Wading Through the Paper

Essential Information About Real Estate Law 

It doesn’t matter whether you are buying or selling your home, there are going to be a lot of legal documents that you are going to have to understand and sign. A real estate lawyer can be your guide though this intimidating process. Answering your questions, helping you negotiate, and taking care of all the little details that you might not be aware of.

Before you hire a real estate lawyer, there are some things you will want to know. It’s always a good idea to have some background knowledge before asking questions or hiring anyone. The more you know now, the better your questions will be, and the less you will have to ask (if you are being charged by the hour, this can be a very important thing!)

Real Estate Law and Lawyers

Real estate law includes a range of legal issues relating to financing, managing, constructing, purchasing, leasing and selling residential and commercial property of all kinds. There are tons of complex real estate laws (which often differ significantly from one state to the next) and complicated selling agreements, so it’s always wise to seek a professional for help.

Usually the seller will hire a real estate agent to assist them in selling the house or property for an agreed fee to be paid when the house is sold. On the flip side, the buyer will engage a real estate agent to find and purchase a house, again with an agreement, and will either pay the agent direct or by a commission at the point of sale.

One thing to remember is that real estate agents or brokers are not licensed to practice law, so they should never offer you legal advice. A lawyer can represent you to ensure that your transaction is within the law and that your interest is protected.

The Legal Documents

The most overwhelming aspect of buying a house is most definitely the paperwork. A sad fact is that you can sell a jumbo jet with less paperwork then it takes to sell a house. While there are a huge number of papers you have to sign, the most important ones are the promissory note, the settlement statement (HUD-1) and the deed of trust. Your first step in getting through the process is to understand a bit about what these documents are.

Promissory Note: Assuming that you are not paying all cash for your new house, you will be obtaining a loan from someone. It could be from family or from a mortgage lender. Either way, you will have to sign a promissory note. This is, in effect, an “IOU”. You promise to pay your lender the full amount, payable in equal monthly installments, at the interest rate previously agreed upon. This is an extremely important document; you must review it carefully before it is signed. Your lender will keep the original until you completely pay off the loan at which time (or shortly thereafter) you will receive a copy of the note.

 Settlement Statement: After Congress enacted the Real Estate Settlement Procedures Act (RESPA) several years ago, the Department of Housing and Urban Development (HUD) publicized a uniform settlement statement (called “escrow” in some parts of Western United States). It is now commonly referred to as the HUD–1. This document contains the financial picture relating to the sale—and the purchase—of the property. It lists the lender’s charges, the title company’s fees, and the governmental recording fees. Next to the promissory note, this is perhaps the second most important document. You should review it very carefully—item by item. You should also keep this document for as long as you own the property. It will be useful for income tax purposes next year when you file your income tax return, and it may also be useful when you sell the house. Many of the items on the HUD-1 (such as recording and transfer taxes) can be used to reduce any profit you have made when you sell.

Deed of Trust: This is the mortgage document. It is recorded among the land records, and your lender will keep the original. When you pay off the loan, the lender will return it with the promissory note. This document is rather lengthy -- and quite legalistic. Make sure that the person conducting the settlement fully explains all of the ramifications and conditions contained in this document. Basically, as long as you make your monthly payments on a timely basis, you should have nothing to worry about. However, if you are in default (a term which is defined in both the note and the trust), many of the provisions of that deed of trust become operative—such as the right of the lender to ultimately foreclose on your property. A deed of trust is a very important document. It will usually contain such important provisions as:

• Due on sale clause: if the property is sold or transferred, the loan becomes automatically due. In other words, the loan cannot be assumed by a subsequent owner.
• Prepayment penalty: will you be charged a penalty if you pay off the loan before its due date? This is especially important in today’s economy, since many people are refinancing as often as once a year in order to take advantage of lower mortgage interest rates. Before you decide to refinance, make sure there is no prepayment penalty included in your deed of trust.

Books can (and have been) written about deeds of trust, and there are literally thousands of Court opinions interpreting the language of these documents. What is important is that you fully understand all of those legal documents you signed, and get copies before leaving the settlement office.

In addition to the big three, there are these documents as well:

Deed: this is the legal document which transfers the property from your seller to you. When you look over the document these are the three things you should review in detail:

1. Is the legal description correct? Ask the person conducting settlement to compare the legal description in the deed to the description in the title binder which the settlement company obtained when obtaining the title search from land records. I would rather catch mistakes now before that deed has been recorded.
2. Are the names spelled right? The seller is the grantor and the buyer is the grantee. Titles are searched in what is known as a “grantor” index and clearly, if a name is misspelled, there will be problems in the future when you go to sell or refinance your house.
3. How are you taking title to the property? This will be spelled out right in the deed. If you are purchasing in your own name, the deed will state “as sole owner”. If you are taking title with your spouse, the deed will usually state “as tenants by the entirety”. If you are taking title with a friend, the title will either be held as “tenants in common” or as “joint tenants with rights of survivorship”. It is important that you discuss how you are going to take title with your own attorney

It should also be noted that you cannot deduct any mortgage interest for tax purposes unless your property is secured by a deed of trust. This means that the deed of trust must be recorded in the Land Records office..

Survey: Although not all lenders require that the purchaser obtain—and pay for—a survey of the property, it’s probably a good idea that you authorize the settlement provider to obtain a property survey. The survey will assist you in determining whether fences, trees or other such objects are properly located within the property.

Miscellaneous Documents: Lenders like to add a number of other documents to the pile of documents which the buyer has to sign in order to complete settlement. Although many of these are unnecessary, some are required by law or by the secondary mortgage market. The bottom line, however, is that if you want the loan, you have to comply with these lender requirements.

Three Day Cooling Off Period: Under the Federal Truth-in-Lending Law, in many instances when a borrower refinances, he has three business days in which to "cool off" and decide whether in fact he wants to pursue this particular loan. Lenders usually require borrowers to sign a statement that (1) they have received the notice of cancellation rights, and (2) three business days have now elapsed and the borrowers still want to go forward with the transaction.

However, many lenders require that each borrower sign three (and sometimes four) copies of this notice. Thus, when you have a husband and wife who are refinancing, the lender has added six to eight additional documents to be signed at settlement.

Name Affidavit: Many lenders now require that the borrower sign an affidavit -- which has to be notarized -- stating under oath that if the borrower has used any other names or initials, the borrower is really one and the same person. For example, if Sally Jones sometimes uses her middle initial "R," Sally will be asked to sign that Sally R. Jones is the same as Sally Jones.

The Truth-in-Lending Statement: Many years ago, Congress enacted the Federal Truth-in-Lending Law, designed to allow a prospective borrower the right to shop and compare the true cost of the loan. This is referred to as the annual percentage rate (APR).

Unfortunately, most lenders give the truth-in-lending statement only at settlement, when it is next to impossible for a borrower to effectively shop and compare rates. More importantly, at least in the mortgage field, the annual percentage rate is often higher than the actual rate of interest, since points and other lender charges have to be included in the total calculation.

Escrow Analysis. Many lenders will require a borrower to include one twelfth of their real estate taxes and insurance premiums with their monthly mortgage payment. Thus, the initials "PITI" -- standing for Principal, Interest, Taxes and Insurance. The lender keeps these funds in escrow (earning no interest for the borrower), and when the real estate tax and the insurance premium become due, the lender will pay these items from the escrow account. Lenders now require a borrower to sign a statement confirming the amount of real estate taxes and insurance that will paid by the lender on a yearly basis.

Certificate of Compliance. Borrowers are often asked to sign a statement that in the event the lender is audited by a Federal agency, or if there are clerical or typographical errors contained in the loan documents, the borrower agrees to work with the lender to make any necessary changes or to cooperate with the Federal agencies.

Flood Hazard Insurance. Borrowers often have to sign a statement that in the event the area in which their house is located becomes a flood hazard area, the borrower authorizes the lender to immediately pick up flood hazard insurance, and pay the lender appropriately for the annual premium.

Notice of Assignment of Loans. Under a recently enacted Federal law, lenders are required to disclose to a borrower the approximate percentage of loans that the lender sells to other lenders during the course of one year. There are significant consumer protections built into the law in addition to the disclosure requirements, which makes this document interesting, but less than useful.

Hiring a Real Estate Lawyer

Now that you know a little about the documents and their uses, it’s time to find a real estate lawyer. Here’s a few steps and tips to help you find the right lawyer:

Steps:

1. Talk to friends, family members and co-workers, or your stat’s Bar Association for referrals.
2. Talk to local real estate brokers for referrals.
3. Call a local realtors association for referrals.
4. Consult the Yellow Pages under Attorney: Real Estate.
5. Prepare a list of questions about your situation. Most lawyers will answer simple questions for free over the phone.
6. Identify a number of possible attorneys and call each one.
7. Ask how much each lawyer charges per hour, and request an estimate of the time required to complete the tasks you require - looking over contracts, handling disclosures, and helping with the closing.
8. And finally, choose an attorney.

Tips:

• Start with the easiest, least expensive steps an attorney can perform first. Sometimes a little help is all you need.
• Many attorneys are willing to handle multiple tasks for a fixed price or retainer.
• Make sure your attorney specializes in real estate and has expertise in the areas you require.

In Conclusion

Whether you are a first-time homebuyer or an experienced professional investor, you are entitled to get all of your questions fully answered when you go to settlement. There are too many settlement officers—including attorneys—who treat a settlement as if it is just a routine procedure required by lenders.

That is not the way it should be. A settlement is, in effect, both the end of the buying process as well as the beginning of home ownership. As a buyer (or seller), you should fully understand each document you sign. You should not be rushed through the process just because there is another settlement waiting in the reception room.

As long as you are informed about the steps involved and careful in your selection of a lawyer, the purchasing or selling of your home should be a relatively painless endeavor. Good luck!

This paper is intended for informational purposes only. Nothing contained herein constitutes legal, financial or other professional advice. Transmission of these materials is not intended to create, and receipt does not constitute, any relationship of any kind between the provider and the recipient. Some of these points may not apply in your area. Different term and conditions may vary from state to state and province to province. All articles, text and photographic material presented here is for the use and pleasure of the recipient only.

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