What I should know about buying a house
By Rhode Island Bar Assocation (ribar.com)
It is likely that buying a home will be the greatest financial decision that you will make in your lifetime. This pamphlet is intended to provide you with general information about buying a home, and how a lawyer can assist you with the legal matters involved in the transaction.
The Parties Involved
When you buy a home, you will come into contact with a variety of specially trained people. In most cases, the real estate broker will be your first contact, then your lawyer, your banker, and, in some cases, a title officer. It is important to understand the functions of these people so that your buying of a home will be easier.
The Real Estate Broker's Role
Unless you buy directly from the owner, the first person you will come in contact with will be the real estate broker, who is trained to help you by determining your needs and showing you homes that fit within them. You should remember that the broker is a professional salesperson who receives a commission from the seller. Therefore, although you are an important part of the transaction, the broker is representing the seller. The circumstances do not change even if there is more than one broker involved, because they still receive their commission from the seller, and they will earn it only if they can persuade you to buy.
The Lawyer's Role
Your lawyer should participate in all phases of the transaction to help you in dealing with the other people who are involved. He or she can help you select these other advisors and more fully explain their functions to you. There may be times when legal documents are prepared by the broker. Remember, the broker does not represent you. ANY DOCUMENT REQUIRING YOUR SIGNATURE SHOULD BE REVIEWED BY YOUR LAWYER. This is true regardless of what the document is or how it is described to you.
NOTICE: RESIDENTIAL REAL ESTATE MORTGAGES. You should be aware that Rhode Island law gives you the right to choose your own attorney to perform the title examination when you purchase or refinance your home. The additional cost, in selecting your own attorney, will be nominal in relation to your total investment. After all, the lending institution is represented by its attorney, and you should be represented by your own attorney.
The Bank
Unless you are going to buy your home for cash, the bank will help you obtain a mortgage and show you what you will really pay for your home over the term of the mortgage. A mortgage is a loan secured by your home.
Purchase and Sale Agreement
The foundation of the purchase of a home is the Purchase and Sale Agreement, and should, therefore, not be treated lightly. It is the most important document you will sign, as it determines initially almost every right and obligation between the parties.
Frequently a pre-printed form is used for the agreement, and the precise terms are added by completing blanks on the form. It must be remembered, however, that there really is no such thing as a standard form which can be used in all real estate transactions. In fact, there are dozens of different so-called standard forms, and each one contains variations which may be detrimental to at least one party to the transaction. That is why it is important to review the agreement with your lawyer or have him or her prepare one for the transaction.
The contract for the sale of real estate usually covers such items as:
- Legal description of the property being purchased;
- List of all personal property included in the sale;
- Purchase price and deposit;
- When possession is to be given;
- Time and place of closing;
- Apportionment of taxes and special assessments;
- Whether your obligation to purchase is subject to a termite inspection, your ability to obtain a loan or other events;
- Whether property is to be conveyed free and clear of all encumbrances;
- Amount of insurance coverage on the property pending closing and what happens if the property is damaged by fire prior to closing; - Damages to be paid if you refuse to purchase. This listing is not intended as a complete checklist but merely illustrates some of the basic items that should be covered in all contracts.
REMEMBER, ONCE YOU SIGN IT, IT IS TOO LATE!! It is extremely difficult and sometimes impossible for a lawyer to protect a client in a real estate sale when the client has already bargained away his or her protection in a poorly drawn contract.
Title Examination
Before settlement, the title to the property should be examined to determine if the seller owns the property and whether anyone else has a claim against the property. For example, the title examination will show if taxes are unpaid or if a utility company has a right to place its poles or lines on your property. The Title Examination - or Title Search - is done by your lawyer or by a title insurance company by an examination of the public records relating to the ownership of real estate and sometimes of other title evidence. The buyer pays for the title examination.
Title Insurance
A title insurance policy is a contract between the insured and an insurance company. Unless you are named in the policy, you are not the insured. The policy may protect only the person holding your mortgage. It is customary in Rhode Island for mortgage lenders to require a title policy in their name (a mortgagee's policy) as a condition of making the loan. When your name is added to the policy, it is called an owner's policy.
An owner's policy insures you against defects in the title to the real estate described in the policy. Just as in any other insurance, the coverage is no greater than is stated, and exceptions to coverage may be recited in the policy.
The policy states the type and amount of indemnity due under it. The amount of the premium is determined by a schedule of rates based on the real estate purchase price and includes the price of the examination. In most cases, your purchase price is the maximum amount for which you are insured. Your owner's policy may contain an inflation endorsement at no charge, which would increase the maximum coverage to 150% of the purchase price.
A Building Under Construction
If the home you are buying is still under construction or has been completed recently, special care is required to make sure that all building costs have been paid by the seller and that you are fully protected against mechanic's and materialmen's liens.
You should also be concerned about lien protection when repairs on a house have been made recently or building materials recently delivered, and about protection from whole or partial loss due to fire, windstorm, or other calamity which may occur after purchase but before the building has been completed. Your lawyer can help you to ensure that all costs have been paid.
The Closing
The final stage in the purchase of property is called CLOSING or SETTLEMENT. The closing may be held in the office of the title insurance company, in your attorney's office, or at the bank which provides the mortgage.
At closing, the terms of the agreement of sale will be complied with, the mortgage documents will be signed, and title, in the form of a deed, will be transferred to you. There are many documents to be signed and many others to be reviewed. Your lawyer will attend the settlement with you and will help you understand exactly what takes place.
Expenses Involved In the Purchase of a Home
- The cost of title examination and insurance:
- Financing charges;
- Adjustments for taxes and other items already paid for by the seller;
- Recording fees;
- Your lawyer's fee.
You, as a careful buyer, should insist on your attorney being present at the closing and checking each detail. A lawyer knows which points are significant in making the purchase of your home the trouble free ownership to which you are entitled.
NOTE
This piece is produced as a public service by the Rhode Island Bar
Association and intended to provide background information. This is not a
substitute for legal advice and representation by a licensed attorney of the
Rhode Island Bar.