Real Estate Matters – Frequently Asked Questions
When should I talk to an attorney about my real estate transaction?
How can I know that a buyer that makes an offer to purchase my property can obtain a mortgage?
If I enter into a contract and then change my mind, can I get out of the contract?
What if I want to sell my house, but I do not want to use a real estate agent?
Do all real estate agents charge the same commission?
What do attorneys do in real estate closing?
What is a “use and occupancy” agreement?
Lois Andrews and Jim Young have each been assisting clients meet their legal needs for thirty years or more, including in real estate. If your only interest at this time is in a real estate transaction we would be happy to assist you, however, you may want to make this an opportunity to create a relationship with a law firm for issues in addition to real estate, so that when the time comes for you to address estate planning, probate, small business issues, elder law concerns, planning for nursing home costs, or other things, you will already have a relationship with someone you are comfortable with.
You may already know us.
Lois and her family have resided in Waterford for 40 years. Lois has served as the President of the Eastern Connecticut Symphony Orchestra, President of the Waterford Rotary Club, President of the Waterford Education Foundation, a founding member of the Women’s Center of Southeastern Connecticut, and of the Women’s Network of Southeastern Connecticut, and Town Attorney for the Town of Waterford, among other things.
Jim and his family have resided in Mystic for over 25 years. Jim has served as the Chairman of the Board of Directors of the Chamber of Commerce of Southeastern Connecticut, and Vice Chair of the Town of Groton Zoning Board of Appeals, and Chairman of the Town of Groton Econcomic Development Committee, and Treasurer of the United Cerebral Palsy of Eastern Connecticut, among other things.
If you would like to review a potential real estate transaction or any other matter with us, we invite you to give us a call at 860-444-2101, or email us at info@andrewsandyoung.com.
Q. When should I talk to an attorney about my real estate transaction?
A. In our area of Connecticut it is common for the real estate agent representing the buyer to prepare the contract for the transaction, for acceptance or modification by the seller, on forms approved by the local association of real estate agents.
We are available to review a proposed real estate contract for you, if you would like to have an attorney review the contract before you sign it. We can usually do this quickly, so as not to delay negotiations.
Some clients have an existing relationship with an attorney and look to that attorney to protect their interests. It is a good idea that as with physicians, attorneys practice in different areas of the law, and it is prudent to ask any attorney you may condider hiring what their experience is, and whether real estate is a focus for them, or simply something they do from time to time. You may want to ask if the attorney has a qualified paralegal to assist him in his real estate practice, or does he handle all aspects of real estate closings himself?
Some clients aren’t sure who to hire, and essentially rely on their real estate agent or mortgage lender to refer the work to an attorney they have a relationship with.
Given that any real estate transaction (including a mortgage) is at heart a legal transaction, and may be among the largest financial transactions you ever engage in, we think it makes sense for a buyer / borrower or seller to invest some time and decide who will protect their interests, and to have that attorney review the contract before they sign it, but it is true that many people sign real estate contracts without first having them reviewed by an attorney.
A. It is very difficult to know for certain. Sellers are well advised to talk to their real estate agent and ask when an offer is presented whether the buyer has been pre-qualified by a recognized lender. And ask whether the pre-qualification means the buyer has actually been fully underwritten and is approved for a mortgage in a certain amount, or whether the approval is simply a non binding statement by a possible lender.
Q. If I enter into a contract and then change my mind, can I get out of the contract?
A. The parties to a contract can agree to release each other from the contract, but be aware that in some cases a party may owe his or her real estate agent a commission since some agency agreements call for the agent to be paid once a “ready, willing and able” buyer is located, whether or not the closing actually occurs (unless of course one of the parties is not obligated to perform because a contingency stated in the contract has not been met), so the position of the real estate agents should be verified before any party to a real estate contract (where a real estate agent is involved) releases the other party from the contract.
The contract should define your legal exposure to the other contracting party, but the liability of a seller for not closing can include monetary damages to the buyer, and the possibility that the buyer will bring a lawsuit to compel the seller to close (this is called suing the seller for “specific performance”), which will typically put a cloud on the title and make it imposible to sell the property. If a buyer changes his or her mind (other than because one of the contract contingencies has not been met, such as a negative property inspection, or because the seller cannot provide good title, or the buyer has not been able to get a mortgage after exerting a diligent and good faith effort to get a mortgage), the contract may say the seller can keep the deposit as damages, or pursue greater damages through legal proceedings (which can be time consuming and expensive), so this is one reason why a seller should pay close attention to the amount of the deposit made by a buyer.
Q. If the contract says the closing is to occur on a certain date, but one party or the other is not ready to close on that date, is the non performing party in default?
A. Not necessarily. Unless a contract specifies that “time is of the essence” generally speaking, a party that has made reasonable good faith efforts to be ready to close, but cannot close, is accorded an additional period of time under governing case law within which to close, which period can be up to 30 days, or even more. You may want to discuss with your attorney or real estate agent the pros and cons of inserting a “time of the essence” clause into your contract. The standard real estate agent form does not have this clause, which needs to be carefully worded.
A. Title insurance is insurance to protect against defects in title to real estate, or the unenforceability of mortgage liens. It is intended to protect an owner’s or lender’s financial interests against defect in the title to the real property concerned. Generally, a title insurance company will provide a defense to an insured if the title to the property is attacked, or the validity of a mortgage is attacked.
When loaning money, institutional lenders will typically require that a policy of title insurance be issued to protect its interests. This is called a Mortgagee Policy, and is generally in dollar amount equal to the amount of the loan it is making.
A Mortgagee Policy will not directly protect an owner of property, and when buying a property one should consider the benefits and disadvantages of purchaseing an Owner’s Policy, which can be in the amount of the purchase, and which continues to protect the Owner even after a mortgage is paid off.
In Connecticut, attorneys act as title insurance agents, and receive a portion of the title insurance premium.
A. A short sale is one where a lender agrees to release its lien on a property, for less than what is owed to it. The lender may also agree to release the property owner from any deficiency (shortage of funds) that remains after the lender receives the proceeds from the sale. If you are involved in a short sale, whether as a buyer or seller, it is important that you work with an attorney that is experienced in handling such matters, and if you are the seller, make sure you have a clear understanding with the lender whether you are being released from any deficiency, or not. Do not assume you are being released from the deficiency.
Another consideration for the seller is that if the deficiency is forgiven, the lender may issue a 1099 tax reporting form to the IRS, and it may be that the amount forgiven, may be taxed to you as income. You should work with an accountant or tax attorney to determine whether or not you as a seller have forgiveness of debt income, and whether there is an exception that will allow you to avoid having the amount forgiven, considered as taxable income to you.
Q. What is a “Hubbard Clause”?
A. Generally, this is a label for a contract provision under which the seller agrees to sell his or her property to the buyer, but the buyer does not have to close until he or she sells another property owned by them, usually their existing residence. Under such a contract provision, if the seller gets another offer on his property, notice is then given to the buyer, and the buyer has a limited amount of time to either (1) drop the contingency and close on the purchase as if there had not been a Hubbard Clause, or (2) back out of the deal and allow the seller to sell the property to the other interested party.
Many think that a seller should avoid such aclause if possible. Some think other buyers will avoid properties that are already under contract with a Hubbard Clause, as too much trouble, or that their real estate agent may not want to continue to show their property on the assumption that the property is sold. However, such clauses can be helpful in the right circumstance.
The parties will want to pay attention to the following issues: how long does the buyer have to list their home for sale (if they haven’t yet); If the buyer’s house is already on the market, is it reasonably priced or not? how many days does the buyer have to drop the contingency upon receiving notice the seller has received another offer? Another question is whether the buyer can close without selling their home, that is, can they get approved for bridge financing where a lender will loan them money to buy the seller’s home, even without selling their existing home?
Q. What is a “mechanic’s lien”?
A. Connecticut law protects persons who work on a property or add value to it (including architects and engineers), or who supply materials, certain protections if they are not paid, by allowing them to file a lien on the property, within ninety days of last performing substantial work at the property, or delivering material to the property. This is a technical area of the law, and the law must be strictly adhered to or rights can be lost. Once properly filed, for purposes of determining priority of the lien (that is the date it is considered to become effective), the effective date will be the date work was commenced on the property, which may be a long time before work is completed and a lien filed.
At closings, sellers are required to execute an affidavit where they make a sworn statement whether materials have been delivered, or work done, within the last ninety days, and this is required so a title insurance company will issue a title insurance policy to the buyer of the property, and the buyer’s lender. Depending on the dollar value of the work done or materials delivered, the seller will have to obtain a lien release (or commitment to release a lien), or lien subordination, from the party concerned, so the closing can proceed. A seller should notify his or her attorney whether any lien releases of this sort will need to be obtained, early in the represetation.
Q What if I want to sell my house, but I do not want to use a real estate agent?
A. Some persons successfully sell their properties themselves and save the real estate commission, but real estate agents are trained in assisting clients successfully navigate these waters, so please think carefully before embarking on such a venture without an experienced real estate agent at your side.
Selling your property without a real estate agent requires you to consider the things that the real estate agent does, and whether you are prepared to market and sell your home without the expertise an agent brings.
Questions you might want to ask yourself are the following:
- How will I decide how to price my property, and what to list it at, and what is a reasonable selling price? (Of course you don’t want to under – price your property, but over pricing a property can be as big or bigger a problem, and can lead to “chasing the market down” in a declining market.)
- How will I bring my property to the attention of the market? (A real estate agent can help bring your property to the attention of the market, including by listing it in the multiple listing service, which is a manner in which real estate agents market their listings to other agents, and the market at large. Is your property situated so that if it is not in the multiple listing service, will it come to the attention of the community of buyers?)
- How will I know if the contract is in good form, and protects me, and if I am making the disclosures required of me by law? (Here again, a the real estate agent can prepare the contract, and help the seller comply with applicable laws that pertain to the sale of real estate, particularly as to making appropriate disclosures.)
- How can I get real estate agents to bring their clients to look at my property?
If after reviewing the various tasks that need to be attended to in marketing and selling a property, you feel confident that you can proceed without an agent, you should retain an attorney before taking steps to market your property, so that you can be advised about your obligations as a seller, and how to meet those obligations.
Please keep in mind that even if you as the seller do not hire a real estate agent, if the buyer of your property is represented by an agent, the buyer may assume you will pay their agent, so you may not save as much as you hoped, and the savings may be decreased such that you may wish you had retained an agent. You should expect an attorney to charge more for a transaction where no real estate agent is representing you, than one where a real estate agent is representing you.
Another consideration is that a buyer’s agent may be hesitant to even bring your property to the attention of a porspective buyer if they are uncertain about how they will be paid, or generally feel that dealing with seller / owners can be an inefficient and perhaps ill fated approach to a transaction. Some sellers for this purpose will give notice of “brokers protected” as a way to communicate to brokers that the seller will pay them a commission, but before you do this, you should consult with an attorney so that you do not create unintended obligations.
So there are a number of things to consider before trying to sell your property by yourself, but some people do this successfully, and if you think you have the capability, and the knowledge, and the time necessary to successfully sell your property without a real estate agent, we are available to assist you.
Q. Do all real estate agents charge the same commission?
A. No. The commission is negotiable and different agencies charge different amounts. Please note that if a listing agent (the agent that represents the seller) finds the buyer for the property, then their agency is entitled to the entire commission, but if another agency – not the agency you hired, brings the buyer into the transaction, that in a typical commission arrangement, the agent who brought the buyer into the transaction will be paid by the listing agent – usually roughly half of the total commission. There are real estate agents who charge less than others, but sometimes the discounted rates do not include some services provided by agents who charge the higher commissions. For example, you should inquire whether your property will be listed in the multiple listing service, and ask if the agent will pay the commission due another agent out of the commission you have agreed to pay.
Ask the agents you are considering to prepare a market analysis for you and to advise you on what you should list the property for, and what a reasonable selling price would be, and to tell you how they would market your property. Different agents have different approaches.
Q. What do attorneys do in real estate transactions?
A. Attorneys protect their client’s legal interests in dealings with other parties.
The attorney for the seller will review the contract (preferably before it is signed), talk to the seller about his or her duties and obligations, obtain commitments to release liens on the property, prepare documents for the seller to convey title including a deed, work to get the deal closed, talk to the seller’s real estate agent, attend the closing, and transmit the closing proceeds to pay off any liens.
An attorney for the buyer also reviews the contract (or if no real estate agent is involved, typically will prepare a contract), again hopefully before it is signed, and the title to the property and informs the seller’s attorney of any liens or title defects. The buyer’s attorney typically acts as the agent for a title insurance company which issues a policy of title insurance (typically required by institutional lenders and prudent for a buyer to purchase even if they are involved in a cash purchase). The attorney may also represents any institutional mortgage lender that is providing financing.
Q. What is a “use and occupancy” agreement?
A. This is an arrangement which usually involves the seller of a property needing to stay in the property being sold for a limited time after the closing. Attorneys prepare special agreements to address these circumstances. Generally, the seller agrees to pay a negotiated amount to the buyer for the right to stay for a limited period of time. This period of time cannot be overly long, because most mortgage documents require the buyer to occupy the property as their primary residence within sixty days of closing. Generally, the period of time should be as short as possible. Any buyer will have the risk that the seller may not vacate on time, or may not leave the property in proper condition, and the agreement the attorneys will negotiate will typically include provisions intended to protect the seller in these circumstances, but no matter what the agreement says, if the sellers do not leave by the closing, the buyer may find themselves in an uncomfortable situation if for any reason, the seller does not vacate the property by the date the buyer needs to move in.