Mrs. Jones called to say that she was selling her home. Her husband had recently passed away (more about that in another blog entry). She is 78 years old and has owned the home for 52 years! This was the only home they ever bought. They had never sold real estate!
“What do I do?” she asked, sounding somewhat panicked.
“Not to worry” I said. “It’s all fairly straightforward.”
I then proceeded to walk her through the steps involved:
I. Listing the Property for Sale.
Most people use a real estate agent to assist in the purchase or sale of property. It’s not necessary; you can sell your house yourself, but a good agent can be very helpful in marketing your house at the right price and finding the right Buyer.
Agents are licensed by the State of Connecticut. They charge a commission for their services, which is contingent on the sale price. Traditionally, agents were paid six percent of the sale price, but more often these days five percent seems common. These commissions are negotiable. If the agent does not find a Buyer who is ready, willing, and able to purchase at a price satisfactory to you, no commission is due. The agent will have you sign a “listing agreement,” which is a contract giving the agent the exclusive right to represent you for a specific time period, usually six months. The agents earn their commissions by, among other things:
Most agents in the Hartford area are members of the Greater Hartford Association of Realtors, which has developed its own set of forms for real estate transactions. A good agent will work closely with your lawyer to ensure a smooth process for you.
Mrs. Jones spoke with an agent who was also a long time neighbor. The agent was familiar with property sales in their neighborhood. The agent was a member of the Greater Hartford Association of Realtors. She found a Buyer for Mrs. Jones and drew up a contract, which all parties signed. The Purchase and Sale Contract was on the standard form developed and routinely updated by the Association.
Sometimes, the agent will suggest that Seller assist Buyer with purchasing expenses, also referred to as closing costs. The Purchase and Sale Contract will state a certain amount of “closing cost credit” to be given to the Buyer. This credit is a reduction in the amount of money the Seller will receive. This may occur with a Buyer who can afford a mortgage on the house, but does not have a lot of money to put down. In those cases, the agent’s commission should be applied to the net sales price – the Purchase Price minus the closing cost credit.
II. Seller’s Disclosure Requirements.
The State of Connecticut requires that all Sellers prepare and sign a Residential Property Condition Disclosure Report. The report asks about the condition of the property and the mechanical systems. The report must be signed by Seller. When a Buyer submits an offer to purchase the property, the Buyer must also sign the report, indicating that the Buyer has read the report.
When I am involved from the beginning, I always counsel Sellers to provide as much detail as possible in this Disclosure Report. Most Buyers will have home inspections performed. Problems reported by the inspector can result in a request for Seller to repair or to provide a monetary credit. Often the inspector will find an issue with the property that the owner already knew, like a damp basement or cracked window. In those cases, if the Seller has listed the issue in the Disclosure Report, the Buyer may be foreclosed from seeking repair or credit, since the contract price was presumably based upon knowledge of these issues.
III. The Purchase and Sale Contract.
Purchase Price. This is the amount the Seller and Buyer have agreed upon, and is likely the single most important term for both parties.
Deposit. The Buyer should put up a deposit to secure the contract. Seller does not want to take the property off the market unless there is an almost certainty that the Buyer will complete the transaction. The amount of the deposit can be an indication of Buyer’s financial strength and good faith. Often there is an initial deposit followed by a second, larger deposit after Buyer’s inspection – see below.
The deposit(s) are usually held by Seller’s real estate agent’s broker (like Keller Williams or Raveis, for example). The deposit(s) are not given to the Seller until the Closing.
Personal Property. Seller should always indicate what goes with the property and what stays. The real estate agent will generally include these items in the listing. Appliances and window treatments are the most commonly discussed items. For the most part, Buyers have a right to assume that anything fixed to the property stays with the property. For instance, electric fixtures remain with the property, so if there is a special chandelier that Seller is taking, Seller must note that from the onset.
Inspection. Most Buyers will want to have the property inspected by a professional home inspector. In the old days, a Buyer might bring a father or friend along to “kick the tires.” Today, with asbestos insulation, radon, and other such issues, Buyers justifiably rely on professionals to assess the property. The inspection period is generally short – 10 to 14 days is common. Both sides want to know if they have a deal. The Buyer will show the inspection report to the Seller and indicate if there are any findings which are unsatisfactory to Buyer. If so, and no agreement is reached, the parties terminate the contract, the deposit is returned to Buyer, and the Seller continues to list the property. If an agreement is reached – the Seller agrees to repair certain items and/or give a credit against the Purchase Price for instance – the next date of concern is the mortgage contingency date.
Mortgage Contingency. In most cases, the Buyer will need financing from a lender in order to complete the purchase. The Purchase and Sale contract will typically then include a Mortgage Contingency Date. This is the date by which the Buyer must either have a commitment for a mortgage loan or must terminate the contract. Seller will have invested substantial time waiting for the Buyer to obtain the mortgage loan (usually six weeks or so) during which the property has been taken off the market. Hence, most Sellers will not enter into a contract with a Buyer without first seeing a letter from a lender indicating that the Buyer appears able to qualify for a loan of a certain dollar amount. This letter is called a Pre-Qualification Letter. Barring some unforseen circumstance, a Buyer who has pre-qualified will thereafter obtain a commitment from a lender for the necessary loan, known as a Commitment Letter. Should Buyer fail to obtain a Commitment Letter within the time allotted, Buyer may terminate the contract and receive back all deposits, or the parties may agree to a written extension agreement to provide more time if it appears the loan is likely.
Mortgage loans come in many varieties: conventional fixed, conventional variable, CHFA, FHA, VA are some of the more common. A conventional fixed rate mortgage is one where the Buyer is putting up at least 20% of the Purchase Price and receiving a mortgage for no more than 80% of the Purchase Price. This is a traditional mortgage indicating a Buyer with assets, income and good credit. The variable option usually means the Buyer’s income is not sufficient to qualify for a fixed rate, but the lender feels the Buyer is otherwise a good risk. CHFA, FHA and VA are all government loan programs which help Buyers (often first time Buyers) with insufficient assets but good income to buy a home.
Clear Title. Seller will deliver a Warranty Deed to Buyer at the Closing. A Warranty Deed affirmatively states that Seller has good title and will defend (guaranty) that title forever. Good title means that there are no liens (mortgages, home equity loans, judgments) outstanding against the property and no assessments for water, sewer, sidewalks, or the like. Sometimes there is an outstanding assessment which is being paid by Seller over a period of years. Seller can require that Buyer assume this responsibility, but only if this is disclosed before the contract is signed, and the requirement is included in the contract.
Closing. The contract will set forth a Closing Date, which is customarily a week or two after the Mortgage Contingency Date. This is the target date that the Buyer and Seller choose for completing the transaction. The date is not “set in stone” and can be set earlier or later to accommodate schedules. The Closing Date cannot be set, however, until the Buyer’s lender provides a “clear to close.” This is a statement from the lender that all underwriting requirements have been met and the lender is ready to prepare its documents and fund the Closing. Most lenders and lawyers need three business days from the “clear to close” to actually hold the Closing.
IV. The Closing.
Payoff of Existing Mortgages. We arrange for the payoff of all mortgages, home equity loans, and other liens, if any, at the Closing. Clients provide us with the name of their lender and the account number, and we do the rest. Home Equity Loans and Lines of Credit are mortgages. They must be paid at the closing just like any other mortgage loan.
Adjustments. Some expenses associated with property have been paid by Seller and will benefit Buyer. At the Closing, an adjustment will be made to reimburse Seller for payments made which will benefit Buyer. Taxes, homeowner association fees, sewer and water charges, oil and propane purchases fall into this category.
The Purchase and Sale Contract provides that there will be adjustments to the Purchase Price at the Closing. Property taxes and fire district taxes as well as certain sewer use charges in some communities are paid annually or semi-annually. By custom in Connecticut, a tax payment covers the period from the date the payment is due to the date the next payment is due. Therefore, if current, all Sellers will have paid taxes, and sewer use charges in some communities, covering a period after Seller will no longer own the property. Seller will receive an adjustment in Seller’s favor for the amount paid representing the period from the Closing to the next due date. Homeowner association fees and condominium fees are adjusted similarly.
Some properties utilize oil or propane as fuel for heating and/or cooking. As the costs for filling these tanks can be substantial, Seller is reimbursed at the Closing for the amount of oil or propane which is remaining or in some cases, Seller will arrange for the tank to be filled and charge for a full tank.
Your lawyer calculates whatever adjustments are appropriate to your property.
No adjustments are generally made for utilities. Utility companies (electric, natural gas, and more recently water) will take a meter reading and bill the Seller. A new account will be created for Buyer with the first bill starting with the Closing date. Telephone services, cable television, and internet services are similarly the responsibility of the parties: Seller must terminate services in Seller’s name and Buyer must make independent arrangements for whichever of these services Buyer desires.
Closing Documents Provided to Buyer. Your lawyer prepares and delivers at the Closing the following documents:
a. Warranty Deed. This is the document which transfers title to the Buyer. The warranties in the deed are that you, the Seller, have good title and you will defend that title forever. This document is recorded in the land records in the town where the property is located. We prepare the deed from the one which the Seller received when the property was purchased. That deed is provided to us by the Seller or the Buyer’s attorney after the title search has been done.
b. Conveyance Tax Statement. The State of Connecticut collects .75% of the sale price as a conveyance tax paid by Sellers. We prepare the one-page Conveyance Tax Statement.
c. Owner’s Title Affidavit. In addition to providing Buyer with a Warranty Deed, Sellers must provide a title affidavit providing Buyer with assurance that there are no title issues which could not be found in the title search. Chief among these potential issues are mechanic’s liens. A mechanic’s lien can be recorded by any contractor who has repaired the property and who claims to have not been paid for such work. Because the lien must be recorded within 90 days of the last work performed, the risk is that a mechanic’s lien can be recorded after a closing has occurred, which means that the lien would relate back to before the deed transfer. As a result, Buyers and their lenders demand that Sellers certify with an affidavit that no such work has occurred. Where there has been work done within 90 days of the Closing, a Mechanic’s Lien Waiver must be obtained. As your lawyer, we take the responsibility for making sure these issues are resolved.
d. Tax Identification Information. The federal government requires that all real estate transactions be reported to the Internal Revenue Service to assist in the collection of capital gains taxes. The IRS has created Form 1099S for this purpose. Many homeowners are exempt from these taxes if the property being sold is the person’s home and the sale price is below $500,000 for a couple ($250,000 for an individual). At the Closing, your lawyer will have you sign either the exemption form or Form 1099S, whichever is applicable to your sale.
e. FIRPTA. The federal government is also concerned that foreign persons may take sale proceeds back to another country without paying taxes here first. The Foreign Investment in Real Property Tax Act (FIRPTA) requires that you certify that you are not a foreign person, as defined in the act. If you cannot so certify, then there will be tax withholding at the Closing. Your lawyer will prepare the FIRPTA certification for you to sign at the Closing.
f. Payoff Letters. As stated above, your lawyer will confirm the amount owed on your mortgage. Your lawyer will then be responsible for transmitting that money to your lender immediately after the closing. We usually do this by overnight courier, and accompany the check with our transmittal letter and the payoff statement provided by the lender. If the Closing is about to happen and you have not yet made your monthly mortgage payment, we advised that you contact us first. Sometimes this payment will be unnecessary.
g. Undertaking and Indemnity Agreement. Your lawyer will ask you to sign an undertaking and indemnity agreement in which you agree to make sure a Release of Mortgage and/or Lien is recorded for every encumbrance being paid off at the Closing. Your lawyer will sign this document as well. We require that Sellers use CATIC Trac, a service of our title insurance company. CATIC Trac takes the responsibility of obtaining all required Releases for the modest fee of $35 per release. The best bargain in the entire closing process!
h. Settlement Statement (now sometimes referred to as a Closing Disclosure or CD). From your perspective, this document is the most important document at the Closing (besides the check for your proceeds, of course!). The Settlement Statement (or CD) details the financial aspects of the sale, including all of Seller’s expenses. Your lawyer prepares Seller’s figures and and transmits them to the Buyer’s lawyer. The Buyer’s lawyer is generally the Settlement Agent and, as such, is responsible for the final Settlement Statement and will make all payments at the Closing.
Seller will see all expenses broken down by payee and amount, including the real estate agent’s commission, your attorney’s fee, the conveyance taxes, any recording fees, any unpaid taxes, and any other expenses which must be paid in connection with the sale. The adjustments between Seller and Buyer are also shown with detail. The statement shows:
Seller not in Attendance. As the Seller, you are not required to be at the Closing. Certain documents, as outlined above, must be delivered at the Closing, and the Buyer must be given the keys to the property. However, your lawyer can do all of this without you if you prefer or if circumstances require. Mrs. Jones was moving out-of-state to live near her daughter. She had already made arrangements for housing in Virginia. Once she knew Buyer had a mortgage commitment, she packed up her house and moved. Coming back to Connecticut for a closing would have been a great difficulty.
Knowing Mrs. Jones would not be around, we then prepared all documents expected for the Closing, and had her come in to sign everything in advance. Since we never know what might arise, we also had her execute a limited power of attorney form giving me the ability to sign her name on any other necessary document. Of course, the authority under a power of attorney is only for me to sign documents which the Client approves.
After the Closing, we make arrangements to deliver to Seller a copy of the Settlement Statement, the payoff letter, and any other documents from that transaction, as well as the Seller’s Proceeds – the money Seller netted from the transaction. If Seller provides us with wiring instructions or a deposit slip, we can transfer money directly into Seller’s chosen bank account. Otherwise, unless Seller is personally coming in, we overnight funds to Seller.
And that’s it Mrs. Jones. Questions?
Mrs. Jones signed a contract with a Buyer who was getting a conventional fixed rate loan. The inspection went well, with one or two items disclosed that Mrs. Jones paid a handyman to fix. The Closing occurred on the date set by the parties. We had drafted all documents in advance, and sent them to the Buyer’s lawyer to review. All issues were resolved well before the Closing. Mrs. Jones was not there, having already moved. I attended in her stead. Everything went very smoothly and all parties were happy.