Let’s Get Started
While certain different considerations exist as between purchasing residential real estate for investment purposes and buying a first or second home, the processes by and large are quite similar. Some of these differences are noted below. Once the decision has been made to purchase a residential property, you must put together a purchasing team of at least a real estate broker and real estate lawyer. If you are purchasing real estate for investment purposes, you will also need an experienced business lawyer in the mix. Your broker and attorney(s) can provide advice regarding loan programs or, in the investment context, other avenues of financing. They can also recommend mortgage professionals to issue no-fee mortgage pre-approval letters and, once you have an accepted offer on a property, reputable property inspectors, title examiners and insurance agencies.
A mortgage professional will require your credit score(s) and an overview of your income, debt and savings prior to issuing a mortgage pre-approval letter. You will not be committed to obtain your loan from the lender providing this letter, so there is no need to shop around for the best loan rates and terms at this stage of the game. At this point, you require the pre-approval letter to gauge the properties you can afford. Also, many sellers’ brokers will not present an offer to their client without the presentation of such a letter.
Searching for the Right Spot
If you haven’t already done so, you will provide your real estate broker with certain criteria for your desired property, which may include among other things, location, number of bedrooms and bathrooms, parking, fireplace, swimming pool, gymnasium, proximity to public transportation, schools, commercial centers, etc. You can participate in the search by requesting that your broker provide you with access to the Multiple Listing Service (MLS).
Making the Offer
When you find a property you wish to purchase, your broker should complete a comparative market analysis (CMA) of a number of similar properties with recent sales histories so that you can make an educated estimate of the present market value of the property in relation to the seller’s asking price. Prior to making any offer on the property, you should discuss with your broker the current state of the real estate market where the property is situated and the best negotiating strategy for obtaining a final result with which you will be both emotionally and financially satisfied. In some markets, you can successfully offer less than the asking price, others require no less than the asking price, and in “hot” markets, you may be well advised to offer substantially more than the asking price if you really want the particular piece of real estate.
If you are purchasing the property for investment purposes, you should advise your real estate broker to include language whereby you can assign your rights and obligations under the offer to a nominee. This will provide you and your business partners, if any, time to determine whether you will own the property individually or under the umbrella of a limited liability company (LLC) to shield this investment from your other personal assets.
Your broker will submit your offer to the seller’s broker along with a copy of your initial deposit, usually in the amount of One Thousand Dollars ($1,000.00), and your mortgage pre-approval letter. The offer will establish the amount of time the seller possesses in which to accept or reject your offer before it expires by its own terms. The seller may also make a counter-offer to you that you may elect to accept, reject or you may make a further counter-offer. Once an offer has been signed by both you and the seller it becomes a legally binding contract between the parties. Most offers will contain a number of contingency provisions through which you can opt out of the deal, including inability to obtain the required financing, unsatisfactory inspection reports and failure to agree on the terms of the purchase and sale agreement by a predetermined date.
Inspecting the Property
Your offer will state the amount of time you will have to complete a property inspection; however, it is typically ten days. Your broker should provide you with a list of reputable property inspectors from which to select and also provide you with insight regarding particular items to investigate at (and in regard to) the property during the inspection period. You should attend the home inspection as it will give you the opportunity to ask questions about the property and gain informal insights from your inspecting professional as he goes about his business.
P&S: the Purchase and Sale Agreement
The purchase and sale agreement (P&S) is a more detailed agreement between you and the seller and, once signed by the parties, supersedes the terms of the executed offer. Your broker traditionally initially prepares a standard form of purchase and sale agreement and your real estate lawyer reviews the document and includes additional language, generally, in the form of an addendum, to further protect your interests. It is important that the P&S includes relevant contingencies set forth in the offer, the most important of which is the financing commitment deadline date, which is the final day you can opt out of the purchase due to inability to obtain financing without risking loss of your deposit amounts.
Contemporaneously with the submission of the draft P&S to the seller’s broker, you will traditionally make an additional deposit of purchase monies in the amount of the balance of 5 percent (5%) of the purchase price of the property (remember, you already made an initial deposit at the time of the offer). The initial deposit is typically held by your broker and the second deposit is held by the seller’s broker.
If you are buying the property either alone or with others for investment purposes, you should discuss with your business attorneys the wisdom of purchasing individually or organizing a limited liability company to act as the legal purchaser. If it is determined to purchase the property utilizing a limited liability company, you should work with your business lawyer to organize the entity pursuant to state law and negotiate the terms of the company’s operating agreement with your co-investors, if applicable. Learn more about limited liability companies here and here.
The Lender Goes to Work
At about this point in the purchase process, your lender will direct a state licensed professional to appraise the property to ensure that its fair market value (FMV) is at the very least equal to the purchase price you have agreed to. Upon receipt of a satisfactory appraisal and further consideration of your financial health, your lender may issue a commitment letter to you containing a formal offer to extend you a loan and the details of the terms and conditions of the loan, including applicable interest rate(s) and the length of the repayment period. If the lender determines that you are not loan worthy, you and your broker must notify the seller’s broker prior to the lapse of the financing contingency period in order to avoid loss of your deposit amounts.
Examining the Title
A title examination is a very important element to your real estate transaction. This examination ensures that title to a property is marketable (suitable for sale). Title examiner will conduct research to determine whether there are any “defects” or encumbrances on the property. An encumbrance is anything that could disrupt the sale of the property, such as unpaid tax liens or any other restrictions upon the property. Examiners also review the “chain of ownership” or history of ownership, including all trusts, will and deeds associated with the property in the past to determine whether the property’s ownership may be legally tied to anyone other than the seller.
Title examination occurs after there is an accepted offer on the property, and usually, once there is a signed P&S in place. Up until the transaction’s closing, anything found awry in regard to the property gives you the opportunity to back out of the sale or negotiate with the seller to rectify the issue. Examining the title to the property is the most important part of this process. Without a proper title examination, you could very well end up purchasing a property that belongs to someone else or which has unsatisfied debts associated with it that could lead to someone else claiming legal ownership.
Most of the property tax and ownership history researched during a title examination are public record and could be inspected by you without the aid of a professional title examiner or attorney. For legal purposes, however, a professional is almost always required and certainly recommended. Without a professional examination, you will be unable to take out a title insurance policy on the property. Title insurance legally recognizes that a professional third party has examined the title to a property and determined it marketable. If in the future the title turns out to be flawed, you will be protected from and compensated for some or all of the resulting damages.
Closing the Deal
If you are purchasing the property for investment purposes and have determined to use an LLC as the title holder, you should be sure that the necessary organizational documents have been filed with the Secretary of State and, if you have co-investors, that the LLC’s operating agreement has been finalized and fully and properly executed by each party.
It is wise to conduct a final walk-through of the property either the day before or the day of the closing of the real estate transaction to ensure that nothing expected has occurred in regard to the property and that it will be delivered in the condition anticipated (including, emptied of the seller’s possessions you do not expect to acquire in the purchase). In most instances, the closing on the purchase and sale of the property will occur approximately one month after your offer is accepted by the seller. The parties to the sale, you, the seller, the lender, and each of your representatives, will gather either at the Registry of Deeds in the county where the property is situated or the closing lawyer’s office. You and the seller will execute numerous documents as directed by legal counsel, including the new deed legally conveying the property and the mortgage, which gives the lender the right to seize the property in the event of a default on the loan. The deed and the mortgage will be filed with the Registry of Deeds to give notice to the world that you are the new owner of the real estate.
A Smart Thing to Do If You Are Going to Live There
At the time of the filing of the deed and mortgage, if you are purchasing your property as a primary residence, you should consider filing a Declaration of Homestead. Massachusetts law allows the owner or owners of a residential property and who occupies that property as their principal residence to file a declaration of estate of homestead for that property. The declaration is a fairly simple document that becomes effective upon filing with the Registry of Deeds in the county where the property is located.
A declaration of homestead protects the owner against most claims that arise after it is filed, up to Five Hundred Thousand Dollars ($500,000.00). For example, if, after you file your homestead, you negligently injure another and that person is awarded damages in the amount of One Hundred Thousand Dollars ($100,000.00), he cannot force you to sell your home to pay the debt (except in some cases where the house is worth more than the protected amount).
Note, however, that the declaration of homestead only offers protection against claims that arise after you file the declaration, not against claims “for a debt contracted prior to the acquisition of said estate of homestead.” Also, the declaration offers no protection against certain types of claims, such as a forced sale for unpaid taxes or an execution issued from the probate court to enforce a judgment for support.
Principal Attorney Eric C. Belanger (License No. 151166) and certain of our consulting attorneys are also licensed Massachusetts real estate brokers. If you are considering purchasing or selling real estate for business, investment or residential purposes, you can engage us as your broker-attorneys. We are ready to assist you in locating the right property for you and be your professional guide throughout the purchasing or selling process. At ENDEAVORLEGAL, we feel strongly that our legal, business and financial experience and industry contacts provide greater value over non-attorney real estate brokers and we charge the same fees as they do.