GUIDE TO THE PURCHASE OF REAL ESTATE IN VIRGINIA
by Craig E. Buck and Teri Anderson Buck, Attorneys at Law
Copyright ©2012, Craig E. Buck and Teri Anderson Buck All Rights Reserved. No part of this material may be reproduced, transmitted or stored in any manner, in any form or by any means without the express written permission of the author. Permission is granted to reproduce and distribute this text in its entirety and, if by electronic means, with a link to URL www.virginiaclosings.com
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ABOUT THE AUTHORS: Craig E. Buck and Teri Anderson Buck are partners in The Buck Law Firm P.C., specializing in real estate, real estate closings and estate planning with offices at:
6800 Backlick Rd. Suite 205 Springfield, Va. 22150 (703) 451-5203
1109 Heatherstone Dr. Fredericksburg, Va. 22407 (540) 785-2122
Craig E. Buck was Chairman of the Northern Virginia Association of REALTORS Standard Forms Committee and is author of The Real Estate Contracts Handbook. He was named the Affiliate of the Year by the Northern Virginia Association of REALTORS.
Teri Anderson Buck received the Affiliate of the Year Award from the Prince William Association of REALTORS.
GUIDE TO THE PURCHASE OF REAL ESTATE IN VIRGINIA
Home ownership is a rewarding investment. Unlike stocks and bonds, it is one of the few investments you can use and enjoy. Financing is readily available allowing purchases with relatively small down payments. This leverage means the rate of return on invested capital can be substantially higher than that available from other investments. Favorable tax laws provide a deduction for interest paid, effectively lowering the real mortgage payment.
Gain from the sale of a personal residence can be tax free dollars in your retirement years. Your heirs can sell inherited property without tax on the appreciation accumulated during your lifetime. These benefits reinforce the desire we all have to own a home we can call "ours."
This guide explains some of the important aspects of a real estate purchase. The advice given here is general information and you should seek the guidance of experienced professionals. Competent advice will avoid many complications and hidden risks.
If you would like additional information, please call either of our offices. We will be glad to assist you with more information and closing instructions.
Real estate agents are licensed professionals. The Virginia Real Estate Board, an agency of the Commonwealth of Virginia, closely governs their activities. Agents undergo extensive training before receiving their license and most companies provide continuing educational programs. A "REALTOR" is a member of the National Association of REALTORS and bound by a Code of Ethics. Most agents in our area are also "REALTORS."
Real estate agents can provide services to both the buyer and seller. Agents must disclose, in writing, which party they represent. You will be asked to sign this disclosure acknowledging you have received it. Agents are usually paid by the seller, at settlement.
All commissions are negotiable. There is no “set” fee and you can find agents willing to discount their fees. There are also limited-service companies that will work with you for a flat fee rather than a percentage commission.
As a buyer, you may hire an agent to represent you. This is known as buyer agency. Buyer agents will expect you to sign an exclusive retainer agreement and you might be asked to pay an upfront fee. The retainer fee is usually refunded when you settle. The agreement may be “exclusive.” That means you agree to work only with that agent. In most cases, the seller pays the buyer agent's fee. However, if you sign an exclusive buyer agency agreement and buy a house from someone else, you would owe the buyer agent a fee.
Agents can pre-qualify you to determine your appropriate price range and financing. Agents locate suitable properties, provide information on comparable sales, help select financing, and write the sales agreement. The agent can also act as a "go between" in the negotiations between buyer and the seller. After writing the contract, the agent arranges for other services, such as a termite inspection, and processes the case to settlement.
However, the agent is your agent for a very limited purpose. The agent does not owe you a duty of fiduciary care -- the high standard imposed on attorneys and trustees. The agent answers to a standard of ordinary care -- what a reasonable man would do. The agent must disclose to you all known material matters concerning the condition of the property. The agent is not under a duty to take any special precautions or do any special inspections on your behalf. The agent may rely on statements from the other party unless it is obvious they are false or known to be false. If the agent represents you, the agent must also disclose known material aspects of the transaction (in addition to property condition).
THE CONTRACT OF SALE
The Contract will define the details of the transaction and is a binding commitment on the parties. Oral agreements are not binding. There is no "cooling off" period to change your mind, in Virginia, unless specifically provided in the written agreement. Be sure you have carefully inspected the property condition and neighborhood. Check the schools, shopping, taxes, special assessments, homeowner's association and surrounding zoning. The time to seek legal advice is before, not after, signing.
After signing the contract there is no further negotiation, so be certain you understand and agree to all of its terms. The REALTOR's Associations developed a standard-form Sales Contract that has gained wide acceptance in the area. The Contract is generally regarded as “fair but tough.” Every word is there for a reason and carries obligations and responsibilities. Every term is also subject to negotiation and change. There is no such thing as a “cookie-cutter” transaction.
The REALTOR's New Homes Sales Contract is not widely used. Most builders have their own Contract and they are notoriously one-sided. There is often no fixed delivery date, the builder reserves the right to change landscaping and materials without notifying you and the contract may not be contingent on your ability to obtain the loan or sell your existing home. Seek legal advice before you sign.
The items that cause most contract misunderstandings are:
* Personal property included in the sale (washer, dryer, chandelier, stove, fireplace inserts, drapes, etc.). The seller can remove anything not permanently attached. If you have any doubt at all, write the item into the contract. Do not rely on the fact the item is listed as being for sale. If it is not in the contract, it is not sold!
* Condition of the property. The standard contract provides the structure conveys in its present condition so you must inspect carefully before signing or hire a professional home inspector and make the contract contingent on acceptance of the report. The latest version of the contract used in most of Northern Virginia contains NO requirement that appliances, heating, air conditioning, plumbing, electrical and mechanical systems be in "normal working order" at the time of settlement. This is a major change from the accepted practices going back over 30 years. You have a choice of accepting the property in its condition on the Contract Date or after a Home Inspection. Obviously you want to choose "after a Home Inspection." You will conduct a final inspection of these systems shortly before closing and the Seller would be responsible for repairing anything that broke in the interim. You should get estimates and try to resolve any repair issues before coming to the settlement table.
* The division of closing costs including loan charges or points. You will probably have not yet picked a specific loan program, but you should have some idea of the loan discount points. Each point is 1% of the loan amount. If the seller agrees to pay one discount point and your lender charges two, you will have to pay the extra one.
* Arrangements for financing. Most contracts contain a contingency that will cancel the contract if the lender denies your loan or the property does not appraise for a high enough value. You must diligently pursue loan approval and apply for a loan within 5 days of contract ratification or you are in default. Many builder contracts do not contain these contingencies.
* You may apply for financing other than as specified in the contract, but you must obtain a contract addendum signed by the seller or you will waive the financing contingency.
* Set the settlement date and date of possession. Avoid the last few days of the month, if possible. They are the busiest and delays may result.
* If you need to sell a house in order to buy a new one, your contract can be made contingent on the sale of your house but you will need to add contingency language.
* Ask for termite, well, radon, home and septic inspections, if needed, and warranties.
* Consider carefully the choice of settlement agent.
Many subdivisions have a mandatory homeowner's association (HOA). The HOA is responsible for maintaining common area, such as private streets, playgrounds and sidewalks, There may also be restrictions that limit what you can do with your property. There may be restrictions prohibiting you from erecting an antenna or storing a boat that can be seen from a neighbor’s yard. Color schemes, fences and improvements may require HOA approval. These restrictions are a normal part of HOAs.
Virginia law requires the Seller furnish you with current documents explaining the association, its dues and regulations and noting any architectural control or maintenaince violations on the property. Your offer is contingent on your acceptance of the HOA disclosure package. If there is work the seller needs to do, you must object and amend the contract to require the corrective action or you will have bought the property and assumed that obligation yourself.
It is possible for you to waive the protections of this Act by signing a separate document. You can ask for the documents but waive the right to cancel the contract if you don't like what you see. Or, you can waive receipt of the package completely. We do not recommend you waive this important right!
MANDATORY SELLER DISCLOSURE
Virginia Code Section 55-517 to 525 requires sellers deliver a statement warning the buyer that the seller is making no representations concerning the condition of the property, adjacent properties, historic districts, Chesapeake Bay Preservation Act, sexual offenders and dam breaking zones. Therefore, buyers should investigate and not rely on what a well-intentioned seller might disclose.
We recommend a professional home inspection.
Buyers may also want a home warranty. These warranties cost about $400 a year and cover most systems and appliances in the home. The typical deductible is $50 to $100 per occurrence. Our firm can order the warranty coverage.
Even if the seller discloses, it is only to the best of his knowledge and belief. Honest errors do not give the buyer a right to sue. Therefore, buyers should investigate on their own and not rely on what the well-intentioned seller disclosed.
There are many sources of mortgage money available. Mortgage companies act as brokers for institutional investors such as the Federal National Mortgage Association (FNMA) and others. There is competition between lenders and you should shop for financing. Deal only with reputable, known and recommended lenders. If the lender you choose cannot deliver your loan on time, you may lose your new home. We have not had good experiences with Internet lenders and lenders located out of state.
When making application, be sure you understand the terms of the loan and fees the lender will charge you. These may include service charges, points, appraisal fees, escrow fees, tax service fees, document preparation or lender's attorney fees. The lender should provide you with a good faith estimate of all of your closing costs.
Certain charges collected when you apply for the loan may be non-refundable. If the lender turns down your loan, or you change your mind and transfer or withdraw your application, you will not get back the appraisal or credit report fees.
* How long will application and approval take?
* What is the interest rate and how long will the lender commit to hold the rate after you apply? How do you “lock in” the rate and can it float down?
* Will the interest rate or payments vary over the life of the loan? If the loan carries an adjustable rate, does it have a conversion option so you can convert to a fixed rate later, and how? Ask for an explanation of the "Index, Margin and Caps."
* Will you need private mortgage insurance? What will that cost? Lenders require mortgage insurance when you put less than 20% down. This does not pay the loan off if you die or become disabled. It only serves to protect the lender against your default. One option to avoid mortage insurance is to place an 80% first trust and a second trust to provide the additional financing you need.
* Will there be a prepayment penalty if you pay the loan early and how much will it be? Does the penalty apply to sales as well as refinances?
* Will the loan be assumable and under what circumstances?
* Does the loan "balloon" or come due before the expiration of its normal pay out? If so, will the lender agree to refinance, and at what terms?
* If the transaction involves assuming an existing loan, there are usually savings in settlement costs. Be sure you understand the terms of the loan you assume.
Property is often subject to restrictive covenants limiting use of the property, or easements for utilities and other public purposes. Usually these matters are not considered defects but a part of modern life. They will not entitle the purchaser to cancel the transaction.
The seller must give you marketable title, title that is of such quality as to ensure its ready acceptance by a future purchaser or lender. The seller must correct title defects such as unreleased mortgages or judgments, unpaid taxes, and sewer and water liens.
The settlement agent will order a careful search of the public records to identify documents bearing on the title in question. In our office, an attorney reviews the abstract or summary prepared by the title examiner to determine the legal impact of the various documents. Other companies may rely on title agents rather than attorneys.
A title insurance binder, prepared based on information found in the abstract, commits a title insurance company to insure the transaction. The title insurance binder and the policies issued after settlement represent an insurance company's obligation to protect the insured's interest in the property. Title insurance is ordered by the settlement agent so you don't need to call around looking for it.
The insurance company may choose to insure against loss or damage due to known defects. These include slight surveying errors, judgments against persons with similar names or incomplete notary acknowledgments. Protection against matters that you cannot discover by examining the public records is the most important benefit of title insurance. Traditionally, title insurance has covered matters that happened in the past. Examples are fraud, forgery, missing heirs and clerical mistakes in indexing documents or posting taxes.
More modern title insurance policies,such as the Eagle Policy offered by First American Title Insurance Company, add coverage against post-policy matters such a fraud or identity theft (someone signing your name to a deed or mortage). They also offer limited coverage against building code violations, survey defects and violation of subdivision ordinances.
The lender will require title insurance to protect the amount of the loan but this does not protect the buyer's equity. The amount of lender's title insurance declines as the loan balance pays down. A policy issued to a prior owner does not protect the buyer either. To obtain protection for your growing equity, you need an owner's title insurance policy. Such a policy protects the equity at settlement, and usually contains an escalation clause increasing coverage as the value of the property appreciates. You can learn more by visiting the First American Website at www.TitleCentral.com.
We strongly recommend owner's title insurance and specifically the Eagle Policy. The additional premium collected at settlement is usually not significant when compared to the amount of coverage. You pay the premium only once, at settlement, while the coverage continues for as long as you could have liability for title.
HOUSE LOCATION SURVEY
In transactions involving new financing, Lenders require a house location survey prepared by a licensed professional land surveyor. The survey will verify the legal description of the property and discover encroachments. Encroachments would include a carport or shed built over the property line. The settlement agent orders the survey.
House location surveys in a residential subdivision typically cost $225 and up but do not include setting posts at the corners of the lot. Contact the surveyor to discuss setting corners. The charge is about $50 per corner. If the property is not in a residential subdivison, surveys can be quite expensive, and you should check with the settlement agent to confirm any extra charges. You will not need a survey for a condominium. Surveys are not required, but may be advised if you are assume a loan.
TYPES OF OWNERSHIP
Most married couples chose "tenants by the entirety with the common law right of survivorship." If one of the parties dies, the other automatically inherits the property without regard to wills or probate. This may not be a good idea it the couple had children by a previous marriage. The surviving spouse would inherit all and the children could get nothing. Also, in cases where the Federal Estate tax may be an issue, it could be advantageous to hold title as tenants in common.
Unmarried persons may choose "tenants in common" or “joint tenants.” Tenants in common each own a portion of the property and may convey that portion independently while alive or in their Will. Joint tenants may only convey together and the survivor inherits.
We strongly recommend a joint ownership agreement for all purchasers who are not married couples. These agreements document each party's responsibilities and ownership interest.
Refer questions about title, joint ownership agreements, partnerships, divorces, the rights of spouses and powers of attorney to an attorney as soon as possible.
Real estate companies, lenders and title companies may have controlled-business relationships. That means they increase profits by sending business to each other. This can influence their recommendation. You may be asked to sign a disclosure form acknowledging controlled-business relationships. Keep your options open. Talk to other lenders and be sure you are getting a fair quotation. If the lender attempts to steer you to their title company, Federal Law provides that can not be a condition of your loan. Further, Virginia Law says, before your loan is approved, it illegal for a lender to solicit you to use a particular title company.
Settlement is the formal process that accomplishes the transfer of ownership. The purchaser usually has the choice of Settlement Agent. Settlement Agents in Virginia do not have to be attorneys. The selling real estate agent will forward the contract and related documents to the Settlement Agent for processing.
The practice in Northern Virginia is to have one settlement Agent conduct settlement and mediate disputes. If a serious dispute arises, the buyer and seller need to seek separate counsel. You should notify the settlement Agent immediately if you desire separate legal counsel so they can discuss how to divide the settlement duties.
The services normally provided for the purchaser include: review of the sales contract, assemble necessary information and documentation, review title, arrange for a house location survey and issuance of title insurance, review loan instructions, prepare, explain and record documents, and receive and disburse funds. Typical settlement fees vary from $300 to $400. There may also be messenger fees to pick up or deliver documents to your lender.
At settlement, the parties execute the various documents necessary to meet their obligations under the contract. All parties should be present. Most lenders do not accept a power of attorney for settlement and none will do so without prior notice. Many power of attorney forms are not acceptable for settlement. Some lenders have their own form they want you to use. Be sure to tell both the settlement attorney and lender as soon as possible if there is any chance you may not be present at closing.
The documents you execute at closing include:
* Note -- evidencing the loan and setting forth the terms of repayment.
* Deed of Trust -- pledging the property as security for the loan. In other states, this document is often called a mortgage.
* Disclosure documents and other certifications required by the lender.
* If the seller is staying in the property after settlement, you will execute an occupancy agreement similar to a lease.
* The seller will execute the Deed and deliver possession of the property to you.
The settlement agent will prepare the documents, handle the financial accounting and mediate the settlement. He will receive and disburse funds among the purchaser, seller, new and old lenders, real estate agents, surveyor, termite inspector and homeowner's or condominium association.
After settlement, the Settlement Agent will record the Deed and Deed of Trust in the land records of the jurisdiction where the property is located. The title examiner checks title up to the moment of recording to protect the purchaser and lender against intervening liens. Funds are disbursed within two days after settlement to allow time for recording and clearance of funds.
WHO TO USE FOR THE SETTLEMENT AGENT
The Buck Law Firm, PC acts as counsel to Alliance Title & Escrow, Inc., a full-service title insurance agency and settlement agent. Settlement fees are very competitive and Alliance will match any competitor's total closing cost package. Be very careful when calling for fee quotes. Many companies quote low settlement fees but more than make up the "savings" by over-charging for other services. The largest single transaction most of us make is the purchase or sale of a home. Use someone you can count on to give you courteous and professional service.
We have extensive real estate experience. Since 1979, we have helped over 35,000 families buy, sell or refinance their homes. We look forward to helping you.
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