The Advice I Give

Title Search

2011-09-05T18:29:00.000-07:00

I’ve mentioned a Title Search in several posts about securing a mortgage and buying a house. This is a very important document. It substantiates the owner’s right to sell the property—that there are no other ownership claims or liens against it. This verification is required by the buyer’s lending institution. And, if as a buyer you are opting for owner financing, you will want the property to have a clear title (or understand the possible consequences of not having one).

If you are planning to apply for a mortgage loan from a traditional lender a title search ultimately will be done for a fee by professionals in the title abstract field. A lender is not likely to accept your own research. However, should you find something questionable (something that could lead the lender to decline the loan) doing a search of your own as a preliminary to applying for that loan could save you the application fee. And, again, if you will be buying directly from the owner, you will want to know that your future right to own and sell the property will not be challenged by something from the past.

By the way, many people (even professionals in the field) will use the terms “title abstract” and “title search” almost interchangeably. There is a difference. A title abstract is basically a chronological listing of every recorded legal document associated with a property—some of them being fairly insignificant to a current sale e.g., the quit claim of a house from one spouse to the other; this would only be of interest if it resulted from or in a title problem. A title search on the other hand is a thorough search of records specifically to find problems (or their absence). The result is a report also called a Title Search. It may go back quite a few decades. To put it in perspective: Consider the claims of Native Americans on parcels of land in various parts of the United States. The disputes can be traced to documents (or the lack of them) and their legality from a couple of centuries ago. Some of these disputes have resulted in large financial settlements. Granted, the suits are federal rather than private, but a parallel can be made.

The report resulting from the title search will include a legal description of the property, i.e., physical address, subdivision, lot number, etc. It will also list tax information and any encumbrances. —Encumbrances are a multitude of issues, including:

Liens—These are claims against a property to secure a financial obligation or debt owed by the owner. There are several types of liens. A mechanic’s lien denotes an unpaid bill for work (or materials involved) done on the house or property, e.g., painting or roofing. Unpaid taxes commonly result in a lien. A lien can be put in place against the property as part of a judgment against the owner. (The cause for the judgment need not even be related to real estate.) Here’s a conundrum: Sometimes a property owner can be forced to sell in order to satisfy lien-holders. It is, however, difficult to obtain new financing when liens are in place. — In situations like this buyer can benefit greatly from having a legal advisor that specializes in real estate.

Covenants—These are deed restrictions. They govern how a property may be used, as well as what structures may be present. Especially in new subdivisions, developers, builders, and homeowners associations establish covenants to maintain the quality and value of the property. A covenant could limit on-street parking, the number and type of trees in each yard, the number and style of storage or utility sheds on the property, even the type and placement of children’s play structures—the list can be virtually endless. Here’s a historical note: In the past, owners could place restrictions on deeds that would prohibit certain people from ever buying that specific property. In the mid-1900s the US Supreme Court ruled that if based on race these restrictions were unenforceable. Now, tight strictures (and their enforcement) tend to limit buyer pools to those that appreciate them. (And to those who can afford to live with them.)

Licenses—These are privileges granted by the property owner that allow someone a particular use of the property. For example, years ago I bought a house adjacent to a park. On move-in-day I was busy unpacking when my kitchen door opened and in trooped five kids. They were on the way to my bathroom when they realized they didn’t know me. (We were all shocked!) Anyway, it seems there was a general agreement in the neighborhood that the children were free to use the bathroom in any house next to the park as long as the back door was unlocked. I can tell you that was one license I quickly suspended (until I became acquainted with their parents). This particular arrangement (this license) had been established by verbal agreement, but a license can also be granted in writing. Either way, licenses can be withdrawn at the property owner’s discretion. —Because of their flexible and informal nature, a researcher may not find the licenses attendant to a property when a title search is done. But once in a while one is recorded (this does not make it any more permanent), so I’ve included the topic in this discussion.

Easements: These are permanent privileges— specific usage rights that transfer with a change of user. The owner retains title to the property, but the party to whom the easement is granted has a real interest in it and to deny usage (for the stated purpose) would make the owner liable for litigation. Understanding the intent of the easement is important—and so is the wording of the document. Easements are recorded documents. Types of easements include:

Easement in Gross: Utility companies commonly hold this type of easement. It allows workmen and equipment onto property; a clause will allow them to place structures needed to maintain (or establish) service. The rights granted can be sold or transferred to another like company when the service provider changes. These easements are usually established on every parcel of land in an area during the development stage. They are the reason the wall of a house (or sometimes, even a fence) cannot be built directly on a property line.

Easement Appurtenant: This occurs when the owner of a property has secured some right of use to an adjacent property with a different owner. A common form of this easement is the shared driveway or the one that must cross a neighboring property in order to access the public road. This last example is further defined as an easement by necessity. The owner seeking the easement must be able to show in court that: (1) there is no way to access the public road from his property, (2) the property on which he wants easement to place the driveway does have access to the public road and (3) his property and the one he wishes to cross, share are adjacent.

Other types of easements may be encountered. One of interest is the Negative Easement: This type of easement prevents a property owner from doing something that would adversely affect an adjacent property—like obstructing their view of the ocean with a 20-ft. fence. Basically, easements are established for fairness, but prospective buyers and financers often consider them to be a problem.

Encroachments: An encroachment is the invasive use of a property from one adjacent to it. Usually it is unintentional. Probably, the most common encroachment is the fence that is set a few inches (or maybe, more) on the wrong side of a property line. A more serious encroachment would be part of a permanent structure extending a considerable distance into the neighboring property. Encroachments are usually discovered when a survey of the offered property is done at the request of the prospective buyer (or his lender). Owner resolutions to an encroachment vary: An owner may be recompensed for damages; the offending part of the structure may have to be removed, etc. Legal assistance is frequently required. — The amount of time an encroachment has been in place (unrecognized or ignored by the current or previous owners) is a major concern. The number of years will vary by state, but encroachments that are not confronted and resolved in a timely way become permanent encroachments—prescriptive easements—by law. This becomes an inherent problem in that prescriptive easements might not be documented, apparent only after a survey is done (or by talking to the neighbors). When discovered, they are viewed as problematic in the transfer of property titles, but is should be noted that (sometimes) the problem is rooted more in emotions than practicality. Before declining an offered property, a prospective buyer (especially one interested in taking advantage of owner financing) should always consider how detrimental to the use (or appearance) of the property the encroachment really is. Some mortgage providers will also take this into consideration.

As with any other aspect involved with the buying of a house and obtaining a mortgage (or other financing) there are many things to be considered when interpreting the ramifications of the findings in the report. A buyer is wise to educate himself in these matters. In my next post I plan to give information on how to do a title search.

What to Expect at a Real Estate Closing

2011-08-31T07:45:00.000-07:00

Closing—if there’s one word associated with buying a house that’s guaranteed to cause anxiety, it’s this word. Of course we’ve all heard horror stories about transactions that fall through right at the end. They are disheartening, but the event is really intended to facilitate a smooth financial settlement and transfer of property. Most conclude satisfactorily.

That said, during the course of the closing process you will be exposed to a lot of official information. Official can be translated as “financial and legal”— and maybe, as tedious. But based on the documents you sign, you will make commitment(s) that have long-lasting impact. So, in addition to financially, you want to be prepared mentally and physically. —To me, that means alert, not hungry and (to the greatest possible extent) with nerves under control.

In situations like this, ignorance is my greatest disadvantage. On the other hand, a decent idea about what’s going on is very helpful. My goal with this post is to give you a decent idea as to what you will encounter in this meeting. Hopefully, you will gain some peace of mind.

The first thing you need to do is make sure the timing of this meeting works for you. A number of people and agencies (the seller, the agent, the bank or other mortgagee, attorneys, etc.) have devoted time and effort to bring this transaction to its conclusion and ultimately, all expect to leave with some sort of financial gain. But, you—the buyer—are the star of the show. If you don’t come away with your prize (the house) and the responsibility that goes with it, few will get that satisfaction. You want your house. You want this meeting to go smoothly. A scheduling crunch would not be advantageous to either your attentiveness or your peace of mind. So, you should give some consideration to what else is in your plan of the day. Here are two sets of things to consider:

The first set involves timing—What’s on your schedule for the rest of the day?

An hour is usually allotted for a closing meeting. If something unexpected comes up, it could take longer: Don’t try to close over your lunch hour. Besides, this is a big event; you may want to take some time to celebrate. And, do allow yourself plenty of travel time—it’s not common, but some real estate sales fall through because the buyer is late.

Some buyers are also sellers. If so, you may need the money from the sale of a property you own to make the down payment on the one you want to buy. You could have two closings in one day. Schedule the one in which you are the seller as early in the day as possible. Depending on the various lenders and agents involved, the second meeting—the one at which you are the buyer—may follow immediately, but it’s possible it will be awhile and at a different location. Set the time of the second meeting to allow for the unexpected in the first and (again) plenty of travel time. Also, since selling a property carries its own excitement and stress, it doesn’t hurt to give yourself time to relax and refresh before you become the buyer.

Closing day is sometimes moving day. If you plan to move into your new house the day you close, get the closing done early in the day. Whether you have scheduled a moving company or are moving yourself, this is another event that requires time and is prone to unexpected happenings. (And again, it should hold an element of celebration.) If you’ve been renting, you’ll probably want to schedule the closing near the end of your lease. Or, if there are repairs and remodeling going on, you may want to pick a date that allows you to keep your current residence for a couple of weeks (or months) while the work is completed.

The second set of considerations continues to involve timing, but in conjunction with some timely monetary considerations. (As if a closing isn’t all about money—Ha!)

Don’t lose the “locked in” interest rate on your mortgage. Make sure your closing date falls before that option expires.

Consider tax advantages. Currently, the interest you pay on your mortgage can be deducted from your taxes. This gives you two things to think about: For a while, your mortgage payments are going to consist almost entirely of interest and it is possible to prepay interest. If you schedule your closing shortly before the end of the year, you can reap a quick tax advantage by claiming the deduction when you fill out your tax forms sometime in the next few months. (Note: Points paid at closing are not usually tax deductible and as none of your down payment is paid to the seller and not applied against your mortgage loan as either interest or principle, it is not deductible.)

Your closing meeting will be overseen by a closing agent. Depending on the state in which you are purchasing property, this person may be required to be an attorney. Securing a closing agent can be done by the buyer or the seller, but buyer’s lending institution often makes the arrangements. This agent represents neither you nor the

seller. He makes sure the paperwork is legally filled out and that funds are properly distributed. If there are questions, he can explain but not advise. Because the closing agent (attorney or not) is required to be neutral, it’s conventional (and wise) for both you—the buyer—and the seller to have your own attorneys present. In some cases, the seller may be excused from the meeting and represented by an attorney. But, the buyer must be present. And if you are married, your spouse needs to be present. (However, “must” is not always must. Sometimes the buying party also may be represented by an agent with proper Power of Attorney.) The lender and the real estate company might send representatives. Less typically, there could be others with a claim or interest in the property present.

The location for this meeting can vary. Often, it is held at an attorney’s office or a title company. (The office of the buyer’s attorney is frequently used.) Sometimes the lender’s office is used. Or, even a real estate office. —The professionals will work that out ahead of time and it will take place where there is enough room to keep in order all the documents you’ll read and sign.

And sign you will! —You’ll be likely to sign your name 20 to 30 times, maybe even more.

Some documents will deal primarily with your mortgage:

Truth in Lending Disclosure Statement: Your lender is required to provide the

interest rate, annual percentage rate, amount financed, and the total cost of the

loan for its duration.

Itemization of Amount Financed: This document summarizes and verifies the Truth in Lending Disclosure Statement. It provides specific financial descriptions and figures—like points.

Monthly Payment Letter: This document shows your total monthly payment and also breaks it down proportionally into its parts: Principal, Interest, and various escrows—like Taxes and Insurance.

Promissory Note and Mortgage: These are two separate documents. By signing the Note, you borrow the money to buy your house. You also guarantee repayment. In signing the Mortgage you allow your lender to hold your house as security against your failure to repay the Note. (This allows the lender to foreclose on your property should you default.)

It is important to read each document and understand it before you sign it. Figures should be checked against information you received previously. Those that were estimates should not have huge discrepancies. (Shortly after you applied for your loan, your lender should have given you a Good Faith Estimate of your closing costs. —Take a copy to your closing for comparison.) If you any questions, ask for clarification before you sign.

You’re not done signing yet. The following documents cover the transfer of the property to you. (Not without some more financial issues, of course.) Again read for understanding, and to make sure any errors are corrected before you sign these documents. The seller will also be signing some of these documents. In addition, there will be several documents (that I’ll not list here) requiring only the seller’s signature.

HUD-1 (Settlement or Disclosure Statement): This document declares the

various costs and amounts of the settlement.

Warranty Deed: This is the document that transfers the title of the property to

you! It will include your name, the seller’s name, and a description of the

property. (It may include a declaration of the seller’s right to sell.)

Proration agreements: You may have several of these to sign. They define how

you and the seller agree to cover the property expenses for the current month (or

a longer period). These will include property taxes and association dues, possibly

utilities and some services. This is necessary as cyclic bills do not all fall due on

the same date. If a bill, not due immediately and perhaps not yet even figured, is

to be split (Property taxes for the current year are a prime example.) you and the

buyer will sign a document stating that a cooperative division of the payment will

be figured and made at the appropriate time. A copy of this will be put on record

with the proper agency. Also, it’s not unheard of for a seller to remain in

residence past the closing date or for a buyer to move in beforehand. These

agreements define each parties’ responsibilities during the overlap (and in the

case of the seller, the end to any responsibility). It’s possible that some

reimbursements are due to one party or the other. In theory these are paid off

individually. In practice, one check is written in the amount of the difference by

the one of you owing the most.

Name Affidavit: You (and your spouse) must verify that you are who you say

you are (and should list any a.k.o.s). Make sure you have on hand the usual two

official forms of id—one of them must be photo: A driver’s license and credit

card should do.

Acknowledgment of Reports: Signing this document affirms that you have seen

all the ordered reports on property you are purchasing. These reports will almost

certainly include the termite inspection and a survey of the property. A flood

evaluation is becoming more common in many places. There may be others.

Title Search or Title Abstract: You will sign one or the other of these documents.

(An abstract, however, could be attached to a title search.) Essentially, each of

these is a chronological list of all documents and actions on record about the

property you are buying.

The above should give you a sense of what you will sign at your closing. The documents on this list are fairly common. Depending on your locale and the findings in various searches and reports you may have others to sign and you will probably have to provide proof of things like Homeowner’s Insurance. Regardless, you do not have to be surprised. Do some homework. (You really do need to read these documents ahead of time. If the closing meeting is your first exposure to them, an hour will not be nearly long enough to cover everything.) Talk to the various professionals involved; they’ve done this before. They can tell you what to expect, both generally and in your particular instance. If you have reached Closing, all parties are interested in a successful transaction.

There is one other important aspect of your Closing: Paying. I mentioned above that you and the buyer will probably settle a few small accounts. You will have to provide a certified check to cover these larger sums:

Closing Costs: These cover a variety of fees, including any points you’re paying

to buy down your mortgage interest rate. Closing costs can vary, but generally

run at 2-4 percent of the purchase price for your property; they should be

negotiated ahead of time. Within 24 or 48 hours before your closing call the

closing agent’s office to get an anticipated figure. Purchase a certified check in

that amount. Have it made payable to you. (You’ll sign it over at the meeting.).

You should also be prepared to write a personal check to cover any slight increase

in these charges as until paid they are really only estimates. (As another

safeguard against exorbitant changes check your closing costs against the figure

on line 303 of your HUD-1 Settlement Statement (refer to the above section on

documents you will sign).

Payment for the House: You will be expected to make your down payment to the seller at the closing. The amount of this payment will have been negotiated early in the process of buying a house. The amount you now pay will be adjusted down by any applicable deposits you may have made. A personal check is rarely acceptable, so this figure is usually included in the total for the certified check covering your closing costs, (The closing agent will have funds from your lender—likely a check—for the balance of the purchase price.) And, by the way, the seller does not actually receive his money the day you close. It takes a few days for the closing agent to make the required disbursements.

Escrow Accounts: These are reserve accounts designed for the accumulation and disbursement of funds for recurring, long-term bills, like required insurances or annual property taxes. They are usually managed by your mortgagee. The money to set up these accounts is likely to be included as part of the total for the certified check you’ll bring. Thereafter, part of each monthly house payment will go to Escrow. —And in practice it will be just one account; the individual bills will be accounted for through bookkeeping.

There is no doubt about it: You will be committing a lot of money on the day of your closing. You will be committing it to your future. —That’s exciting! In the days preceding this event take the time to talk to the professionals involved. Familiarize yourself with the documents, forms, and figures. View them with the perspective of what you will gain—your house. If you do this, you should experience more anticipation than anxiety at your closing.

real estate closing

2011-08-19T20:23:00.000-07:00

What to expect at a real estate closing