For most people, the purchase of a home is their largest single investment in their lifetime. There are many complex aspects of a residential real estate transaction. With competent assistance and advice, the purchase of a home can be a very pleasant and rewarding experience. The purchaser should seek the advice of competent, knowledgeable persons about a residential real estate transaction, such as a real estate agent, an attorney, a mortgage banker, an insurance agent, a title insurer, and other persons that may be capable of inspecting the conditions of the property.
The Purchase Agreement
A contract to purchase real estate must be in writing to be enforceable, to include any specific terms for the sale. If a term is not in the written agreement, then the courts will not enforce it. The real estate agent prepares a proposed "offer" on a printed form purchase agreement, which is then signed by the purchaser, and then presented to the seller. When accepted by the seller, the purchase agreement (or "binder") is a binding contract which fixes the terms of the sale and the rights and obligations of the purchaser and seller. It is at this stage, before the agreement is signed, that the purchaser should retain an attorney to either review the agreement before it is signed, or to draft a contract with the purchaser's interests in mind. This is not to say that the agent does not have the purchaser's interests in mind, but, legally the agent is accountable to the seller, not the buyer, and their commission is paid by the seller. Therefore, if the sale does not close then the agent earns no commission.
Terms of the Agreement
Oral agreements about certain aspects of the purchase are not enforceable, and often times many written "side agreements" may not be enforceable if not specifically referred to in the purchase agreement. The agreement should contain, at a minimum, the following provisions:
- The names and addresses of the sellers and the purchasers, including how purchasers are to take title (e.g., joint tenant, tenant in common, etc.)
- The purchase price and how it is to be paid, including the amount of the down payment (if any), earnest money deposit, and who is entitled to the earnest money deposit if the sale does not close
- Arrangements for financing, especially the purchasers' right to cancel the contract if they are unable to secure financing that is acceptable to the purchasers
- The legal description of the property, to include fixtures such as drapes and carpet, and any personal property that is to be included in the sale
- That the seller has good title to the property, subject to reasonable reservations, restrictions, and easements. The purchaser should require the sellers to furnish an owner's policy of title insurance, containing only exceptions that are considered acceptable by the purchaser(s) and their attorney
- The condition of the property at the time of closing, including a provision that the condition of any major components of the house (e.g., roof, plumbing, heating, etc.) and all major appliances shall be satisfactory to the purchaser(s). The contract should specify any repairs or replacements which the seller has agreed to make.
- Whether or not a survey and/or appraisal are to be made, and if so, at whose expense
- All expenses that are to be divided between the seller and purchaser, (e.g., property tax, insurance, utilities, etc.) and the date on which the purchaser becomes responsible for paying them
- The method of handling any escrow accounts containing reserve funds for payment of taxes and insurance that are held by the seller's mortgage company
- Seller's statement of the condition of the property disclosing any non-obvious defects
- The date the sale will close, which is also when the purchaser will be entitled to possession
- A list of all closing costs and who is responsible for paying them
- That all closing documents must be acceptable to the purchaser's attorney
- That the terms of the contract, particularly any warranties as to the condition of the property, will survive the execution and delivery of the deed
- Which party bears the risk of loss if the property is damaged or destroyed between the time the purchase agreement is signed and the closing date
- The names of the sales agent and commission due to them, if any
- Signatures of the parties. The signatures of all co-owners selling the property are required
Unless the purchaser pays with cash, they will finance their purchase in one of three ways:
- By paying cash for the seller's equity, and assuming an existing mortgage
- By obtaining a new loan from a lending institution or other source
- By financing all, or a portion, of the purchase price secured by a mortgage, trust indenture, or real estate contract
The different types of available financing, and the documentation for the debt and security obligations, will vary for every transaction. Mortgage financing is furnished by various financial institutions which compete with one another. Like all goods and services, the cost of mortgage financing varies, and it can definitely pay to shop around. Most real estate agents are familiar with the various financing alternative available in the community, and can assist the purchaser in applying for a loan. The purchaser should also seek advice from their attorney, as well as any financial consultants they may have, to be sure that they fully understand their rights and obligations under the financing documents. This is especially important in transactions where the seller is financing all or part of the purchase price. Some of the financing documents offer more protection to the purchaser than others, and the alternatives should be fully discussed and considered before the purchase agreement is signed.
Prior to closing, the purchaser and lending institution should investigate the title to determine that the seller owns the property and has the power to convey it and to determine whether there are any reservations, restrictions, or liens against the property that would impair the property's use or value. In Montana, the title examination is generally handled in one of two ways.
The first is for the seller to furnish, at his or her expense, an abstract of title prepared by a title company. This is a compilation of deeds, mortgages, liens, and other documents concerning the title which have been recorded in the official land records of the country where the property is located. The abstract must then be examined by the purchaser's attorney, who gives an opinion as to the status and quality of the title.
The most commonly used method of investigating a title is through title insurance. With title insurance, the title insurance company investigates the title and determines whether or not it will it insure the title against challenges and claims, and to what extent it will insure the title. Typically, the title policy is issued for the amount of the purchase price.
In addition to the owner's policy of title insurance, which insures the purchaser, most lenders will also require that a mortgagee's policy of title insurance be issued (this is an insurance measure that protects the lender.) The mortgagee's policy insures that the purchaser is the owner of a clear title to the property, and that the lien of the lender is a "first lien" against the property. When the owner's policy and mortgagee's policy are issued simultaneously, the premium for the mortgagee's title policy is a nominal amount.
All title insurance policies have certain standard exceptions and exclusions from coverage. Special exceptions are often added to the policy. Thus, it is advisable for the purchaser to have his attorney review the title policy prior to closing to determine whether or not the exceptions and exclusions are acceptable to the purchaser. It is possible to have some of the exceptions or exclusions deleted from the policy for an additional premium.
In some situations, the purchaser may wish to require a "title insurance commitment" prior to closing. This is a written commitment to insure issued by the title company which states the various exclusions and exceptions which the policy will contain along with any conditions which must be satisfied by the seller or purchaser before the policy is issued. The title insurance commitment gives the purchaser and his attorney an opportunity to evaluate the quality of the title and the title insurance policy prior to closing.
The purchase agreement should specify how the purchasers are to receive title to the property. In the case of two or more purchasers, title can be taken either as joint tenants with right of survivorship, or as tenants in common.
There are many differences between these types of ownership, but the most important difference is that upon the death of a joint tenant, title to the property passes automatically to the surviving joint tenant without probate. With the other type, a probate is usually necessary to pass clear title to the decedent's heirs.
Frequently, there are different tax consequences associated with the different forms of acquiring title to real estate and the language used must be precise. The purchaser should seek the advice of his attorney or tax consultant with respect to the best method of taking title.
Closing the premises following any inspections he or she may have requested, has obtained and qualified for any necessary financing, and the examination of the title has been completed and is acceptable to the purchaser, the transaction becomes ready to close. Closing of a residential transaction will typically occur at a title company, although it is not unusual for the closing to be at the offices of the lending institution, real estate broker, or attorney.
Prior to closing, the closing documents will have been prepared and should be carefully reviewed by the purchaser's attorney. The closing documents generally consist of the following:
- Documents pertaining to the title, such as the deed conveying the property and any releases of mortgages or other liens that may be required by the purchase agreement or title insurance policy.
- The documents pertaining to the financing, such as a real estate contract, mortgage note, mortgage, or trust indenture.
- The closing statements, which contain an itemization of the closing costs, to whom they are charged and the various portions and disbursements made in connection with the closing.
The closing costs will vary from transaction to transaction, and although the parties may agree to allocate the closing costs in any manner that they wish, there are certain allocations that have become customary. The Realtor, attorney, or title insurer will be familiar with the various closing costs involved in your transaction and their customary allocations.
Under Montana Law, housing discrimination occurs when prospective purchasers are prevented from buying the home of their choice because of their race, color, national origin, sex, age, religion, physical or mental handicap, marital status, or the presence of children in the family.
If you think you have been denied a loan or a home purchase for one of these reasons, please call the Montana Human Rights Bureau at 1(800)542-0807 to file a complaint, and to learn more about your rights under Montana's fair housing laws.