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Did You Know? Why You Need a Lawyer When You Buy a House

Purchasing a house is likely to be the most expensive and significant transaction you make in your entire life. Home buying involves the law of real property, which raises special issues and problems not present in other transactions. A real estate lawyer is trained to deal with these problems.

The average home sale involves the seller entering into a brokerage contract with a real estate agent. When the broker finds a potential buyer, the broker conducts negotiations on behalf of the seller. The broker often acts as an intermediary between the buyer and seller. Once an agreement is reached, the broker will draft a formal written contract for the sale—a purchase agreement—that the buyer and seller will use to bind the transaction. The buyer then seeks a commitment for financing from a lender. The property title is searched to satisfy the lender and the buyer. Finally, the property is transferred from seller to buyer, and the seller receives the purchase price bargained for during the negotiation and due under the contract. This seems simple, but without a lawyer, because of the sheer enormity of the value exchanged, any complications or mistakes can have ruinous consequences.

A real estate attorney can help you prevent several frequent troubles with property transfers. Sellers can easily enter into brokerage agreements that neglect a number of legal problems. This happens quite often; realtors often use standard forms, expecting that they will cover all circumstances or will be easily customizable for unusual circumstances. Standard forms can be suitable for the most basic deals. Savvy sellers and buyers will have all agreements reviewed.

In the absence of an agreement to the contrary, the seller may become liable to pay a brokerage commission even if a sale does not occur, or liable to pay more than one brokerage commission. If the agreement allows the seller the right to negotiate on his or her own behalf, for example, you may avoid this problem.

The seller should seek the counsel and opinion of a lawyer regarding the brokerage agreement. Even if the agreement is a standard form, the terms should be explained to the seller. If necessary, the agreement should be revised.

Whether or not a lawyer is needed throughout negotiations, the buyer and seller each may want or need to consult with their respective attorneys to answer essential questions, such as the tax consequences of the transaction. The tax consequences may be of immediate relevance to the seller. For example, the income or capital gains tax consequences of a sale, especially when the seller turns a great profit, can be significant. A lawyer can advise the seller about whether he or she can make use of advantageous tax provisions that provide exclusions of capital gains in some situations.

The most important document in the transaction is the purchase agreement. While boilerplate forms are handy, an attorney can be helpful in explaining complex forms and making changes and additions to reflect the mutual intentions of the buyer and seller. Several issues may come to light in the purchase agreement, for example:

  • Has the property been changed? Additions? Detractions? Were the changes recorded?
  • Are all alterations to the property that the buyer has in mind able to be made in accordance with zoning and land use laws?
  • If a buyer has an engineer or architect inspect the property, what happens if defects are found? What constitutes a defect? What defects will break the deal?
  • What if the property requires environmental cleanup?
  • What are the consequences of the closing not occurring? What happens to the down payment? Will an attorney hold the down payment in escrow? Are there proper instructions?
  • How will payment be made? Is the closing appropriately conditioned upon the buyer obtaining financing?

Buyers often have to finance most of the purchase price for the property with a mortgage loan. The purchase agreement should contain a carefully worded provision subject to the buyer obtaining a commitment for financing from a lending institution. Remember that boilerplate forms can be insufficient in considering the mutual intentions of the buyer and seller absent revision.

Many kinds of mortgages may be available. Mortgage loan commitments and mortgage loan documents are almost always complex. An attorney can review and explain the importance of those assorted papers.

When the purchase agreement is signed, the lending institution will require evidence that the seller’s title to the property is not defective. A buyer may purchase property regardless of the state of the title, but the mortgage bank will not supply the funds without proof that its interest will be perfect. Minnesota operates under the Torrens system. A title search will reveal the state of the title to the extent it has been recorded.

An attorney can verify that the legal description is accurate and determine any recorded problems with adjoining owners or prior owners. He can explain the consequence of easements or covenants imposed by a previous owner and any legal restrictions that might hamper your ability to sell the property.

The title search does not inform the buyer or seller of current and future zoning restrictions. An attorney can explain zoning and land use further.

The closing is a significant part of the purchase and sale transaction. The deed and other closing documents must be drawn. The seller passes title to the buyer, who in exchange surrenders the remainder of the sale price. This final balance is usually paid at least in part out of the proceeds of a mortgage loan. A closing statement should be prepared prior to the closing to indicate the payment and receipt of monies between the buyer and seller. An attorney can help to explain the character, quantity, and equity of closing costs. When the deed and mortgage instruments have been signed, an attorney can ensure that these papers have been properly executed.

The closing can be complex and bewildering, especially to first-time buyers and sellers. The parties in attendance at the closing can include the seller and buyer, their lawyers, a representative of the title company, a lawyer for the lending institution, and the real estate broker. Any manner of last-minute disputes may arise. If you are the only person without an attorney, your interests might be at risk.

Maybe the most important reason to hire a lawyer is the conflict of interests between the parties. The buyer’s and seller’s interests may be opposing. The brokers and agents, especially those working on commissions, can have their own professional and personal interests. The broker usually owes a duty to the seller, and the lender is found by the buyer. Both sides want to see the deal completed though, since that is ultimately the source of their income.

Brokers, agents and lenders cannot provide legal counsel. The respective lawyers for the buyer and seller will serve only their own clients’ best interests. Your lawyer will be the only one who is looking out only for you. Seeking the advice of a lawyer is a very good idea from the time you decide to sell or buy a home until the end of the closing.

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