Real Estate Property

A. Before you sign the Purchase Agreement (“Offer to Purchase”):

1. Government Codes. Check with the local building [and health department if a business] to see what corrections, if any, need to be made. Call the county zoning office to check the current zoning on the property to be sure it is compatible with your intended use. Appraise the value of the corrections and deduct these corrections from the amount you are willing to offer. Sellers be advised that you must execute a disclosure statement to notify the buyer of all known defects. Your real estate agent usually checks to confirm that this has been done. Buyers, especially buyers of new construction should first visit with the neighbors to see what the neighbors would do differently from everything from materials to the blueprints to contractors to landscaping. The insight is very helpful and saves costs that can add up really quickly.

2. Negotiate the Terms. Remember, the offer to purchase is fully negotiable and the terms are not etched in stone. You are not bound to boilerplate forms. You are bound, however, once signed. Be absolutely sure to specifically list any furnishings, equipment, or attachments to the property. Most equipment is sold “AS IS” which means that the seller does not guarantee their condition and that the purchase price reflects the value. The purchase price is always a business conclusion, not a legal one! In any event, the seller must pay certain title fees, recording fees, and taxes that typically range from $1,000 to $8,000 so be sure you get an estimate from a title company in advance so you know what to expect! I strongly suggest that if you are a buyer paying cash, you negotiate to have the seller pay all closing costs including title fees, title prep costs, closing costs, and realtor compliance costs. This should be done in writing from the onset, and signed by both parties.

3. Offer to Purchase. DO NOT SIGN ANY PAPERS UNTIL YOU CONSULT AN ATTORNEY!!!! The Seller or the Buyer’s real estate agent usually prepares an Offer to Purchase and Sale Real Estate. This is the contract that binds the parties to transfer title in exchange for money. If the property is being sold by the owner, the seller should be confident that the buyer is pre-approved for a mortgage otherwise it may be a waste of time if the buyer is later determined not to be qualified. Only accept deposits/offers from pre-approved buyers. Be sure to obtain my prior approval on the disclosure forms required by law as well as the offer to purchase before you sign. The buyers should require the realtor to promise in writing that no “compliance fee” will be charged, a fee charged to the buyer for complying with the law!

4. If the Buyer believes that the property may be sold in the interim, prepare an Affidavit and Memorandum of Agreement for Purchase and Sale for recording in the public records of the county where the property is located.

5. Deposit. If the Purchase Agreement does not detail the conditions of the deposit, prepare an Earnest Money Escrow [deposit] Agreement to detail the conditions governing the deposit.

6. The Buyer and the Seller should execute the documents according to the above paragraphs and the Escrow Agent should execute the Earnest Money Escrow Agreement. All documents should be carefully reviewed by both the Buyer and the Seller with particular attention directed to the costs paid by the respective parties to prevent any misunderstanding at closing.

7. Mortgages. You may wish to obtain pre-approval from a mortgage lender for a floating sum. In any event, you want to investigate with your CPA and mortgage rep the different rate points and options. The differences could well affect your tax return and long-term plan. Large mortgages in or near retirement should be avoided. See me for details and/or referrals.

8. The Buyer should examine any leases currently in effect on the real property since title to property is usually taken subject to all existing lease agreements.

9. Simultaneous Buy and Sell. If you are buying and selling property at the same time, be sure to have provisions in the purchase agreement that specifically permit you to stall the closing until such time as you sell your current house. Otherwise, you might have to incur the expense of bridge loans to cover two properties at the same time. That can be pretty expensive and can be avoided if the language is properly drafted.

10. First-Time Home Buyers: Be sure to consider whether you want to take a penalty-free withdrawal from your IRA up to $10,000. If so, contact me for details. Also, contact your mortgage rep to see if they participate in the Michigan State Housing Development Authority grant program or the Mortgage Credit Certificate Program. I STRONGLY SUGGEST you get a mortgage or credit program with a mortgage company that is a participating mortgage company through MSHDA. Your CPA can calculate how many thousands you will save over the long term. Your tax advisor can help you understand the program rules for a credit based on certain income limits as detailed by the authority. See: MI State Housing Development Authority

11. Land Contracts. I strongly suggest that buyers and sellers on land contracts do the following: execute a deed at a closing held by the title company until the last payment is made [in case a seller dies or leaves the area]; use a title company to issue a policy at the time of the sale and process the applicable transaction documents; and have an attorney review the title work.

12. Using a Realtor. If the property has to be sold quickly, is in an area that doesn’t move well, or if you choose not to market your property as a seller, then a realtor can be a big help. They usually charge about 6% commission based on the sale price. Recently, realtors have been charging “compliance fees” which, in my view, should be negotiated OUT of the listing contract from the beginning by the client. Many listing contracts require the commission to be paid even after expiration if you sell the property to anyone who was shown the property for up to 180 days. This should be negotiated OUT as well. If you need a referral, please email me and I can send back a list to choose from.

B. After you sign the Purchase Agreement:

1. Title Insurance. Title insurance is required as it guarantees that the buyer is getting a deed free of any other person’s claim. The Seller usually orders and pays for a Commitment for Title Insurance as well as the title policy [usually between $200-500] that will evidence current title information and insures the buyer of good, marketable title. The Buyer must make sure this has been done. If the buyer will finance the purchase with a new mortgage, the buyer must pay for a title policy that insures the mortgage company’s interest in the property. Thus, there are actually two title policies: one insuring the buyer, the other insuring the new mortgage company. If any parties are not going to attend the closing, or if any parties are out of state, you MUST notify the title company in advance.

2. Appraisal. Order an appraisal of the property, if necessary or desired [usually the mortgage company orders this].

3. Survey and Inspections. Order a survey of the property [I always recommend this to prevent later boundary line disputes especially where the land is vacant, or where no prior, current survey is available], a termite inspection, and an inspection of the building. The buyer cannot rely on a mortgage survey if there is a later mistake. Thus, the buyer has to pay $2- 4,000 more if they want to be sure of the boundaries.

A special note: an environmental survey should be completed as a rule, though many folks pass on this if it is a subdivision. New laws place liability on the current owner of property for toxic or contaminated soil even if it was the result of an earlier owner.

4. Mortgages. If the Buyer is assuming the underlying mortgage, obtain Estoppel Affidavits from all mortgage holders and request, in writing, their permission to assume the Seller’s debt with conditions and instructions for assumption, if necessary. The Seller should request this information from the Mortgage holders or assist the Buyer in obtaining it.

5. Taxes. Check with the city and the county real property tax collector to be sure the taxes and all other assessments are current. Ask for the amount of taxes due for the most recent tax year, because this figure will be used to pro-rate taxes on the closing date. Michigan residents must execute a homestead exemption certificate on their new residence and rescind the certificate on the property they are selling. See your city treasurer for details and deadlines! Sellers be advised that you generally pay the state transfer tax [usually between $500-1500], unless you negotiate otherwise. This is often a surprise to the seller on the settlement statement. [If the subject property relates to a simultaneous business closing where the seller is ending the business, DEMAND A STATE PROPERTY TAX CLEARANCE CERTIFICATE.]

6. Insurance and Utilities. The Buyer should order a homeowner’s insurance policy immediately and ask the agent to supply a binder to present at closing that shows coverage. The seller should order a final meter reading for all utilities and the title company will traditionally order a water escrow account until there is a final read since unpaid water bills become a lien on the property.

C. Closing

l. The following documents are usually prepared or provided by the Seller, the Title Company, or closing Agent:

a. Closing/Settlement Statement. Most of the figures required for the closing statement are self-explanatory. Closing statements are notoriously late and the buyer often finds out the actual payment amounts just hours before closing. Be prepared to have enough funds readily accessible. Some discussion is necessary about the prorations for taxes and interest on mortgages:

(l) Taxes – Real property taxes are usually due near the end of the year to which they apply or they may be due at the beginning of the tax year, be sure to have your real estate agent check with the local taxing authority. Taxes 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 for the prior year. The Buyer will be responsible for paying the tax bills that come due after closing.

(2) Interest – Interest on most mortgages is paid in arrears, i.e. a mortgage payment which is due on November lst will cover the interest due on the mortgage from October lst through October 3lst. Therefore, if closing is to take place on the l5th day of October, the interest for 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 October. The Buyer will then be responsible for paying the entire principal and interest payment due on November lst.

b. The mortgage company will prepare a Mortgage Agreement and a Promissory Note.

c. If business property, the mortgage company will usually require an Assignment of Rents and Leases.

2. PAYMENT: The Buyer must have cash or a certified or cashier’s check for the amount needed for closing, as shown by the closing statement. If the source of the payments is from another state or country, please be advised that clearance may take weeks so contact me well in advance to avoid lengthy clearance problems.

3. INSURANCE: The buyer must bring an insurance policy or binder covering the property listing any mortgage holders as “loss-payees.”

4. Bill of Sale. This evidences the Buyer’s title to personal property.

5. Properly execute all closing documents; there are a host of affidavits: Compliance Agreements, Owner’s Affidavit for identification, IRS disclosure statements, and even your mother’s maiden name; pay all items according to the closing statement.

D. Follow-Up

I request that the final title policy and all recorded documents be sent to my address so I can verify that they have been properly recorded.

1. In particular, I check to make sure that the following occurs: Recording the Warranty Deed, all Satisfactions of Mortgage, Termination Statements under the Uniform Commercial Code [if business property], new Mortgages, and Assignments of Rents and Leases, if applicable. The Seller is only responsible for recording the Warranty Deed and documentary stamps. The buyer is typically responsible for recording any Assignments of Rents and Leases required by any new Mortgage holder, together with the payment of recording fees, and intangible tax as required under the Agreement 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.

2. Once all documents are recorded, request that the Owner’s Policy of Title Insurance issued.

3. SHOULD THEIR EXIST A PRIOR MORTGAGE ON THE PROPERTY, MONITOR THE MORTGAGE TO BE CERTAIN NO DEFAULT EXISTS. SHOULD A DEFAULT OCCUR, CONTACT ME IMMEDIATELY.

4. Commercial Property. If a business is sold and terminated, the seller should apply for a STATE PROPERTY TAX CLEARANCE CERTIFICATE and give a copy to the buyer. In addition, the parties should specifically detail who should make any repairs required by city ordinance in order to obtain the new, proper certificate of occupancy. Particular problems can arise when transferring a business and/or real estate, and a competent attorney can help reduce problems.