By Richard W. Hechter, Attorney and Former Real Estate Broker, Morris Law Group
Many people experience legal and financial difficulties stemming from so-called “simple” real estate transactions. The problems usually arise from a lack of information. This post provides a list of suggestions and key information compiled from Minnesota attorneys, real estate brokers, and legal instructors. It is our hope that the information provided will help benefit and protect you and your family in your real estate dealings.
Note: each real estate transaction is unique. This blog is designed to heighten your awareness of the legal rights and financial options you have. It is not a substitute for legal advice. We advise you to seek the advice of a good real estate attorney at Morris Law Group before you sign any contract, including a listing agreement, purchase agreement, loan agreement, representation agreement, and more.
1. GET PREQUALIFIED. Get pre-qualified (pre-approved) for a home loan before you even begin your house hunting process. Not only will you have an idea as to what you can afford, you will stand a much better chance in having a seller accept your offer over others. Sellers are more likely to sell or pledge their home to someone they know who can afford it. Make sure you have your lender issue a commitment letter or “pre-qual” letter (proof of loan approval) which you can show a seller. Being pre-qualified should help you beat out other offers in a multiple offer situation.
Likewise, if you are a seller, you should be hesitant to accept an offer to buy your home unless you know the buyer can afford it (i.e. has a pre-qual letter or a big bank statement!)- Once you accept an offer from one person (i.e. sign the purchase agreement), you generally can’t re-sell your home to another person until the first deal is legally cancelled. You don’t want your home tied up for months waiting to see if the buyer(s) can obtain financing. As a seller, you have the right to ask for financial information and proof of loan-worthiness from the buyer before an offer is accepted.
2. UNDER BUY. It is no fun being house poor. Make sure the home you buy fits easily into your budget. You should consult with a financial planner to veriör how much home you can afford. Be careful when speaking to loan officers and loan brokers (mortgage originators) about this topic. Many loan officers (loan brokers) work on commission. They earn more money on bigger loans. Thus, they may not have your true financial interests at heart. Remember, in addition to your home payment, you need to budget for taxes and insurance, as well as utilities, possible garbage service and unforeseen repairs. Don’t forget the utilities, taxes, insurance and Target runs.
3. RESEARCH. Make sure you research the neighborhood and municipality you are considering moving into. Have your realtor take you to meet your potential neighbors. Make sure you know the school district, municipal crime rates and the amenities offered by the municipality. You can also contact the State corrections department to see if there are any sex offenders living in the area. These items affect resale value. Finally, we suggest you meet and interview the home sellers. They should be a wonderful source of information about the neighborhood, etc.
4. LOAN ORIGINATION FEES. Loan origination fees lenders charge to “write” or process your loan (mortgage) are negotiable. While the standard and often preprinted rate is 1%, many lenders will be glad to reduce this amount to .75 % or less, if you ask. This can save you a lot of money. Make sure you shop around for the best interest rates, and truly understand all types of loans (i.e. conventional or ARMs, etc). Make sure you receive a good faith estimate from your lender as to how much your total loan payment will likely be, what the total costs for obtaining the loan will be, and how much cash you will need to bring to the closing. You are not required to use any particular title or closing company. As such, it often pays to shop around to compare costs for services.
5. CONSULT WITH A LAWYER. Always consult with a real estate attorney before you sign any contract. Contrary to public belief, there is generally no cooling off period to rescind or get out of a contract. Once you sign a contract, you are bound by it. You cannot avoid (get out of) a contract on the basis that you did not read it, thought its terms were different, or found a better deal elsewhere. Furthermore, once signed, the terms of the contract cannot be changed unless all of the parties to the contract agree to the changes. Trying to back out of a contract can result in you being sued, and losing your earnest money (down payment/escrow payment). Once the purchase agreement is signed by all, you have bought the home (or sold the home — if you are the seller) according to the terms and conditions set forth in the contract you had just signed. A good real estate attorney can suggest changes to the standard forms Realtors use in order to give you the maximum legal and financial protection.
6. PUT IT IN WRITING. An agreement to buy or sell a home must be in writing. In Minnesota, there are three basic (pre-printed) purchase agreements used. The first one, and most common one, is a purchase agreement endorsed by the Minnesota Association Of Realtors and used by Realtors. The second form is the one endorsed by the Minnesota Bar Association and used by many lawyers. The final type of purchase agreement seen is the ‘universal” form sold by office supply stores. Each of the three purchase agreements have different terms and conditions which affect legal rights. It is a good idea to consult with a real estate attorney to see how the forms vary from one another, and which form may best fit your real estate needs. Our personal preference is to use the form endorsed by the Minnesota State Bar Association. We think it is the fairest and most complete. However, the Realtor form works just fine, as long as proper changes are made to it before it is signed. Finally, make sure all terms and conditions of the sale are put in writing in the purchase agreement (or addendum to it). Oral (side) agreements are difficult, if not impossible, to enforce. Make sure you list all personal property and expensive fixtures which are to remain with the home. This will prevent the seller from taking the personal property, or switching expensive fixtures (i.e. window treatments or light fixtures) with cheap replacements when the seller finally moves out.
7. WARRANTIES. There are generally NO warranties or guarantees under
Minnesota law which comes with existing (used) homes. The law is pretty much “buyer beware” in Minnesota. As such, it is very important to obtain a private home inspection before you agree to purchase a home. Purchase agreements should be contingent upon a satisfactory private home inspection.
Do not rely on municipal inspections or inspections done for lenders (banks). These inspections are typically not as thorough as a private inspection. A private inspector will inspect the entire home, its mechanicals, its appliances, the insulation, the plumbing, the roof, etc. The buyer must typically pay for these inspections. Private inspections generally cost between $325.00 and $450.00.
You must remember that virtually everyone in a residential real estate transaction is working on commission. Thus, no one gets paid (including the seller), unless and until the home sells. The pressure to sell the home and get paid can often “distort” the truth Finally, realtors may not know a lot about the home they are showing you. They don’t live in it! It is a lot cheaper and easier to obtain a private home inspection than to try to sue someone down the road for fraud.
The law imposes a duty upon buyers to exercise reasonable care for their own financial safety. Having a home inspection is exercising reasonable care. Make sure you get a good inspector and ask for references. You can also ask the neighbors what they know about the home you wish to buy.
You should also consider obtaining a professional inspection for mold, moisture problems, asbestos, radon, lead paint, old wells and septic systems. You also need to check with your homeowner’s insurance company to see what they cover, if you happen to discover one of these problems after you buy a new home.
If you are a seller, be careful about what you say (representations) about your home. If what you say turns out not to be true, you can be sued. Thus, always be truthful in your dealings. Also, if you are a seller, you need to know that the law in Minnesota changed in 2003. Sellers are now required by law to disclose material defects they know of concerning their home. If you are a buyer, make sure you obtain this disclosure before you even consider making an offer. Anything which would negatively affect the enjoyment of living in the home should be disclosed by the Seller.
8. SURVEY. In addition to a home inspection, make sure you walk the property line to look for encroachments, and to make sure all structures are within the boundaries of the property. You have a right to have a survey to be sure. Make sure you learn of all easements (ask a lawyer).
9. FINANCING CONTINGENCY. Make sure your purchase agreement is contingent upon you obtaining financing. Make sure your earnest money is returned if you can’t obtain financing, or the deal falls apart. If you need to sell your existing home before buying your new home, make sure the purchase agreement is contingent upon the successful sale AND closing of your current home. The sale alone is not enough. You need the deal to close to obtain the money for your new home.
If you are the seller, you should note that most of the standard purchase agreements realtors use only require the buyer to make one application for financing. If the buyer is rejected, he is likely allowed to cancel the deal and get his earnest money back.. The purchase agreement or financing addendum can be changed to require the buyer to make more than one application for a loan.
Finally, if you are the seller, the purchase agreement can be amended to allow you to keep the buyer’s earnest money if the buyer cannot perform under the purchase agreement. Ask a lawyer about this.
10. DOCTRINE OF MERGER. Watch out for the doctrine of merger if you are a buyer. Under contract law, the purchase agreement ends by performance (becomes extinct) immediately after the closing. It is said the purchase agreement “merges” with the Deed. As a result, many of the promises and warranties contained in the purchase agreement do not survive the closing. Thus, you should ask your attorney about changing the purchase agreement so that the important promises and assurances given in the purchase agreement “survive” (live past) the closing.
I l. TRASH. You should have the seller sign an agreement that he will be responSible for any damage he causes to the home when moving out, and will pay for the removal of any items (trash) left behind. You can also consider asking the seller to agree to clean the carpets, or pay for the same, right after he moves out, but before you move in.
12. ARBITRATION AGREEMENTS. Contracts, such as purchase agreements, often contain binding “arbitration” clauses as a way to resolve disputes. Do NOT agree to arbitration until you first discuss the matter with an attorney. By agreeing to arbitration, you will likely be giving up your right to have your dispute heard in court by a judge and jury. Furthermore, decisions (awards) from arbitration proceedings are extremely difficult to appeal. This is true even if the arbitrator makes a decision that is contrary to the law!
For clarity, arbitration is a process where a “neutral” person is appointed to hear and fully decide a dispute. The person chosen to hear the dispute may not even be a lawyer or judge. The person chosen could be a contractor or real estate broker. The decision given is presumed to be binding. This means it is nearly impossible to appeal the decision in court. Whatever the decision is, you are likely stuck with it — forever!
Arbitrations in the real estate area are often held in homes, not courtrooms. Arbitrators often decide disputes according to their subjective notions of fairness, and not necessarily the law. Unlike a judge, arbitrators are not required to explain how or why they came up with their decision. Because you are giving up a right to a judge and jury, because many arbitrators in the real estate area have little true legal training, and because there is generally no right to appeal the decision, most lawyers would advise against signing an agreement for binding arbitration on the front end of a transaction (i.e. purchase agreement).
Many real estate agents push for arbitration because their brokers and/or their insurance companies request that they do so. Arbitrations are quicker and cheaper to defend against, than district court lawsuits.
13. SPECIAL ASSESSMENTS/JUDGMENTS/LIENS. Make sure the seller agrees in writing to pay for all pending or levied special assessments, and all disclosed and undisclosed judgments and liens; including all mechanics liens arising from the seller’s ownership and usage of the home.
14. WARRANTY POLICIES. Consider having the seller buy you a one-year homeowners warranty policy. This will help protect you against breakdowns and repairs which occur during the first year you own the home. It’s like having a service plus type of contract. Make sure you know the coverages, exclusions and deductibles (if applicable).
15. REAL ESTATE COMMISSIONS. Real estate commissions are negotiable. Most large companies will list your home for under 7%. You should not have to pay over 6% for realtor services.
16. CONTRACTS REALTORS TYPICALLY USE. Most realtors will want you to sign an “exclusive right” to represent or sell a contract. Under these types of “exclusive” contracts, you will technically owe the real estate company a commission even if you, yourself, end up finding a buyer for your home; or, if you, yourself, find the home you actually buy. Realtors can offer you different contracts which relieve you from paying a commission if you find your next home or buyer for your current home. It’s best to have a lawyer look over any contract before it is signed.
Many realtors will want you to be under contract with them for 6 months. We feel this is too long. Listing contracts or contracts for buyer representation should not be more than 60 days at a time. Contracts can always be renewed. Don’t get stuck with a bad realtor for 6 months.
Finally, you should know that there are circumstances when you could still owe a commission to a realtor even after you fire the realtor, or after the contract expires. Realtors can claim commissions in these cases if you end up buying a home the realtor had shown you while you were under contract; or when you sell your home to someone the realtor introduced to you while you were under contract. Again, check with a lawyer on this matter.
17. EXAMINE TITLE AND GET TITLE INSURANCE. Have a real estate attorney examine the title to the property you wish to buy. We also suggest purchasing an “owners” title insurance policy. Lenders policies only protect the bank. Make sure you know of all covenants, easements and restrictions associated with the property. Have your lawyer obtain “gap” coverage for you, and have all standard exceptions to coverage in title policies eliminated. This paragraph alone should compel you to see a lawyer for explanation!
18. AS IS CLAUSES. If you are selling your home, consider using an “AS IS” clause (addendum). An AS IS clause allows you, as seller, to disclaim any potential promises, warranties or assurances you may have given the buyers about your home. The “AS IS” clause tells the buyers they are buying your home subject to all of its faults, if any. In addition to the AS IS clause, you should also remind the buyers, in writing, they have a right to a private home inspection. [f y_ou use an AS IS clause, you must make sure the language in the purchase agreement (or other involved document is consistent with the AS IS clause.
Using the AS IS clause and notifying the buyers in writing of their right to a home inspection should greatly reduce the risk of legal claims against you if something should happen with your home after the closing (i.e. the basement starts to leak). Again, it’s best to have a lawyer’s help.
*Note, the law in Minnesota just changed in January of 2003. The law, for the first time, now requires sellers to notify potential buyers of any known problems associated with the home. The new law, however, still appears to allow the seller to sell “AS IS” under certain circumstances. This new law needs to be understood and discussed with a real estate attorney BEFORE a seller places his or her home on the market for sale.
19. CONTINGENT OFFERS. If you are a seller, be careful about accepting a contingent offer. Some realtors say a contingent offer is NO offer at all. If the buyers can not remove, meet or fix the contingency, they can get out of the sale. If the sale falls through, you may have difficulty quickly finding a substitute (backup) offer. Many realtors will not show properties which have a pending contingent offer on it. Many buyers will not bid on a piece of property where there is a pending contingent offer. If a contingent offer falls through, your subsequent offers may be less. Of interest, many realtors believe that the first offer(s) received are usually the best (highest) offer(s) the seller may ever receive. This, of course, excludes the multiple offer situation. Ask your realtor about these items.
20.GETTING MARKET DATA. Before making an offer or accepting an offer, make sure you have reliable comparative market data so you can make an informed decision on price. If you are a buyer in a multiple offer situation, think twice about offering more than what the home is worth. You may have trouble getting your money back if you decide to sell the home in a short period of time. The next buyers may not be willing to “overpay” for the home. You have the right to make your purchase agreement contingent upon a satisfactory property appraisal. You can hire a real estate appraiser to assist in valuing the home you wish to buy.
21. BE AN ACTIVE PART OF THE TRANSACTION. Don’t be afraid to be an active part of the real estate transaction. Most real estate agents want to take your purchase agreement (offer) and leave you at home. This is a good way to lose control and over-pay. Your best bet is to try and be physically present (at least in the same home or office) when the purchase agreement is being presented.
22. FSBO PROPERTY. For sale By Owner (FSBO) property is typically not very successful for homes priced in the “move-up” category (i.e. homes over $250,000.00). Most people on their second or third home are not overly concerned about saving money in real estate commissions. In fact, most people in the move up category are working with realtors to save time and effort. The problem with FSBO property is usually one of exposure. Many real estate agents will not show FSBO property for three main reasons: 1. It undermines the real estate industry. 2. Real estate agents fear the FSBO owner will not pay a commission; and, 3. Real estate agents fear FSBO property because there is no real estate company behind the sellers, should something go wrong. When agents deal with listed property (property represented by a real estate company) real estate agents know that if something goes wrong, the real estate company, or its insurance company, will come to the rescue. WIth FSBO property, real estate agents fear that they, and they alone, will have to deal with, and financially pay for any problems that arise from the property.
If real estate agents won’t show your property, and if home buyers are not seeing it because they are working with real estate agents, you will have difficulty selling your home. If you decide to go FSBO and want realtors to bring in clients, make sure you advertise the fact that you will pay some commission. Finally there are several companies (businesses) which help homeowners sell their own home. Ask around and look in the yellow pages. Many of these companies can place your home on the IVILS system when a commission is offered.
23. TIME. You must be aware that there are statutes of limitation, notice periods and filing deadlines which apply to real estate transactions. If something goes wrong with your transaction, the law only gives you a limited period of time (deadline) to make legal claims and/or to obtain insurance coverage. These time periods vary from state to state and can vary by the terms of a purchase agreement. You need to discuss this matter with an attorney in your state. Some time periods can be very short (i.e. 180 days).
24. SUMP PUMP COVERAGE. If you are buying a home which has a sump pump or potential wet basement problems, make sure you obtain sump pump and sewer back up coverage from your homeowners insurance company. Many policies do not automatically provide for this coverage. Talk to your insurance agent about the types of coverage you can get to protect your home from water damage. Ask about Flood Insurance as well.
25. TAX IMPLICATIONS. You need to be aware that there can be significant tax consequences associated with the buying and selling of a home. These tax consequences include capital gains tax. Thus, make sure you check with a real estate attorney or CPA before you enter into a real estate transaction.
26. WHO CAN GIVE LEGAL ADVICE. only licensed attorneys can give legal advice. Remember, real estate agents are “sales people” working on commission. Your best protection is to consult with a lawyer who can objectively protect your legal and financial interests. Sellers have different interests than buyers. They want to get as much money as possible and lessen their legal exposure as much as possible. Buyers want to pay as little as possible and maximize their legal protections. You need a good lawyer to “mark up” or adjust a purchase agreement to fit the needs of whether you are a buyer or seller. There is “no one size (type) of purchase agreement that fits all. Don’t be misled by Realtors.
*Again, this information sheet is NOT a substitute for legal advice. You are advised to consult with an attorney regarding your specific real estate transaction.
Do NOT sign any document until you discuss the item with a qualified attorney. The information contained in this publication is specific to Minnesota law and procedure. Laws, practices and procedures in other states may vary.
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