1. Prepare "Contract for Purchase and Sale" of Real Estate: This is usually done by the Buyer, but it may be done by either party. The Buyer will often want the Contract to contain various contingencies clauses that allow him to cancel upon the occurrence of specified circumstances. A common type of
contingency allows the Buyer to cancel if he or she is unable to obtain
financing. Developers often negotiate various contingences that allow
them to cancel in the event that their "due diligence" investigation
reveals that the property is not suitable for their proposed project
(issues such as zoning, environmental pollution, appraisals, government
Rather than having a series of specifically worded contingency clauses it may be preferable to simply have a "free look" type provision that gives the Buyer a specified period of time in which he or she can cancel the contract for any reason (thus allowing for the performance of whatever due diligence investigations deemed appropriate).
2. Prepare an Earnest Money Escrow Agreement. Prepare this agreement when a third party (such as the attorney for one of the parities or
the title company) will hold the buyer's deposit so that the buyer will
know that the deposit will be returned expeditiously in the event that
the buyer is entitled to its return pursuant to a contingency that may
be specified in the Contract (such as a financing contingency, etc.).
The Escrow Agreement does not unnecessarily have to be a separate
document but can be included in the body of the Contract for Purchase
and Sale (with the Escrow Agent signing the document so as to indicate
his or her agreement with the escrow provisions).
3. Execute Documents: The documents prepared
in accordance with paragraphs 1, and 2 above should be executed by the Buyer and
the Seller and the Earnest Money Escrow Agreement should also be
executed by the Escrow Agent. All documents should be carefully
reviewed by both the Buyer and the Seller with particular attention
directed to the costs and expenses to be paid by the respective parties
so that there will be no misunderstandings at closing.
B. POST-CONTRACT, PRE-CLOSING
4. Financing: If the purchase is to be financed with
a loan, the Buyer must obtain a commitment from the lender and then work to meet
all of the lenders stated requirements. Most lender will require that
the borrower put the property up as collateral. For that reason the
closing on the mortgage loan and the closing on the purchase of the
property must occur simultaneously.
5. Title Insurance: The prudent Buyer will order a
title insurance commitment ("Committment") from a reputable title insurance company (the actual policy will be issued after the closing). The Committment is a promise by the title company to issue a title insurance policy on property following the closing. It will contain a schedule of matters that need to be resolved prior to closing. These can include a listing of existing liens, mortgages, judgments, or other title defects. Often these types of items are cleared up at closing by being paid off out of the sellers proceeds. The Committment will include a separate schedule of items that are "execptions" to coverage. Sometimes the purchase contract specifies that the Seller must provide the Buyer with a title insurance commitment but more typically it the Buyer who is responsible for investigating and insuring the quality of the title for the property about to be purchased.
Lender's Policy: insures the mortgage lender's interest in the title to the property (the collateral for their loan).. Most lender's require this type of policy and charge the cost to the borrower at the loan closing.
Owner's Policy: Insures the owner's interest in the property. The premium for this policy is usually small if a lender's policy is also being purchased.
Title Insurance Agents
Many lawyers (especially those that represent lenders in loan closings) are agents for title insurance companies and can arrange for coverage. There are also any number of independent title insurance agents that are not affiliated with law firms.
Typically the title insurance agent will also act as the closing agent for the purchase of the property
6. Survey: The title insurance Committment will typically require that a survey be done so determin if there are any "encroachments" on the boundaries of the property that might result in a loss of title to a portion of the property through the operation of the doctrine of "adverse possession". If there is no survey done an "exception" will be added to the title policy for any matter that might have been revealed by a survey
7. Leases: The Buyer should examine any leases
currently in effect on the property (title is usually taken subject to all existing
lease agreements). A purcent buyer would require that the Seller provide a signed statement from each tenant confirming what the monthly rent is, the amount of the security deposit being held by the landord and the date that the term of the lease end.
8. Appraisal: The Buyer,if so desired, may order an appraisal of the property. Often an Appraisal is require by the lender is there is one.
9. Termite and Other Physical Inspections: If the purchase contract has a "free look" period allowing the buyer to cancel during a specified period of time, the buyer should retain expert consultants to inspect for termites and to inspect the phyical condition of the property.
10. Estoppels: The Buyer must to request "estoppel" statements from all mortgage and other lien holders shown on the Committment stating the amount of money that will be required to release the lien. These will be required by the title company as a precondition to closing. Under the law of "promissory estoppel" the lien holder is bound by the representations made in the statement. The Buyer can request a mortgage holder's permission to assume the obligations of the Seller under their mortgage along with conditions and instructions for assumption.
11. Zoning: Contact the relevant body of local governement to confirm the zoning on the property to confirm that it is compatible with the intended use.
12. Back Taxes: Check with the city and the county real property tax collector to be sure the taxes and all other assessments have been paid and ask for the amount of taxes due for the most recent tax year, because
this figure will be used to prorate taxes on the closing date.
13. Recording Fees: Contact the Recording Department for the county in which the property is located to determine the fees for recording all documents
and any other fees which must be paid at the time of recording, such as documentary stamps and intangible tax, in order to prepare the closing statement.
14. Closing Statement: There needs to be a statement indicating how closing costs and sale proceeds are to be paid and disbursed. The closing statement is usually, but not always, prepared by the Buyer. If a mortgage loan is
being used to pay a portion of the purchase price there will be one
closing statement for both the loan closing and the closing on the
purchase of the property (wherein the costs and disbursements for both
transactions are consolidated). Most of the figures required for a
closing statement are self-explanatory. However, some discussion is
necessary with reference to the prorations for taxes and interest on
mortgages: (i) Taxes - Real property taxes are usually due near the end
of the year to which they apply and are prorated to the date of
closing, with a credit given to the Buyer for the number of days the
Seller has owned the property based on the taxes on the property for
the prior year. The new owner, i.e., the Buyer, will then be
responsible for paying the entire tax bill for the year in which he
obtained title to the property. (ii) Interest - Interest on most
mortgages is paid in arrears, i.e. a mortgage payment which is due on
November 1st will cover interest due on the mortgage from October 1st
through October 31st. Therefore, if closing is to take place on the
15th day of October, the interest for the month of October should be
prorated to the date of closing, with the Buyer receiving a credit for
the number of days the Seller owned the property during the month of
October. The Buyer will then be responsible for paying the entire
principal and interest payment due on November 1st.
15. Mortgage and Note: If a mortgage loan will be used to pay the purchase price prepare a Mortgage and Security Agreement and a Promissory Note covering the financing. Prepare an Assignment of Rents and Leases if required by
the lender as additional collateral for the loan.
16. Payment at Closing: The Buyer must have cash or a certified or cashier's check for the amount needed for closing, as indicated by the closing statement, and must bring an insurance policy covering the property
listing any mortgage holders as "loss-payees".
17. The Closing: All closing documents should be properly executed and all monies should be paid out in accordance with the closing statement.
18. Record the Deed: all Satisfactions of Mortgage, Termination Statements under the Uniform Commercial Code, plus any new Mortgages and Assignments of Rents and Leases. The Buyer is generally only responsible for recording the Deed and any Assignments of Rents and Leases required by any new Mortgage holder, together with the payment of recording fees, documentary stamps and intangible tax as required under the Contract for Sale and Purchase; however, the Buyer should confirm that the Seller has recorded all Satisfactions of Mortgage and Termination Statements under
the Uniform Commercial Code.
20. Title Policy: Once all documents are recorded request that the Owner's Policy of Title Insurance be issued.