal record is 4 lost water tests in one month. The fourth one I hand carried to the office, handed to the manager and got a signed receipt for. A week later the closer swore they had never received it).
Mortgage processing is like an assembly line. Anywhere from 3 to a dozen people will work on your file between the time you apply and the time you close. Mostly they are pretty good at what they do but each person only does a small part of the total job and generally doesn't know or care about the other parts. It's always a good idea to check in every once in a while and ask how things are going and if there's anything they need. Remember that "We have everything we need" really means "I have everything I need". The next person in line to get the file may want something else entirely. Always be polite. Nothing will get your file stuck in the bottom of the pile quicker than giving the processor a hard time. (Giving people a hard time is your lawyer's job. We know who to scream at and when it's necessary).
Once the processing is completed the file will go to the closer who will contact the Lender's attorney (or the Buyer's attorney if he or she is doing the bank work) and authorize the loan to close.
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Chapter 4 - The Table
Closing is when it all comes together. The bank is ready to turn the money loose, the Sellers have moved out, the Buyers have inspected the house and have their furniture on a truck in the parking lot and their closing funds in hand, the attorneys have all the paper work done (actually the secretaries and paralegals did it but we look good in the Law Suit with the 3" thick file), the real estate agents are there with the deposit money (and a bottle of champagne) and, if everybody did their job right, closing will be an hour of boredom, handshakes and old war stories. Closings are supposed to be dull and boring. Exciting closings (the ones where people start throwing ashtrays and insulting each other's mothers) are interesting for the attorneys and agents but less entertaining for the Buyers and Sellers. It is generally best to avoid those.
Pre closing - Buyers
Before closing your attorney will examine the title to the real estate, prepare a preliminary title report or proposed title insurance policy for the lender and let the Seller's attorney know what has to be resolved in the way of title matters at closing. You generally won't hear much about this except when there's a problem or something unusual like private deed restrictions or weird boundaries. I do a lot of title searching and I can tell horror stories by the hour but title problems are comparatively rare on residential properties. Your attorney will also tell you (in more polite terminology) that you would be an idiot not to buy title insurance for yourself. It's cheap and it covers you for a multitude of strange things that could otherwise come back to haunt you. Your attorney gets a nice piece of the premium as a commission (usually 60%) but it's still a good idea.
Most of the hard part is over with now. The only things you will have to bring with you are:
(1) Your closing funds. Your attorney will have given you an exact figure (provided all the information came in on time). You will need a certified or bank check in that amount made out to yourself. If everything comes off right you will endorse that over to whoever is handling disbursements (usually the Bank's or Buyer's attorney although it may be the Seller's attorney in the Southern part of the State). The check is made out to yourself in case something goes wrong and the deal doesn't close. You can then redeposit the money.
(2) A picture ID (like a Driver's License). Banks get really excited if the wrong people get the mortgage money. The Attorney malpractice insurers don't like it much either. Somebody will (or should) ask you for positive identification.
(3) Homeowner's Insurance Policy and receipt for the premium. Some lenders require that you deliver this before closing is even scheduled but, if they don't, you will have to bring it to closing. Take your mortgage commitment letter to the insurance agent's office and make sure that the bank's name appears on the policy according to instructions in the letter. (This is important. The bank will reject the policy if you don't follow instructions). Tell your agent that you need two copies. The lender will want the original (guess where the fire insurance policy would be otherwise if the house burned down).
(4) Commitment Conditions. There's always some piddly thing that didn't get to the lender ahead of time, like current pay stubs or your latest tax return. They will be listed in the commitment letter.
(5) Your checkbook. Every once in a while something crops up at the last minute that nobody knew about (or forgot). Be prepared.
Pre closing - Sellers
The Sellers generally don't have to bring anything to closing except the keys to the house (and the electric garage door openers). Your attorney will have prepared all the necessary documents. In rare cases you may have to bring money (as when there is a large mortgage or interim financing to be paid off) in which case you'll have to bring a certified or bank check made payable to yourself just as the Buyers do.
On most normal closings it's not even necessary for the Sellers to be present since the deed and other documents can be signed ahead of time. Your attorney can sign the lender's Settlement Statement for you. That's pretty common these days with out of state Sellers. You can also avoid being pestered for piddly adjustments. It's easy for your attorney to say "Sorry, my clients aren't available, take it or leave it." (It's fun too.)
Closing
Once everybody is at the table it's pretty simple. The Buyers sign a zillion documents (of which about 4 have any real significance), the Sellers sign 3 or 4 (of which 2 have any significance) and then look out the windows a lot. The Buyer's side takes a lot longer. Sellers can easily show up a half hour late and not miss anything.
Then everybody gets up, shakes hands, smiles a lot and gets on with their lives.
See how easy that was?
Chapter 5 - Are We Done Yet?
That's pretty much it. There's lots more to do but the Buyers and Sellers won't see much of it. The Buyer's attorney will update the title work, record the deed and mortgage on the land records and issue title insurance policies. The bank will spend a couple of days proofing and packaging the file and getting it ready for the servicing department or for shipping to the investor. The Seller's attorney will pay off the lien holders and get the Releases for recording.
Every closing generates a hay bale sized pile of paperwork and it's always possible for there to be typos and other errors. The big ones usually get caught early and the little ones get fixed (or ignored). Occasionally the lender or one of the attorneys will contact the Buyers or Sellers and ask them to correct or replace a document. Its generally no big deal unless it's a significant error on an important document (like the Mortgage Note). In most cases this just involves signing a corrected document or initialing a correction on the original. Nevertheless, you should NEVER sign any post closing documentation without discussing it with your attorney. Every once in a while some boob will try to cover up a serious mistake by trying to get you to sign something that changes the deal significantly. If you sign it, you get to be the boob.
For the Buyers and Sellers it's all over but the unpacking.
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Appendix 1 - Horror Stories
Horror stories are just that: the kind of stories that scare the bejesus out of buyers and sellers and make life a misery for everybody else involved in a real estate transaction. These situations are no fun but the are significant learning experiences. Most of these stories have a moral and it's very simple: learn from this experience and don't have it again. That's not always possible but the trick is to have as few of these to tell as possible.
a. Dumb Things to Put in Contracts
Connecticut real estate agents (except in Fairfield County) like to use "standard" contract forms with lots of boiler plate language and just a few blanks to fill in. As contracts go most of them aren't too bad. But any bozo can put something dumb in a blank. The following are samples of things that seemed perfectly logical to the Buyers and Sellers when they signed up.
1. "Dining room light fixture to be replaced". I've had 3 closings over the years that turned into pitched battles over this exact language. Who's going to replace it? With what? Who pays and how much? Like to guess how many versions of what "everybody understood" there will be when you get to closing? BE SPECIFIC!.
2. "Refrigerator to remain" Did anybody bother to look and see if there might be more than one? We had an hour and a half screaming match in New Haven one afternoon because the Buyers thought they were getting the new one in the kitchen and the Sellers thought they were leaving the old junker in the recreation room. (In 3 languages, with interpreters...it was like a Peter Sellers Movie).
3. "Closing to take place in 90 days". That's nice...so how come you applied to a mortgage lender who would only lock your interest rate and points for 60 days? And how come you contracted to buy in 90 days and sell your old house in 60 days? (Or, better yet, vice versa?). Planning to live in a tent for a while? Look at a calendar...see how easy that was?
4. "Washer and Dryer included". Sounds harmless enough doesn't it? Would have been except that the property was a condo unit in a complex that had laundry rooms and prohibited washers and dryers in the units. The agent who drew the contract knew that but added the provision because "the Buyers wanted it". Guess who got to pay the $500.00 adjustment when the Buyers were ordered to remove the washer and dryer by the Condo Association?
5. "Seller to repair ________ prior to closing." Think about this a bit. As a Buyer, you want any repairs to be of the highest quality because you are going to have to live with them. As a Seller you want them to be fast and cheap. In legal parlance this is called a conflict of interest. Avoid it. If repairs are necessary they should always be done by a contractor hired by the Buyer, preferably after closing. Either adjust the sale price to cover the repair cost or hold an agreed sum of the Seller's money in escrow to pay for repairs.
If repairs must be completed before closing (a mortgage lender may insist on this) the Buyer should be involved in hiring the contractor and make sure that any warranties or guaranties can be transferred at closing. Sellers also like to do their own repairs to save money. Remember that lender required repairs will be inspected by the lender and that repairs that have to comply with the building code (electrical, plumbing, structural) may require permits and municipal inspections as well. Don't have your deal blow up at the last minute because the lender or the Town won't approve the new electrical service that was installed by Uncle Otto the unlicensed electrician.
6. "Buyers to move in ___ days prior to closing" or "Sellers to remain in occupancy for ____ days after closing". This subject requires a whole separate horror story collection. (For a prime example see The Incredible Backward House story.) Suffice it to say that anyone who becomes an accidental landlord or tenant stands an excellent chance of (a) spending a lot of money they hadn't planned on, (b) becoming very familiar with the fine (and very expensive) arts of litigation and evictions and (c) learning to live in a tent.
Don't do it. BAD IDEA!
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b. The Toxic Waste Dump Story
This situation involved a residential property located on a busy state highway in Eastern Connecticut. It consisted of a home set back on the lot and a small building near the road side. The owner (who had died a short time before) had used the building for a woodworking shop and the buyers intended to live in the house and use the building for a small crafts business.
Everything was going along fine, all the inspections had come back clean, the Probate Court had approved the sale, the bank had approved the mortgage and the deal was scheduled to close. The day before closing I got a call from one of the real estate agents who had just discovered that there was "some sort of environmental problem" with the property that might delay closing. The agent and I spent the better part of the day tracking down the problem. What we determined was that a previous owner had used the little building as a printing shop. In the rear of the building, buried and not visible, was a 1000 Gallon underground tank filled with waste printing ink residue.
The tank was leaking and the State's Department of Environmental Protection (DEP) had found out about it and ordered that the site be cleaned up. Under Connecticut Law, the new owners would have been responsible for the costs and, of course, the mortgage lender wanted no part of a polluted property, so the closing was canceled forthwith.
The buyers still wanted the home, but not the environmental disaster, and the Executor of the Estate was willing to pick up the cost of the clean up (estimated to be around $35,000.00). Unfortunately, the Estate's only asset was the real estate and there was no cash to pay for the work. We made arrangements with the buyers' families to provide enough cash to close the sale with a provision that all of the cash be held in escrow until the cleanup was completed and the site certified clean. We then completed the sale and the buyers hired a contractor to do the work. When the cleanup was done, the contractor was paid from the escrow account and the rest of the money released to the Estate. We then got the bank to update it's mortgage approval, closed the mortgage, paid back the families and everybody lived happily ever after.
The moral to this story is that any time there is any indication that a residential property might have been used for a commercial purpose, it is extremely important to take a close look at environmental problems. They are rare on residential properties but the consequences can be staggering. P.S. Check for underground fuel oil tanks. They have to be removed and replaced with an above ground tank.
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c. The Skating Rink
This story concerns a residential property in Southern Connecticut which closed in the middle of the winter during a spate of extremely cold weather. The house had been unoccupied for about 6 months (the sellers had moved out of state) and had been cared for by the real estate agency. The buyers and the selling agent had done a walk though the morning of the day before closing and everything was fine at that time. When we arrived at noon the next day to close the deal, the listing agent showed up in hysterics.
The night before, after the walk though, the oil tank had run dry (oil company's fault, they messed up the automatic delivery schedule). The furnace shut down, the water pipes froze and broke and there was 4 feet of water in the basement...with a nice sheet of ice on it. The bank allowed us to close the deal, provided all the proceeds of the sale (which were substantial) were held in escrow to pay for repairs. The buyers lived in a motel for three weeks while the work was done. Last I heard (I was representing the buyers so we weren't involved in the litigation) the sellers, real estate agents, oil company, hazard insurance carrier and the agents' malpractice carriers were all suing each other's brains out over who was liable for the damages.
From the stand point of the buyers and sellers this was one of those unavoidable Acts of God...but the moral of the story is to do the final walk through inspection as close to closing as possible, preferably just before, to avoid nasty complications at the table or nastier surprises when the movers show up to bring in the furniture.
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d. The Incredible Backward House
Generally speaking homes should be bought and sold empty. The Seller should be out prior to closing and the Buyer should be able to examine the property before it's paid for and then be able to move right in. That's not always possible for a variety of reasons and it's not unusual for some minor adjustments to be made. There's a right way to do that, of course. It involves a written agreement setting forth exactly who has to do what and when. People who are buying and selling don't tend to think in terms of disasters (that's the lawyer's job...we get paid to be pessimists) and they will, with the best of intentions, get themselves into incredible situations.
This case involved a home in Western Hartford County which my clients were buying. The Sellers were having a new house built and, as always with new constructions, things were running behind schedule and the new house wasn't ready. The builder (who also happened to be the listing real estate agent) was at closing and swore repeatedly that the new house would be ready within 4 weeks. The Buyers weren't in a big hurry to move and their mortgage commitment was close to expiration so they agreed (over my objection) to let the Sellers stay in the house for 4 weeks after closing while the new house was finished.
I prepared an Occupancy Agreement which the Buyers and Sellers signed at closing in which the Sellers promised to vacate in 4 weeks, to pay the Buyers mortgage and taxes and to be responsible for any losses suffered by the Buyers if they didn't. Everybody was happy (and thought I was a crank for having a negative attitude). Closing took place and the Sellers were paid in full for the house.
Four weeks later, the new house still wasn't ready and the Sellers flatly refused to move out. By this time the Buyers (and their new baby) were living in the guest room at the wife's mother's house, their belongings were in storage and the dog was in a kennel. The Sellers refused to talk to the Buyers or let them inside the house and referred all inquiries to their attorney. The builder/agent wouldn't answer the telephone or return calls.
After talking to the Seller's attorney and the Town Building Inspector it became clear that the situation had turned into a total disaster. The builder had managed to reverse the house plans (the working plans had been prepared from transparent mylar plastic surveys and someone had copied the print from the wrong side resulting in a mirror image of the house in the working drawings given to the contractors.) The foundation had been put in and the house nearly completed before the Building Inspector caught the error and determined that the house violated the building setback lines (was too close to the side yard line). The Inspector refused to issue a final approval and the construction came to an abrupt halt.
I filed an eviction action in the local court asking that the Sellers be forced to vacate and to pay the agreed upon rent and penalties under the Occupancy Agreement. Litigation is time consuming and expensive though...it takes at least 2 months to force a tenant out of a rental property even if they don't contest the action, and the Sellers contested by filing motions and spurious claims to delay things. Things dragged on for another 6 months before the builder finally fixed the mess and completed the house so that the Sellers could move into it.
By the time the Buyers actually got to move into their home, they had lived in one room for 7 months and total back rent and litigation charges ran over $8,000.00 which the Sellers refused to pay. We would have collected that eventually but it meant more protracted litigation and costs. This being the unusual case where the listing agent and the builder were the same person, I resolved the money problem by filing a complaint with the State Real Estate Commission against the agent/builder and the licensed broker who employed him. Rather than jeopardize their licenses in the hearing process, they paid all the back charges and fees.
I've had about six seller holdover arrangements blow up over the years. Only one of them was a deliberate fraud by the Seller who had no intention of leaving. All of the rest were the result of well meaning people trying to help others out, and who were then caught in the meat grinder when some unforeseen disaster intervened.
Letting the Buyers in early can be a problem in two ways: If the deal falls apart the Buyers have nowhere to live and it's a project to get them back out. Also, no matter how many times you tell them that it's an existing home and purchased "as-is", all Buyers think it's a new house. Buyers who live in the house prior to closing will invariably show up at closing with a 3 page list of piddly problems that they expect the Seller to pay for. As a Seller, you should never let Buyers into the house unless accompanied by you or by the real estate agent. NEVER let them move in and live there (or move their belongings in) before closing without getting some serious legal advice.
Being a nice person is all well and good but sometimes it pays to be the bad guy. Say "no"...tell them your lawyer is a crank and he won't let you do it. We have very thick skins.
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e. They took the WHAT?
One of the most important things for a Buyer to do in a real estate transaction is to make a final inspection of the property as close to closing as possible. Aside from the obvious problems (it's nice to find out that the Sellers are really moving out and that the house hasn't burned down) it's a good way to avoid really unpleasant surprises. (See The Skating Rink story above).
People do all kinds of strange things though, sometimes because they are dishonest but usually just through ignorance or lack of forethought. One of the most common problems is the Seller removing something that the Buyer had assumed would remain. Sellers sometimes have some very strange ideas of what constitutes furniture or personal property and decide to take very surprising items. The professor who taught my real estate course in college liked to tell the story of the Sellers who removed the furnace and shipped it to their new house in Texas.
Over the years I have had deals where the Sellers removed hard wired light fixtures and smoke detectors, entire rooms of installed wall to wall carpeting, hot water heaters, sump pumps, trees and shrubs (and in one case an entire 40 foot garden including plants, soil and railroad tie edging), storm windows and doors, and built in appliances like stoves, refrigerators and air conditioners. In one case, the Seller's relatives, who were doing the moving, stripped the entire house of anything they could unscrew or pry off including light bulbs, electric fixtures (even the plastic covers on the wall switches), curtain rod fixtures, cabinet knobs and all the drawers in the work bench in the cellar. In one case the Seller siphoned all of the oil out of the fuel tank after the gauge had been read for the closing adjustment.
I've had at least two cases where the appliances in the house at closing were not the ones that were there when the contract was signed. (Would you be surprised to find out that they didn't work?). There have been endless instances where the Buyers found that some appliance or fixture wasn't working after closing. The general rule (except in new construction or deliberate fraud cases) is "You bought it, you own it". If the furnace is dead tomorrow, it's your furnace and you get to fix it.
Do the final inspection as close to closing as possible. Turn on all the appliances and make sure they work. Run the furnace and air conditioner. Check ALL of the stove burners and the oven. Run the water (and make sure the hot water is hot), flush the toilets, try the lights, check the basement and make sure it isn't full of water.
Make sure there isn't a 4' by 6' hole in the living room carpet where the couch used to be. (The carpeting on the stairs was worn so the Seller cut a piece out of the wall to wall carpeting to patch it and covered the hole with a couch while the house was on the market. The Buyers didn't see the hole until the Seller's furniture was moved out after closing. Want to guess how much luck they had in getting the Seller, who had moved out of state, to buy new wall to wall carpeting?)
Oh yeah...and find out where the electric garage door openers are...half the time they are in the glove compartment of a car that's on its way to North Dakota.
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f. The Bond for Deed - I thought it was MY house.
A traditional real estate transaction is pretty simple...the Buyer gives the Seller money and the Seller gives the Buyer a deed to the real estate. There are lots of other ways to do it though. One of the more common is the Bond for Deed (BfD) transaction.
A Bond for Deed is simply a contract to deliver a deed in the future after certain conditions are met. In it's simplest form it's just like any other contract to purchase...when you pay the money, the Seller gives you the deed. A BfD can be much more complicated. For instance, you can use them to set up an installment sale where the Buyer moves in and makes a monthly payment, pays taxes etc. After a period of time the property is paid for and the deed (usually held in escrow by a third party) is delivered.
A BfD can be very useful if used properly because it gives you a lot of flexibility in the deal. The bad news is that it's very often used to unload properties that can't be sold for one reason or another (like a bad title or environmental problems) or to sell a property to a Buyer who cannot get a mortgage (usually leading to the Buyer losing his shirt, and the house, when he defaults on the payments).
Once upon a time I searched the title (for a title insurance company) to a house in a little town in Eastern Connecticut. It was a single family home on a small lot, 50' by 100'. The home was supposedly owned by two individuals who were in the process of refinancing it. A little research turned up a somewhat different picture.
The property was in a little mill town where a large corporation (you would recognize the name) had a couple of hundred acres of wood land and a wood processing plant. The company had built 3 or 4 houses near the factory for it's employees. The plant shut down and the company moved its operation out of state.
The company put "Buyers" in the homes under 10 year Bond For Deed agreements which provided that the Buyers could move in and make a monthly payment for 10 years, at which time, if they made all the payments, they would get a deed. They had the option of paying off early which was what these owners thought they were doing by "refinancing".
Problem was, the BfD provided that the company didn't have to deliver the deed until the subdivision of their property into individual lots was approved by the Town Planning and Zoning Commission. The company never bothered to do that and, better yet, about a year before I did the search, the Town had instituted 2 acre minimum lot sizes.
The "Buyers" were living in homes that they thought they "owned", and had made, at that time, 8 years worth of payments. The house was located on a 200 acre unsubdivided parcel of land, subdivision had never been approved (and couldn't be approved for the little lots) and the corporation was long gone.
This is a fixable sort of problem...maybe...but the fix is expensive and time consuming. It's the sort of mess that should be avoided before it happens by drawing the deal properly to start with.
Moral to the story is: never get into a Bond for Deed deal without some serious legal advice.
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Appendix 2 - Myth and Legend
As with any complicated subject, real estate has its own collection of misconceptions and misinterpretations. The ones below have popped up over the years, sometimes leading to bizarre results.
a. "It's Cheaper to Close at the End of the Month"
Home Buyers, particularly first time buyers, are always short of cash. They have to show up at closing with a chunk of money to pay the balance of the down payment, settlement charges and adjustments. Consequently, they are always looking for ways to cut costs. One such device, (popular with real estate agents and mortgage lenders) is to schedule the closing for the last day of the month. There is a certain logic to this (mostly for agents and loan officers who are done with the deal when it closes), although it doesn't work the way most people think.
Interest on mortgages is paid in arrears. In other words, you pay the bank for interest that accrued in the previous month. The interest portion of the payment you make on October 1st, for instance, is for interest that you owe for the use of the bank's money in the month of September. Since most bank mortgages are structured to have the payments fall due on the first day of the month, borrowers must pay interest for the balance of the first month of the loan at closing. If you close on September 15th, you will pay "Pre-Paid Interest" for the period from September 15th through September 30th. There will be no payment due on October 1st since the interest for September was already paid at closing. By closing on the last day of the month the "Pre-Paid Interest" charge is reduced to one day.
The problem is that banks charge interest on a daily basis. You will pay exactly the same amount of interest on the loan from the day you close it to the day you finally pay it off, regardless of the day of the month that you close. The only difference is when you pay. If you close your loan on September 2nd, you will pay 28 days of "Pre-Paid Interest" at closing...but you won't have a loan payment due until November 1st, almost 2 full months away. If you close on September 30th, you will only have to pay 1 day of interest at closing, but the first loan payment will still be due on November 1st, only one month away.
How you schedule the closing date then depends on how you want to structure the payments. If you have the cash, closing at the beginning of the month gives you a two month breathing space before you have to come up with the first mortgage payment. If you are short of cash, closing at the end of the month will get you though closing with less money out of pocket...but you'll have to come up with that first payment in only 4 weeks. Either way, the cost of the loan is exactly the same.
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b. "The Quick Claim Deed"
This one pops up about once a year. It is based on two misconceptions: the idea that a piece of property can be owned by no one and therefore can be "claimed" (probably a holdover from the old days of Homesteading on Government owned land), and a mis-hearing of the term "Quit Claim Deed".
First of all, there is no such thing as property that is owned by no one. All land is owned, by the government if nobody else. Sometimes ownership may be difficult to determine and may even require litigation and a judgment of the court, but it's always determinable. No one can simply claim a piece of land because it seems to be vacant or abandoned.
Note that there is a concept called "Adverse Possession" which allows someone to claim title to a piece of property (or an easement or right of way) if it has been used or occupied for a certain period of time (15 years in Connecticut) and certain other requirements are met. This can be difficult to prove and requires a court judgment to be enforceable against the real owner and other parties.
A Quit Claim Deed is a type of deed that transfers only the interest of whoever signs it, with no guaranty or warranty of title. I could, for instance, give you a perfectly valid Quit Claim Deed to the Brooklyn Bridge, conveying all my right, title and interest in it. You would end up owning what I own, precisely nothing. On the other hand, I could give you a Quit Claim Deed to my home and you would then own my 1/2 interest in that, subject to outstanding mortgages and liens. Quit Claim Deeds have lots of legitimate uses but, if you pay for one, make sure you know what you are getting.
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c. "Closing Costs" "Closing Costs" is like pornography. Nobody can define it but everybody knows it when they see it. Most Buyers think it means what they have to pay at closing. "Closing Costs" is a sloppy general term that may or may not include any or all of the following:
(1) Settlement Charges: the fees you pay to the lender to get the loan like points, prepaid interest, appraisal, credit report etc. (all that stuff on the Good Faith Estimate).
(2) Escrows: Money that you deposit with the lender to pay your taxes, PMI, hazard insurance and other periodic costs.
(3) Other fees: Things that don't show up on the Bank's Good Faith Estimate because the bank doesn't know about them like your attorney's fee, inspection fees, repairs, Buyer Broker fees etc.
(4) Adjustments: If you are closing at the end of March and the Seller has paid the property taxes through the end of June, you will have to reimburse him for 3 months worth of taxes. Same with water, sewer, trash removal, fire district taxes, condo association fees and a dozen other things. If there is a fuel oil or propane tank you will have to pay for the fuel in the tank. The adjustments can't be calculated until a firm closing date is set. Depending on the time of year you may have to pay over a thousand dollars (sometimes much more) in adjustments. Sometimes you get lucky and the net adjustment is in your favor. Don't bet on it though.
(5) Personal Property: If you are buying furniture, appliances or other personal property from the Seller you will have to pay for them at closing.
(6) Balance of Purchase Price: If you are paying $100,000.00 for the house and getting an $80,000.00 mortgage, and have already made a deposit of $5,000.00, you will have to come up with the other $15,000.00 at closing.
(7) Ooops: In about one closing out of ten something crops up at the closing table that no one knew about (or forgot to figure in). "We'll sell you the lawn mower for fifty bucks" Bring your checkbook.
The important thing to remember is that NO ONE knows exactly how much money the Buyers will need to bring to closing except the Buyer's attorney and the attorney won't have a firm figure until the day before closing, if then. Everything else is guess work. An experienced guesser (like me, for instance) can usually come within a couple of hundred bucks after reviewing the contract, bank disclosures and doing some preliminary research into things like taxes and utility charges. Leave yourself some breathing space (or have a rich relative you can borrow money from in a pinch).
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d. The "Deed"
Laymen (and some professionals) have a lot of strange ideas about what a deed is, what it does and what it's good for. Misunderstanding of, or misuse of a deed can create some interesting (for the lawyers) but sometimes disasterous (for the Buyers and Sellers) problems.
A deed is simply a piece of paper which is used to evidence a conveyance of an interest in real property (real estate). There are many types of deeds used for many different purposes. In simple terms a deed states that the Grantor (Seller) conveys and interest to the Grantee (Buyer) in certain property (the land or other property being described in legal terms) in return for consideration (money). It is then executed (signed, witnessed, notarized as required by statute), delivered in return for the consideration and, usually, recorded in the local land records to show the world that the transaction has taken place.
The most common types of deeds are:
1. The Warranty Deed is used when the Grantor warrants or guarantees title. This is the most common type of deed used in residential real estate deals. Any residential buyer should insist on a Warranty deed unless there is a very good reason for the Seller not wanting to deliver one. A Warranty deed gives the Buyer the right to go back and sue the Seller later if a title defect turns up after closing.
2. The Limited or Special Warranty Deed is used where the Seller guarantees that he hasn't made title defective but makes no guarantee that there isn't some other defect. Government Agencies, Banks which acquire title through foreclosure and Relocation Companies love to use these because it limits their future liability. Sellers of this type like to hide the "limited" language down in the fine print of the "standard" purchase contract where an unsuspecting Buyer won't see it until it's too late to argue. A Buyer should fight for a full Warranty deed. Whether or not you get one depends on how badly the Seller wants to unload the property. The Government, Banks and Relo companies generally hate owning residential properties though, so "That's the only way we do it" is the beginning of the argument, not the end.
3. The Quit Claim Deed is used when the Seller conveys only whatever interest he may have with no guarantee of title. These are normally used in family situations (husband to wife etc.), to clear up title disputes like ambiguous boundaries or to release liens or other claims. A purchaser of real property should never accept a Quit Claim Deed without serious legal advice and a very good reason. See more detail on Quit Claim deeds in the Myth and Legend section: "The Quick Claim Deed".
4. The Fiduciary Deed is used to convey the interest of a person who has died or become incompetent or to convey property held by a Trustee. (These come in various flavors such as Executor's deeds, Administrator's deeds, Conservator's deeds and Trustee's deeds) Fiduciary deeds may, but usually don't contain full warranties or guarantees of title. When buying from an Estate or Trust it is imperative to examine the Probate Records or Declaration of Trust to insure that the fiduciary has the power to convey the property.
The most common layman's misconception is that there is a "deed" out there somewhere which contains a proper and complete legal description of the property which is to be conveyed and which states the identity of the true owners. Many times this is the case but there is absolutely no reason for it except coincidence. Many properties are acquired by multiple deeds (the land on which my house is located was acquired in two parcels, by two deeds from two different people). There is also no reason why the parcel of land to be conveyed should be the same as the parcel originally acquired by the Seller. It is entirely possible that a portion of the land may have been sold since or the boundaries changed in some other way.
There is also no reason to assume that any deed, even the most recent one found in the land records, correctly identifies all of the owners and their interests. Deeds can convey percentage interests in a parcel of land and they don't always say so on their face. I recently searched the title to a property which was owned by 3 family members who had ended up with 100% of the title by virtue of inheritance from 2 estates and 11 Quit Claim deeds from other family members.
The problem lies in what I call the "Run Down to the Town Hall and Get a Copy of the Deed" Syndrome. This is usually done by laymen trying to save a few bucks on legal fees but I've seen real estate agents, mortgage lenders and even lawyers make the same mistake. They will pick up a deed reference from the tax records or from a cursory inspection of the record, assume the Grantees in that deed are the owners and use the legal description in that deed to convey or mortgage property. It's a sure fire recipe for disaster.
The most egregious example I've seen lately has to do with a home in Northwestern Connecticut which has been owned by the same family since 1880. The property was originally acquired by the Great Grandfather in two parcels, by two deeds. Over the next 35 years he sold off two parcels. When he passed away, whoever did his estate copied the legal description from one of his original deeds (but missed the second one and both parcels out) and used that in the certificate that passed title to his heirs. Subsequently, title passed through 3 generations, always using verbatim copies of the bad description. The current generation now (think they) hold title by virtue of certificates from their parents' estates. But the certificates contain legal descriptions which essentially describe the land and house next door which their Great Grandfather sold in 1917.
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e. "Deposit To Be Returned to Buyers At Closing"
This language is usually found in contracts for deals where the Buyers are getting a low equity (small down payment) loan. On an FHA loan, for instance, the buyer may be putting down as little as $3,000.00 (and getting a $97,000.00 mortgage loan) on a $100,000.00 house. If they make a deposit of $5,000.00, there will be $2,000.00 "left over" after the deposit is credited against the purchase price. The contract language is supposed to insure that the excess deposit will be given back to the Buyers so that they can use the money to pay their closing costs.
The language is superfluous at best and, at worst, totally misleading. The Buyers always get credit for the full deposit and the deposit money is never given back to them directly. When computing final closing figures the Buyers' attorney will simply add up everything the Buyers have to pay (including the purchase price, and all other costs) and subtract out everything the Buyers are getting credit for (including the mortgage money, deposit and other credits and adjustments) to arrive at a final net figure. If there is a large deposit the net figure may come out as a negative number and the Buyers will get a check back but this is extremely rare.
The problem arises, of course, when the Buyers' attorney tells his clients that they need $5,000.00 to close and they show up at closing with no money because they think someone is going to hand them a check for the deposit. That never happens and the net closing figure they were given had already included the credit for the deposit.
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Appendix 3 - TANSTAAFL
TANSTAAFL is the acronym coined by Robert A. Heinlein in his novel The Moon is a Harsh Mistress. Its stands for the old catch phrase "There Ain't No Such Thing As A Free Lunch." Just as in the old saloon where the price of the "free" snacks was included in the cost of the drinks, there are no freebies in the real estate business. People love to get something for nothing though so "free gift" is always a great marketing tool.
a. The "No Closing Costs" Mortgage Loan
The most common use of the gimmick is the "No Closing Costs" mortgage loan. Check out the real estate or financial sections of your newspaper. You'll always find at least one or two lenders (there were two in my morning paper today) pushing this product. The idea is to play on the paranoia of consumer borrowers who are overwhelmed by the vast array of mortgage products by making a deal seem simple and inexpensive.
The rules here really are simple: Money is a commodity like any other and, like any other it has a price. Nobody works for free. Nobody gives away a product or service and any business that did would go belly up in short order. "The Bank pays for everything" is a myth. The consumer ALWAYS pays one way or another.
In a "No Closing Costs" loan deal, the lender pays out the up front costs for the credit report, appraisal, title work and other processing expenses. (They may collect an application fee that is "refunded" if the loan closes). Since they are buying those services in bulk they usually get a nice discount too. The borrower never sees any of that and often isn't even aware that it's being done. The loan settlement statement shows no charges to the borrower and the paperwork is short and simple. The happy consumer thinks he got a swell deal...and the bank makes out like a bandit.
Remember way back up there in Chapter 3 where I talked about that blizzard of government disclosure forms? I said the Truth-In-Lending disclosure really had a purpose but that it wasn't what it looked like. This is where it's important. Compare the Annual Percentage Rate (APR) for the "No Closing Costs" loan to another lender's loan where all the costs are itemized and billed to the borrower. Guess what? It's the same...or higher. All that's going on here is that the lender bumped the interest rate a bit to recover its up front costs. The lender then sells the loan to an investor, gets a nice bonus on the price due to the higher rate, pays its costs and pockets a tidy profit. TANSTAAFL.
b. "The Seller Pays For..."
A common gimmick in purchase transactions is the "Seller Contribution". The contract provides that the Seller will pay all or part of the Buyer's "closing costs". The closing settlement statement shows the Seller paying points, prepaid interest and all those other obscure bank charges that scare consumers to death on the Good Faith Estimate. On paper it looks like the Buyer got a great deal.
C'mon...smarten up. Where do you think the Seller is getting the money to pay for all that stuff? Did you really think he was going to run down to the bank and take out his life's savings? All the money the Seller has on the table is what he is getting for the house. Unless the Seller is a complete idiot (in which case you might really be getting something for nothing) anything he agrees to pay has been loaded into the sale price. The Buyer ALWAYS pays for everything, either out of pocket or in a higher sale price. The only difference is that, with a "Seller Contribution" the Buyer needs a bigger mortgage to buy the more expensive house. The Seller isn't paying anything. The Buyer is borrowing the money from the bank to reimburse the Seller and gets to pay interest on it for the life of the loan. This isn't all bad, of course...it's a good method for a Buyer who doesn't have a lot of cash for closing costs but has the income to pay the larger mortgage payment, but...TANSTAAFL.
Want to save a few bucks? Pay everything yourself. Scrounge up the money. Take an advance on your credit card (even at those rates it's cheaper than paying the mortgage rate on the money for 30 years). Borrow it from Uncle Otto (if the bank will let you). Sell the boat (well...maybe not the boat). It's a lot cheaper in the long run. Remember that you also don't get to deduct things like mortgage points or pre-paid interest on your income tax if the settlement statement shows them paid by the Seller.
c. "The Seller Pays For..." Part Deux
Mortgage loans that are insured (FHA) or guaranteed (VA) by the Federal Government have lots of strange and wondrous rules. (What a surprise.) These types of loans have lots of rules about things that "cannot be charged to the Buyer". (These are things like loan discount points and termite inspections on VA loans.) What that translates into, in real estate speak, is "the Seller has to pay." What it really means is that the Buyer can't be charged...the government doesn't care who else gets stuck with it.
As I noted above, Sellers never really pay for anything (except their own costs). Anything "paid by the Seller" is loaded into the sale price of the house. This is deliberate on the government's part. The idea behind FHA and VA home loans is to get Buyers who are cash poor and/or low income into their own homes...not a bad thing in and of itself. The Buyers don't really save anything though. All they do is borrow the money from the lender (and pay interest on it) to reimburse the Seller. TANSTAAFL.
d. "Government Loans Are Cheaper"
"Government Loans" (FHA, VA, FmHA, CHFA etc.) are targeted to lower income and/or cash poor borrowers. The idea is to promote home ownership for people who couldn't otherwise afford it. The implication, in most people's minds, is that they are therefore less expensive than conventional bank loans. Once upon a time that was actually the case. The government took a huge beating in the real estate collapse in the 80's though, and it paid out zillions of dollars on defaulted loans or losses on properties it got stuck with by foreclosure. (Guess how many owners walked away from homes that they bought for $100,000.00 with a $97,000.00 FHA mortgage when they found out the house was only worth $50,000.00 after the crash?)
These days the government charges mortgage insurance premiums (MIP) or funding fees that are not only big enough to cover the risk of default on your loan but big enough to cover the losses on all defaulted loans with the premiums that are paid on good loans. In Banker Speak these charges are "included in the loan". What that means in English is that the up front charges are loaded into the loan amount (you borrow it from the bank with a larger loan amount to pay the government) and the periodic monthly or annual charges are attached to your monthly principal and interest payment.
The risk that a mortgage will go into default is directly related to the amount of equity (owner's money) in the deal. (There are incredibly complex computer programs that can predict risk of default on large groups of loans with great accuracy...but any banker with the brains of a door knob knows that in his bones). The more of your own money there is in the house, the less likely you are to walk away from the house and stick the bank with it. The risk is minuscule when there is 20% equity or more and, consequently, most buyers with large down payments go for uninsured conventional bank loans.
The risk of loss increases greatly with less than 20% equity so that even conventional deals with down payments less than 20% (down to about 5%) almost always require private mortgage insurance (PMI). Mortgage insurance pays the lender if it loses money on the loan...it does not pay you and it is NOT life insurance. (And guess who the insurance company goes looking for after it pays off the bank?) Government loans with very small down payment requirements (as low as 0% or even negative equity on some VA loans) have an enormous statistical risk of default. The costs of insuring against this risk are correspondingly much higher and the borrower gets to pay them one way or another.
A government loan may get you into the house with a lot less cash out of pocket but you'll pay a lot more for the money in the long run. In simple terms, the rich get the best deal and the poor get the bill (sound familiar?) And did I mention TANSTAAFL?
Note on FmHA loans. The Farmers Home Administration (FmHA) writes specialized types of home loans. These are not the same people as the Federal Housing Administration (FHA) which is essentially just an insurance company run by the government. FmHA loans are targeted to very low income and cash poor borrowers. The down payment requirements are very small and the monthly payments are also very low...which looks like a great deal at first glance. However, FmHA loans are the most expensive and dangerous loans you'll find this side of a Mafia loan shark. These are negative amortization (the loan balance goes up instead of down as you make payments), equity participation (the government gets a chunk of the profits when you sell) and income qualified loans (they'll cancel the loan and force you to refinance if your income increases). You can be forced into an expensive refinance or end up owing the government money when you sell the house, even if you make a hefty profit on the sale. Read the fine print and remember TANSTAAFL.
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