This portion of our website is intended to offer a basic outline of the purchase and sale of residential and commercial property. It is imperative that you seek competent legal counsel prior to entering into any agreement to buy or sell real estate.
The Real Estate Binder
A binder is an agreement which is intended to memorialize the intention of a buyer and seller to enter into a more formal contract to buy or sell real estate. If possible, it is recommended that you consult with an attorney prior to signing a binder. If a binder contains all the essential terms of the parties’ agreement, the binder itself can be considered a contract. Most form binders prepared by real estate brokers have provisions which state the agreement is subject to an inspection report and approval by legal counsel. Make sure your binder includes these provisions. Chronologically an engineer’s or inspection report is usually the next step in the process.
The Engineer’s Or Inspection Report
Prior to entering into a contract to purchase real estate it is important to retain the services of an engineer or inspector, to fully evaluate the premises you wish to buy. All major systems such as plumbing, heating, electrical, roof and the structure itself should be inspected. The engineer or inspector should advise you of possible environmental hazards such as underground fuel tanks, asbestos and lead paint. The engineer or home inspector should also advise you regarding certificates of occupancy that are required for structures that may exist at the premises. Some engineers or home inspectors are also licensed to perform inspections for wood boring insects, such as termites and carpenter ants. In residential circumstances a clean wood boring insect report is a common precondition to issuance of a mortgage. If the engineer is not licensed to perform such inspections, the typical sales contract will allow you to perform a wood boring insect inspection within a short time period after the contracts are fully executed.
A residential home inspection or engineer’s report typically costs about $475. Fees for an inspection of commercial property, or engineers report vary depending on the type of property being sold. A wood boring inspection report usually adds about $95 to the cost, whether done by your engineer or an outside pest inspection company.
In a commercial setting it is advisable to get an environmental inspection report, as well. Environmental inspection companies offer a variety of environmental inspection services. These reports run the gamut from what is known as a “phase-one” report, which is a search of available public information concerning the environmental history of subject property and nearby sites to the actual testing of soil. The fees for an environmental report begin at about $1,700 for the most basic evaluation. A clean “phase-one” report is a common precondition to a commercial mortgage.
Contracts are not usually prepared until after the inspection process has been completed. Both sides are benefited by avoiding the time and expense of drawing up and reviewing the contract if an inspection reveals a condition that will cause the transaction to fail.
We recommend as part of our due diligence that you check the real estate taxes directly with the subject municipality. Contact the NYS DEC to check for reported environmental concerns and find out if any registered sex offenders live nearby by going online to check the Sex Offender Registry.
Choosing An Attorney
Once you have decided that the attorney has the knowledge and experience necessary to represent you in your real estate transaction, cost is the next consideration. The price for legal representation varies depending on the nature of the transaction. The fee should be fair and competitive. The old adage “you get what you pay for” applies no less to the process of choosing an attorney. If the fee seems too low there is probably a reason. Make sure your attorney is fully insured and has an adequately staffed office.
Closing Expenses — Residential Purchaser
A purchaser’s closing costs vary widely depending largely upon the price of the home, mortgage amount and lender imposed charges. What follows is a rough outline of purchaser’s closing costs for a home with a $400,000 sales price and $350,000 mortgage.
Estimate For Closing Costs — Purchaser
|Premium for fee (purchaser) title insurance||$1,771|
|Premium for mortgage title insurance to benefit lender||$469|
|New survey (bank may accept old survey with inspection)||$700|
|Riders and endorsements to title policy customarily requested by lender||$100|
|Recording of mortgage and deed||$400|
|Mortgage tax (@ .80 percent of mortgage amount less $30 deduction for one or two-family dwelling)||$2,770|
|Discount fee or points (varies, a point is 1 percent of the mortgage amount; this estimate is based on no points)||-0-|
|Tax adjustment and real estate tax escrow picked up by lender at closing (As a conservative rule of thumb estimate nine months. The estimate here is based on a $8,000 annual tax.)||$4,500|
|PMI mortgage insurance and escrow (applicable where down payment is less than 20 percent) Varies, check with lender Insurance escrow (estimate based on two months, escrow only)||$250|
|Fuel adjustment for oil remaining in tank||$500 (if gas no adjustment)|
|Premium for one year homeowner’s insurance policy, naming bank as loss payee||$1,500|
|Prepaid interest for the month of closing (estimate is based upon 6% interest rate; $57.53 per day multiplied by the number of days between closing and the end of the month)||$0 – 1,726|
|Banks attorney’s fee||$ 1,000|
|Mortgage application and processing fees, including, tax service fee, house appraisal and credit checks||$ 500 – 1,250|
|Counsel fees||$1,350 and up|
|Note: A Purchaser’s closing costs in new construction will normally be higher.|
CLOSING EXPENSES – RESIDENTIAL SELLER
|Real estate broker||As negotiated (4-6 percent as rule of thumb)|
|Transfer tax ($4.00 per thousand of sales price)||$1,600|
|Satisfaction of mortgage filing fee||$500 per mortgage|
|Pick-up fee to closer to pay off mortgage||$250 per mortgage|
|Mortgage payoff||Check with lender|
|Property Condition Disclosure Credit||$500|
The Contract Of Sale
Once the engineers or home inspection report is done, typically the attorney for the seller prepares the contract of sale. It is incumbent on the seller to provide his attorney with a copy of the binder, deed, survey, certificates of occupancy and tax bill. In the residential resale market, most contracts are signed by mail, as opposed to a “sit down” contract signing. In residential new home construction and commercial real estate, some contracts are signed at a “sit down” contract signing. Amendments to the contract are most often discussed over the phone and by mail, or facsimile between the attorneys. It is unethical for an attorney to communicate with the other side unless it is done through their attorney.
The typical contract of sale sets forth the purchase price, down payment, mortgage amount, in addition to the terms agreed upon in the binder. The contract will usually represent to the purchaser that the premises will be delivered “as is”, with the plumbing, heating, electrical systems and appliances in working order and the roof free of leaks. The seller is usually obligated to prove the premises has proper certificates of occupancy for the structure as it presently exists and that they will deliver clear title. A purchaser is given an opportunity to do a “walk through” prior to the closing to determine that everything is in working order. The purchaser is normally given 45 days to obtain a mortgage commitment. If a commitment has not been timely produced, usually the seller may extend the purchaser’s time, or either side may cancel the contract and the down payment will be refunded to the purchaser. The contract sets forth an estimated closing date, which usually is just that, an estimate. A seller who defaults risks a lawsuit to compel him or her to sell and/or for monetary damages. A purchaser who defaults risks forfeiting his or her down payment, or a lawsuit for monetary damages. The down payment is usually held in a noninterest bearing escrow account by the seller’s attorney until closing.
The lender plays a critical role when a mortgage is needed by the purchasers to consummate the sale. Both the seller and purchaser should both be certain the purchaser is preapproved by the lender for the mortgage. A preapproval is not a guarantee of a mortgage commitment, but it is usually a reasonable indication of eligibility for the loan. The purchaser should ask his or her lender for a written estimate of closing costs. Compare closing costs and mortgage rates for lenders charging the same number of points. Don’t bother to pay to lock in an interest rate, unless it will last until several weeks past your estimated closing date. Make sure you promptly notify your attorney when you receive your loan commitment. To ensure the commitment is timely issued, stay on top of your lender by communicating with your loan representative regularly. Don’t assume your loan is being processed, confirm it. Make notes of your conversations with the lender.
Title Insurance — What Is It And Why Is It Required
The attorney for the purchaser will order a title search. Most attorneys wait for the issuance of a mortgage commitment prior to ordering same, but you are better suited to order the report at contract. We also recommend that you order a new survey of the property at contract. The sooner title problems are known, the better. The title search will assure the Purchaser and the purchaser’s lender that the seller has clear title to the premises that is being sold, and will reveal any mortgages, liens or judgments which must be satisfied by the seller at or prior to, the closing. The title company will also search building records of the town or village in which the premises is located, obtain copies of the certificates of occupancy and determine whether or not the premises has been issued any violations. At closing, the lending institution will require the purchaser to acquire a policy of title insurance to ensure the lender’s rights to their first mortgage lien are protected. The purchaser will also pay a one-time fee to acquire a policy of title insurance to protect the Purchaser’s interest in the property. The lender’s policy stays in place until the mortgage is paid off. The purchaser’s policy insures the Purchaser that title is clear for the life of their ownership. purchasers are well-advised to insist that their attorney order title insurance from a reputable, nationally recognized company.
Certificates Of Occupancy Or Compliance
A certificate of occupancy or compliance is a document that is issued by the local municipality which certifies that a structure was built in compliance with the building code. We represent several local municipal building departments and are keenly aware of the process. The house or building and all structures should be evaluated as to whether the proper municipal approvals are in place. The purchaser and seller should both be cautious to make sure the certificates of occupancy are in proper order. Rarely does the attorney ever visit the home, so it is up to the purchaser and seller to communicate clearly with their attorney as to what structures actually exist. If the attorney is unaware of the existence of a structure, naturally he or she won’t be looking for the proper municipal approval. In addition to the main structure, look for certificates of occupancy or compliance for extensions, decks, sheds, pools, finished basements, second kitchens, outlying structures, basement entrances, awnings, garage conversions among other things. A common mistake is to wait for the title report before evaluating these matters. Oftentimes this will cause a delay in closing if a problem surfaces. It’s a good idea to check with the local assessor as well to make sure all improvements are assessed prior to contract. The issuance of a certificate of occupancy is what often triggers the tax assessor to tax an improvement. The purchaser should be certain the real estate taxes are the true taxes for all improvements. While the certificates of occupancy or compliance for a premises need not always be perfect, be certain they are in reasonably good order. Otherwise, the Purchaser may have a problem with their lender refusing to lend, or at resale later on.
Once the estimated closing date in the contract has been reached, the loan is in place, and the title search has been completed and any title clearance work is done, a closing can be scheduled. The closing will generally take place at the office of the attorney for the lending institution. Just prior to the closing, the attorneys for the purchaser and seller should send their clients a preclosing letter, which will inform them of the closing date and what they will need to bring with them. It should also advise the parties to arrange for a walk-through inspection of the premises prior to the closing so that it can be ascertained that all contract requirements have been met. The lawyer for the purchaser usually gets closing costs from the bank the day prior to closing and at such time should advise the purchaser of the amount of any certified or bank checks that must be brought to the closing, as well as the amount of any uncertified personal checks they can anticipate needing at the closing. At the time of closing the purchaser must also produce an owner’s insurance policy naming the lender, plus a paid receipt for one year. Purchasers should be sure all conditions of the loan commitment have, or will be met by closing. All parties should bring their file, photo identification and know their Social Security numbers.
Taxes And Tax Exemptions
Prior to entering into contract you should check not only the amount of taxes with the municipality, but what exemptions exist. Typically commercial property has no available tax exemptions and residential property does.
Not every residential property owner is entitled to a real property exemption. You should check with your local receiver of taxes at the township in which the home is located. A March 1st cutoff date applies in most Suffolk towns. A brief summary of available residential tax exemptions for a primary residence follows:
Basic Star: All primary residence homeowners are eligible regardless of age with a $500 income limit.
Enhanced Star: An increased exemption over the Basic Star exemption which is income and age sensitive (you must be 65 years of age or older).
Senior: An age and income sensitive exemption. In Babylon Town, for example, you must be 65 years of age, or older and have an income of $32,400, or less.
Veterans: If you are a veteran of the U.S. Armed Forces released under honorable conditions and have served during a period of war, you may apply for a Veterans exemption.
These tax exemptions can reduce your tax burden by as little as a few hundred dollars or as much as a few thousand dollars, depending on eligibility.
The purchaser of a primary residence, may deduct the cost of mortgage interest and real estate taxes as long as he or she files an itemized return. Points paid on a mortgage issued when the property is purchased are also deductible.
When a seller transfers his or her primary residence there is no capital gains tax due on any profits made in the sale as long as the profits aren’t larger than $250,000 (or $500,000 for a couple) and the owner lived at the property for two out of the last five years.
The tax consequences vary in a commercial situation depending on the facts. You must consult with your tax adviser prior to making any tax-related decision.
The Property Condition Disclosure Act
On March 1, 2002 the Property Condition Disclosure Act became law. Pursuant to the act a seller of residential one to four family dwellings must deliver to the purchaser a Property Condition Disclosure Statement (PCDS) prior to the purchasers signing of a contract of sale. A copy of the PCDS signed by seller and purchaser is supposed to be attached to the contract of sale.
The PCDS contains 48 questions the seller must answer concerning the home to be sold. These questions run the gamut from general queries such as the age of the home and what certificates of occupancy exist, to questions about structural, mechanical and environmental conditions of the home.
Condominiums and cooperatives, unimproved real property upon which a dwelling is to be constructed are exempt for disclosure under the law. In addition, certain types of transactions are exempt from the disclosure requirements, namely transfers pursuant to court order, foreclosure, by an estate, pursuant to a divorce, by one co-owner to one or more co-owners, to or from a governmental entity or by a sheriff.
Sellers are not required to conduct inspections of the property or public records to complete the PCDS nor are they required to make repairs to known defects under this new law. Sellers may continue to sell a home in “as is” condition provided they disclose known defects in the PCDS.
If the seller fails to deliver a PCDS before the buyer signs a binding contract, the buyer will be entitled to a credit of $500 upon transfer of title. If the seller delivers a PCDS that is not true and complete or fails to provide a revised PCDS for material change in the homes condition prior to closing the seller will be liable for damages suffered by the buyer. The intent of the statute appears to focus on the willful conduct on the part of the sellers, not sellers who were confused by the questions, forgetful or innocently mistaken.
The law does not specifically state a statute of limitations on claims, but it appears the six-year statute of limitations for contract actions applies.
Each seller must decide whether to complete the PCDS or pay the $500 credit to the purchaser. The seller must balance the risk and costs of litigation and uncertainty of liability for years after closing against paying a $500 credit at closing when making a decision under the new law.
Metal Underground Fuel Tanks
The EPA requires that all underground fuel tanks storing petroleum or certain hazardous substances conform to EPA regulations after December 22, 1998. Regulations require owners of underground fuel tanks to upgrade their sites as to prevent releases, detect releases and correct the problems created by prior releases from their tanks.
Most residential underground fuel tanks are generally 550 or 1,000 gallon tanks and therefore, are considered unregulated tanks. In these instances, tightness testing and regular inspections are not required. Nonetheless, an unregulated tank that is tested and fails a tightness test is reported to the state regulatory authority (NYSDEC) as a spill site, and specific guidelines must be followed for removal. Most residential sellers are not inclined to permit a tightness test for these reasons.
Underground fuel tanks that are out of service for a particular period of time are required to be removed according the guidelines mentioned above or abandoned in place in accordance with local regulations.
Metal Underground Fuel Tank Removal
An underground fuel tank must be dug up, rendered free of ignitable vapors, cut open and cleaned of all fuel. The tank is then excavated and removed along with all associated piping. The tank is inspected for holes and the open pit is inspected for product release. The pit may be sampled for soil contamination by taking soil from the base and sidewalls of the tank grave. The soil sample is then analyzed at a certified laboratory.
A typical cost for a tank removal is $2,500 to $4,000 for a tank that has not leaked or leaked minimally. The costs expand based upon the environmental impact. If contaminated soil or ground water is encountered, it is required by law, that the New York State Department of Environmental Conservation is notified. The remediation process begins by excavating contaminated areas and removing the contaminants from the site.
Metal Underground Tank Abandoment
In residential circumstances abandonment of the tank in place is the most common and least expensive method of remediation. First, the area of the tank is inspected for obvious signs of contamination. Soil may also be extracted from the perimeter of the underground tank and sampled. If any contaminated soil is detected or breaches in the tank are observed, the tank must be removed from the ground and the site remediated. If no problems are observed, the tank may be filled with sand or concrete or foam, depending on local regulations.
A typical cost for a tank removal is $1,500 to $2,500 to abandon a tank that has not leaked.
Fiberglass And Fuel Tanks
Fiberglass and plastic tanks are considered not regulated and are not required to be tested or inspected. Underground fiberglass tanks are manufactured with corrosion-resistant materials inside and out which eliminates the possibility of leaks.