Purchase & Sale of Real Property
The basic steps for buying and selling real property include:
- Hire a real estate agent. Although you are not required to use an agent when buying or selling real estate, many buyers and sellers hire agents to help them find a home or find a buyer for their home, and to help them through the initial process of making and responding to an offer. In general, the seller pays for both the buyer’s agent and the seller’s agent. The real estate agents are paid at the closing from the proceeds of the sale. Real estate agents will request that selling owners execute a listing agreement which will include the home’s offering price and the amount of the agent’s commission, usually computed as a percentage of the final selling price. Listing agreements are frequently prepared on forms developed by the local multiple listing service (“MLS”). These are legally binding agreements and should be reviewed by the seller’s attorney before they are signed. Buyers’ should bear in mind that an agent whom they consider a “buyer’s agent” is actually an agent of the seller if the seller is paying the commission and that agent’s primary obligation is to the seller.
- Buyer makes an offer. The real estate agents will negotiate the basic terms of the transaction, such as the purchase price, and whether that price includes or excludes fixtures and personal property found on the premises. The agents will also negotiate whether the offer will depend on any other events, like the buyer obtaining a loan or selling his or her own home first. These terms will be included in the offer, which is typically a one-page form.
- Seller accepts offer. The next step is for the seller to accept the buyer’s offer, or present a counter offer. Even after there is an accepted offer, however, neither party is legally obligated to go through with the transaction at this point. Either party can back out of the deal without being in breach of contract. There will not be any obligations to purchase or sell the property until the attorneys write up a formal contract and it is signed by both parties. Execution of binders prepared by real estate agents is discouraged, because they are drafted as though they are legally binding, but typically are not and thereby create confusion.
- Buyer arranges home inspection. After the seller has accepted the buyer’s offer, the buyer’s agent will arrange for a home inspector to inspect the home and identify any potential problem areas. If there are any problems found, these will be addressed by the attorneys when the formal contract is written. Some contracts are made contingent upon a satisfactory inspection within a relatively short period of time.
- Buyer and seller retain attorneys. Attorneys are used in a real estate transaction in most parts of New York. Real estate brokers are not permitted to draft legal documents or give legal advice because it could be considered unauthorized practice of law. However, brokers may be allowed to fill out pre-printed contract forms as long as the forms clearly state that they should be reviewed by an attorney. A cautious buyer and seller will hire an attorney earlier in the process to be certain that important issues such as contract contingencies are discussed and resolved, avoiding misunderstandings.
- Buyer and seller negotiate contract terms. Contracts to buy and sell real estate must be in writing and executed by both buyer and seller. The contract can be viewed as a road map, explaining the parties’ obligations on the way to a “closing” at which the actual sale will be concluded. Generally, the seller’s attorney creates the first draft of the contract. There are standardized, pre-printed forms for this purpose. Any unique or different information can be attached to the contract as a “rider.” The contract will lay out all the terms of the deal, and must state the price, an adequate description of the property, an anticipated closing date, and any details regarding events that must happen before the deal can close, called “contingencies.” The closing date is not considered to be a firm date in most home contracts, and either party is entitled to reasonable postponement of the closing date if the need arises. If the parties want the date to be firm, the contract must provide that “time is of the essence.” This is not the assumption in New York unless clearly stated.
- Buyer makes a down-payment. Upon signing the contract, the buyer typically delivers a down-payment equal to 10% of the purchase price to the seller. The check is usually made out to the seller’s attorney, who holds it for safekeeping in a separate account called an “escrow account.” Most residential real estate contracts in New York allow the seller to keep the down-payment as “liquidated damages” if the buyer decides to back out of the contract for a reason that is not allowed by the contract. Contracts will typically have cancellation rights relating to financing, title issues, engineering issues and termites, all as discussed below. If the buyer goes through with the purchase, the down-payment is credited to buyer and deducted from the purchase price at the closing.
- Seller discloses condition of property, if required. In the sale of residential real property, the seller is generally required to complete a disclosure form answering 48 questions about the property that are divided into four separate categories: 1) general information 2) environmental 3) structural and 4) mechanical systems and services. The seller can be sued for damages for knowingly failing to adequately disclose this information about the property. Also, a failure to fill out the form results in the buyer receiving a $500 credit against the purchase price at the closing. Importantly, for purposes of the disclosure requirement, the definition of “residential real property” does not include condominium units or cooperative apartments, so the disclosure requirement does not apply to many real estate transactions in New York City and the surrounding boroughs. Many contracts simply refer to the disclosure by statutory reference and then agree to the $500 credit instead of disclosure. Additionally, it is permitted by the statute to contractually avoid the disclosure by agreeing to sell property “as is” or otherwise without any representations or warranties.
- Buyer orders title report. The buyer’s attorney will order a title report from a title insurance company to make sure the seller has good title and that there are no issues with title, like liens against the property, that need to be resolved prior to the closing. The title report also includes a search of governmental departments for violations cited against the property. The buyer’s lawyer and the title insurance company will review a survey of the property to ensure that the home does not encroach on neighboring property and that neighbors’ homes do not encroach upon the property being purchased. The survey can be an existing one supplied by the seller, or a new one ordered by the buyer’s attorney. A lending bank will frequently require a new survey if the existing survey is dated.
- Buyer obtains financing. The buyer’s attorney will work with the lender to obtain the information and documents needed to finalize the loan that will be used to purchase the home. Whenever a buyer is getting a loan to finance a residential real estate purchase, the federal Real Estate Settlement Procedures Act (RESPA), ensures that the buyer is informed of all the costs associated with the loan and purchase. These are known as “settlement costs.” First, the lender must provide the buyer with a good faith estimate of settlement costs within three business days of receiving the loan application. The lender’s agreement to make the loan to the buyer is called a “commitment.” At the closing, the lender must provide a Uniform Settlement Statement, also known as a “HUD Form 1.” This form must include all the financial details regarding the transaction. Important: most residential contracts in New York are contingent on financing. The buyer is given a period of time, typically within 30-90 days, to obtain a mortgage loan commitment. If the buyer is unable to, it can cancel the contract and receive a refund of its initial deposit.
- Buyer and/or lender obtain title insurance. A buyer’s title insurance policy protects the buyer from any losses he or she may suffer if someone challenges their title to the property or claims that the property can be sold to satisfy a debt. A lender’s policy offers the same protection to the bank or mortgage company that loaned money to the buyer for purchasing the property. Before issuing the title insurance policy, the title company examines the title records related to the property and the survey to see if there are any defects in the title. If the title company is satisfied with the title, it issues an insurance policy agreeing to defend the buyer (or lender) against any challenges to the title and pay damages up to the amount of the policy. For a buyer’s policy, the amount is the purchase price, and for a lender’s policy, the amount is the loan amount. The title insurance will not cover claims related to disclosed encumbrances.
- Preparation of closing statement. The real estate transaction involves many other expenses for both parties, in addition to the purchase price. The parties will adjust between themselves certain periodic charges applicable to the home, such as property taxes, homeowners’ association fees and utilities. In order to keep track of all the expenses, a closing statement is typically prepared to show how much money the buyer needs to bring to the closing, and how much money the seller will get after all expenses are paid and credited. The closing statement lists all the debits and credits for the buyer and seller, and produces a final dollar amount for each side.
- Buyer, seller and lender attend closing. All parties and their attorneys will typically attend the closing, although closings can be arranged without all parties present, either by using a power of attorney or closing in escrow by mail. If the buyer is obtaining a loan, the bank or mortgage company will also have an attorney present. The real estate agents also may be present. The attorneys will explain to the buyer and seller what documents they are signing and what dollar amounts are owed.
The buyer will pay:
- the balance of the purchase price plus other expenses set forth in the closing statement,
- mortgage recording tax if there is a loan used to finance the purchase,
- the bank’s attorney fee, if there is a loan involved, and
- premiums for title insurance policies of the buyer and the lender,
- other fees required by the lender, and
- when the purchase price of a home exceeds $1 million, a special transfer tax is due to the State of New York equal to 1% of the price. (Buyers also pay a special transfer tax when buying a home in the Peconic Bay Region).
The seller will pay:
- transfer tax to the State of New York, and, when applicable, to the City of New York,
- the commissions of the buyer’s agent and seller’s agent, and
- the sums due to pay off any mortgage loans and home equity lines of credit.
Both parties will generally pay their own attorney’s fees, and the fees required to record the various documents with the county clerk. Sellers typically pay to record the deed and buyers pay to record the mortgage.
- Record deed and mortgage. In order to give notice to the world of the transaction, the deed and mortgage (if any), and any other documents affecting title, must be filed with the county clerk’s office where the real estate is located. (In the counties of New York City other than Staten Island, the office where these documents are recorded is called the New York City Register. The five borough recording system is known as ACRIS.). All documents must be properly acknowledged (signed before a notary), and proof of payment of transfer tax and mortgage tax must be shown before the documents will be accepted for recording.
Legal Editors: Terrence Dunn and William Walzer, September 2017
Changes may occur in this area of law. The information provided is brought to you as a public service with the help and assistance of volunteer legal editors, and is intended to help you better understand the law in general. It is not intended to be legal advice regarding your particular problem or to substitute for the advice of a lawyer.