Buying A Home

Introduction

For most of us, buying a home represents the biggest purchase of a lifetime, and forms the basis of our retirement planning. Carrying out such a big decision, and getting it right, involves educating yourself and getting appropriate professional help. Many people, including lawyers, stand by to provide that help. In this booklet, The Missouri Bar will give you some ideas on how to help yourself, and some suggestions on how to use the professionals in the real estate industry to achieve your objective.

Educating Yourself

Most real estate professionals agree that if you buy a home on a whim or impulse, you will live to regret it. This is called "buyer's remorse," and it can cause unnecessary problems for everybody involved in the process. Therefore, you should start by defining your needs and capabilities. How much house do you need, in bedrooms, storage, and family space? What do you want outside the house, in yard, garage, and garden space? At the same time, you should determine how much house you can afford. This involves a careful calculation of how much cash you have available, and how much you can borrow. Most banks will welcome the opportunity to "pre-qualify" you for a loan by taking your loan application, reviewing your finances, and telling you the maximum amount theywill lend you.

Where do you want to live? You should consider factors such as proximity to work (travel time), style of the neighborhood (city, suburban, old, new, subdivision) and choice of school (Public, parochial, private). The more time you spend educating yourself and "looking around," the better decision you will make. So check out the real estate ads, drive around your favorite neighborhood and survey available homes, and check out community resources.

Getting Help

Help you can get for free. Throughout Missouri, real estate agents earn their commission from the seller's funds when the deal closes. You will generally find four kinds of agents, each of which must disclose to you the nature of the agency:

(a) a listing agent represents the seller only, and earns a commission from the sellers' funds at the closing.

(b) a selling agent will show you a wide variety of houses, and provide a wealth of information on your preferred neighborhood. A selling agent wants to see you buy a house and assist you through the process to closing, and shares the listing agent's commission.

(c) a buyer's agent offers a confidential relationship with you, and helps you negotiate the deal. The buyer's agent also earns a share of the listing agent's commission. If you have your own buyer's agent, you will not see a selling agent.

(d) a dual agent represents both sides of the transaction, a real conflict of interest. You should be careful about disclosing any confidential information, such as your "maximum price," to anyone except your own "buyer's agent" or your lawyer.

Help you pay for. Your lawyer will provide you with your best source of confidential advice, and will help resolve any conflicts that arise during the contract process. You generally pay a lawyer by the hour, and thus your lawyer has no financial stake in the outcome of your negotiations. The lawyer's fee typically represents a very small amount when compared to the purchase price. Your lawyer will act as your advisor, will choose the form of purchase contract, will draft the purchase contract, and will adapt it to your individual objectives. Your lawyer should also review the preliminary title report (the "title insurance commitment") and should review the title transfer documents prepared by the title company.

A loan broker will help you shop for the best real estate loan available in your market. The loan broker will charge you a fee based upon the size of the loan, and may give you very good help in steering you in a specialized loan program. If you already have an established banking relationship, however, you may not need a loan broker.

The appraiser, chosen by your lender, will examine the property you want to buy in light of market conditions in the immediate area and the general condition of the house, and will give an opinion of value based upon an established methodology. The appraiser primarily protects the bank from making a loan on overpriced property, but this may protect you, also. Generally, if the appraisal does not equal or exceed the contract price, you may not get the bank loan you counted on, and the standard contract will let you cancel the deal.

The title company searches the public records to confirm that your seller actually owns the property, and checks to see whether the property has any restrictions that the seller has not already disclosed to you. If the title company considers the title "marketable," it will issue a title insurance policy to you (and one to the bank) and will prepare all of the documents necessary to complete the transfer of ownership, called "the closing." The title company charges a small fee for its services, and a premium for the title insurance policy based upon the purchase price.

The surveyor, generally chosen by the title company (or the bank in some parts of Missouri), will inspect the property primarily to determine if any of the neighbors have built structures which overlap your property ("encroachments"). If the surveyor finds any such encroachments, the seller must clear them up before closing.

Building inspectors, provided for in the standard purchase contract, come in various specialties. The most important building inspector will look for defects in the house itself, especially structural problems. You will also need a termite and pest inspection, and an inspector for gas appliances. Some home buyers have begun to ask for a radon inspection. The buyer generally pays for all of these inspectors, and their modest fees represent a good investment in making the right decision about buying a house.

Getting a Deal

Once you have educated yourself and have a good idea of the house you want, then you need to gain more information about the house before you make an offer. Under Missouri law, the seller has the duty to disclose all "material" defects, ones which would cause you to change your mind about buying the house. In most parts of Missouri, the listing agent has available a printed questionnaire that makes it easier for the seller to provide truthful written disclosure. You should expect to see this disclosure form completely filled out. You should also inquire how long the house has remained on the market. The buyer's agent or your lawyer can easily get this information. The price should fall within the range you have already determined, or within your borrowing capacity as determined by the bank if you pre-qualified. Buyer and seller rarely agree upon the purchase price at first, and careful negotiation can save you a substantial amount of money. Your real estate lawyer or buyer's agent can give you realistic advice on how much of a negotiating range to expect, and can help you formulate your first offer. Negotiations will involve, most importantly, the purchase price, but will include the size of the "earnest money" deposit, the time limits, closing date, and clauses to deal with special situations.

Under Missouri law, only a written contract will bind the parties to the deal. In most areas of Missouri, real estate agents will generally use the same printed form for a purchase contract. The standard contracts try to anticipate most of the problems that arise during a transaction and provide a way of dealing with those problems. Your lawyer or buyer's agent can prepare the contract for you, and make sure that it meets your objectives. For example, most home buyers need to borrow money to finance the purchase. A "loan contingency" in your contract will let you out of the deal if you cannot get the loan you need. Other contingency clauses deal with the necessity of selling your present home, early possession, necessary repairs shown by the inspectors, and other problems. Your lawyer can select the most appropriate printed form for you. Only a lawyer can draft contract language which goes beyond the printed forms.

If you and the seller make any changes after you have reached agreement, you must reduce those amendments to writing, also.

Getting a Loan

Once you and the seller have come to terms and agreed upon a written contract, then you will turn your attention to financing the purchase. Even if you have sufficient cash to pay for the entire purchase, you may still want to borrow the money, since you can deduct the mortgage interest on your federal tax return. If you have already pre-qualified for your loan, the loan process will go very smoothly. If you have not already pre-qualified, your buyer's agent can help you learn about any special or subsidized programs available in your area for first time home buyers or a federally insured loan under the FHA, VA, or FNMA programs. You may also be able to take over the seller's existing loan, called a "loan assumption."

Market rate loans (with no subsidies) come in a variety of forms. Any bank loan officer will tell you what kind of a loan you can get from that bank, and you should inquire of several banks to obtain the best interest rate and loan provisions which suit your needs. Under federal regulations, the bank must provide you with "good faith estimates" of the closing costs, including its own charges, and other closing costs by the title company, the appraiser, and others who become involved in the transaction.

Inspecting the Property

Unless you already know about the condition of the property you want to buy, or would buy it regardless of the condition, your contract should provide that you can have the property inspected and can cancel the contract if the inspection reveals major problems. The inspection clause will provide for at least the following kinds of inspections:

A building inspection, done by a certified home inspection service, building contractor, or architect, will report only on the conditions of the house that the inspector can see. The inspector looks for structural problems, deterioration of the structure, and building code compliance. The inspector will also give an opinion as to necessary preventive or remedial measures, and sometimes will make an estimate of the costs. No one should expect a perfect house, and inspectors almost always find some defects. If the defects do not pose structural problems, the parties will attempt to negotiate for repairs or adjustment of the purchase price before closing.

A termite and pest inspection will look for both active infestation and inactive evidence of old damage from termites or other wood destroying pests. The inspector will propose remedial action, if needed, and may even propose a service contract. If the seller already has a service contract in effect, he should pass that on to you before closing.

In any area where natural gas heats most of the homes, the gas company will provide for safety inspections of all gas appliances furnace, stove, and water heater. The inspector has the authority to "red tag" the appliance until the owner makes repairs.

Radon, a radioactive natural gas that percolates up through the foundation, has become a major concern as a possible cancer causing element. Radon testing has become more common in residential sales. It takes about two weeks to gather the test sample, and another two weeks for the test results. Therefore,you must plan to initiate the test immediately, and allow ample time to get the test result before closing. The Environmental Protection Agency has set "safe" levels above which it recommends remedial action.

Many municipalities have a building code compliance inspection as a requirement before closing, or before occupancy by a new tenant. The code compliance or occupancy permit inspection looks for a whole different range of defects than the standard building inspection. You should find out if the municipality requires such an inspection, and make it a contingency in the contract.

Reviewing the Title Report

In most parts of Missouri (except St. Louis), the seller orders and pays for the title report, and at closing pays for the buyer's title insurance. The preliminary title report ("commitment"), issued before closing, shows who owns the property now. It will show whether the property has any restrictions on ownership or use, such as deed restrictions, easements, and subdivision restrictions. It will show any liens that the seller must clear up before closing. The commitment will also show what the title company requires the buyer and the seller to do in order to complete the closing under the terms of the contract. Reading and evaluating a commitment for title insurance requires legal knowledge, and you should make sure your lawyer has an opportunity to go over the commitment with you as soon as the title company issues it. You should always know what you are buying, and that extends to the legal status of the property as well as its physical condition.

Dealing with Surprises Before Closing

Surprises emerging before closing generally involve defects in the physical condition of the property. Even though the seller may have given you a good faith disclosure of his knowledge of the property condition, the inspectors may find conditions or defects which the seller did not know about. The contract should provide that you do not have to complete the deal if the seller does not repair or compensate you for the defects.

In addition, the preliminary title report may show defects or "clouds" on the title of the property that require action by the seller, possibly even litigation, to make the title marketable. Unless the seller can deliver marketable title, you cannot get a bank loan, and you can cancel the contract.

Surprises before closing generally require further agreement between the buyer and seller in order to avoid terminating the contract. You and your lawyer must pay careful attention to the time limits stated in the contract; if you miss a time limit, you may have lost the opportunity to protect your rights under the contract. If the best efforts of buyer and seller fail to reach an agreement to deal with a surprise and allow the deal to close, then the contract should provide that you will receive a refund of your earnest money. But if you have incurred expenses for inspections or a survey, then the contract will provide that those expenses come out of the earnest money before you receive your refund.

Closing the Deal

Closing a real estate transaction generally involves two stages closing on the loan, and closing on the title transaction. Closing on the loan means going to the bank and signing the loan and the deed of trust, a document in which you pledge the house as collateral for the purchase loan. The loan officer will explain to you the significance of all of the loan papers that the bank wants you to sign, all of the bank's charges, and the bank's requirements for performance of your obligations. When you have finished the loan closing, the bank will give you an envelope to take to the title company with all of its documents for recording, and a check for the title company. Sometimes the bank sends all of the papers to the title company, where you will sign all of the closing documents in one place.

The title company represents everybody in the transaction as the "escrow agent." This includes the buyer, the seller, the real estate agent, the bank, all lien holders, and anyone else who expects to be paid from the funds available at closing. The title company prepares all of the closing documents, and handles all of the money. When you finish the closing, you own the house. The title company, as the agent of the title insurance company, will guarantee that you have marketable title by issuing an owner's policy of title insurance.

Dealing With Surprises After Closing

Even if everything goes smoothly in your residential purchase, after you move into your newly purchased residence you may learn things that you did not know before closing, that the inspectors did not see, and that the seller did not tell you. When that happens, you should immediately ask your lawyer to review the contract and see what remedies you have. You may also have remedies outside the contract under general Missouri law. But no remedy after the closing works as well as full disclosure and knowledge before the closing, when you can terminate the deal if you find the seller cannot deliver what he promised in the contract.

Getting What You Pay For

For most people, buying a home represents both a dream come true and a business transaction requiring great care. You can guarantee that the dream does not become a nightmare by learning as much as you can about what you want to buy, and by seeking the professional help available to you. Even if you have gone through the home buying process before, each transaction presents new problems. Learning through the experiences of others, especially your lawyer and your buyer's agent, will give you the best chance of achieving a happy result.