The 12 Things You Must Know About How to Buy a House!

A Special Report from
Andrew S. Baker, Attorney at Law

Buying a house (or condominium) is easy, right? All you have to do is find a house you like. Put in an offer. Maybe negotiate a bit with the seller to get your price. Then sit back until the deal closes. Easy. Or...maybe not so easy. I have prepared this Special Report to assist you in understanding and completing the process in purchasing a house.

Before you buy a house, you want to be an informed consumer. Buying a house is one of the most complicated and expensive purchases you will ever make. As with most other things in life, you get what you pay for. There are a lot of things that will concern you, such as:

• How is the location of the house in proximity to schools, shopping, and recreational facilities such as parks?
• How good are the local schools - and will you be able to get your children into them?
• How far will you have to commute, and what is the traffic like?
• How about the neighborhood? Are the homes cared for and kept up?
• What is the crime rate in the area, and what types of crimes have occurred in the past couple of years?
• As they say in real estate: location, location, location. It's one of the biggest factors you'll find regarding the seller's home price.

Before you make a written offer (all real estate contracts in California must be written to protect against fraudulent transfers) on real estate, you must know exactly what you are buying and what the costs will be after you own it. For instance, in addition to your real estate loan payments that you will have to finance the purchase of your home, you will need to consider utility bills, property taxes, insurance and maintenance costs. If you buy a home that has a homeowner's association, you will also have to pay association fees.2 Some homes have special assessments in addition to the regular property taxes. There are a number of documents you will want to request from the seller - but I'll get to that, below.

You will also want to check the condition of the house and any appliances, window coverings and any other items that you want included in the sale. I recommend that buyers purchase a home warranty. For a minimum fee, the home warranty company will insure that the house and the appliances are in working condition. Many companies will provide coverage for washers, dryers, pools and pool equipment, air conditioning, and some roof repairs, plus most of these policies can be renewed annually, providing you long term protection. Your agent or escrow holder can provide you with information on these policies.

Now that you know a little bit more about what to look for, let's look at who can help you with your purchase.

1. Do you need a real estate agent or an attorney?

I recommend that buyers enlist the aid of an experienced local real estate agent who can assist you in finding a home that meets your particular needs. He or she will also have knowledge about the homes in the areas that would otherwise be unavailable to you. Most homes are listed for sale by a real estate broker who is referred to as the seller's agent. The seller's agent represents the seller. The agent who helps you is known as the buyer's agent. Generally in California, the buyer will not have to pay their agent a fee for the time and energy he or she spends in finding the home and assisting you in the sales process, including closing the transaction. The buyer's agent's fee will be paid by the seller when you complete the purchase of the home.

Your real estate agent will also assist you in numerous ways:

• Informing you about the community
• Inspecting the home
• Negotiating the price
• Obtaining a loan
• Closing the sale

A word about agency - who represents whom? As I mentioned above, often times the buyers will have one real estate agent, while the seller has another. However, in some instances, a real estate agent can represent both the buyer and seller. This is referred to as a dual agency. This must be disclosed to you before you make an offer. I advise that you proceed carefully in this situation, since your agent will be working for both the seller and you at the same time, his or her loyalty may be called into question.

One of the aspects of home buying that is very convoluted is the (legal) mechanics of the sale of one's home to you - the buyer. The seller puts his or her house on the market. Generally, the seller will have an agent to represent him or her. It's the selling agent's job to procure a buyer for the house. So you would think that it's the seller who is offering up the house for sale, who would be considered the offeror, and you, the buyer would be considered the offeree. This is not so, however.

In law, it's just the opposite (of course - those darn lawyers...) for the sale of real property (as opposed to personal property, like cars, or refrigerators, or lawn mowers for instance), you the buyer are the offeror - you are making an offer to purchase the house from the seller, who becomes the offeree. Is this important to you? Yes, because it relates to your rights and obligations under the real estate purchase agreement.

If you are not sure that you understand all of your rights and responsibilities, then I advise you to consult an attorney who is experienced in the purchase (and sale) of residential real estate. In this day and age, even though the purchase (or sale) of California residential property involves hundreds of thousands of dollars, most people shy away from consulting with an attorney, primarily for fear that the attorney will kill the deal. Certainly, many real estate agents feel that way and will often advise against you consulting an attorney. As a secondary concern, most people don't want to incur the cost of consulting an attorney.

However, a knowledgeable attorney can:

• Help you with legal and tax questions that arise during the home purchase process;
• Assist you in reviewing all of the documents and reports that will be provided to you;
• May very well save you hours of time, thousands of dollars, and provide you both peace of mind and release from stress; and quite possibly,
• Facilitate the sale should other complications arise.

Okay - now you know more than you ever wanted to know about who represents whom and why that's important to you. So how to you go about making an offer?

2. How do you make an offer on a house?

By now, from reading this report, you know that most homes are sold through real estate agents. They have special expertise in valuing homes. You can also get information on home sales in your area by visiting a host of internet sites provided by professionals in the industry, or by reading the real estate section of your local newspaper. Once you have found the home of your choice and have determined how much you are willing to pay, you need to make a deposit (called earnest money) to show the seller that you are serious about buying the house. The deposit is considered a down payment on the price of the home. In some instances you may have to increase your deposit or increase your offer, especially if there are multiple offers on the home.

The deposit is usually placed in escrow upon the acceptance of your offer. You submit a written offer on a form known (generally, the Residential Purchase Agreement and Receipt for Deposit). This form sets out the terms upon which you are willing to purchase the property. The price you offer on a home will, in most cases, be less than the amount you will need to purchase the home. There will be expenses incurred in purchasing the home that will have to be paid by either the buyer or the seller. These include, for example, title reports, document preparation, recording fees, local taxes, fees for inspections, escrow fees, homeowner's insurance, and notary fees. Ask your agent or escrow officer to provide you with an estimated closing statement. This will give you an idea of some of the additional costs you will incur in purchasing your home. You do not want any surprises.

Now that you've made your offer, how is it accepted by the seller?

3. The Residential Purchase Agreement and Receipt for Deposit.

This agreement is an offer which, upon acceptance by the seller, results in a binding contract. It should cover all of the important terms of the sale. For example, it should include a complete description of the property and of any personal property that will be sold with the house, such as window coverings, kitchen appliances, washers and dryers. It should state the exact purchase price, including the amount of your initial deposit, any increases in that deposit, the amount you will pay in cash, check or wire transfer, and the amount you will need to finance to complete the purchase price. This agreement should also list any conditions that may allow you to back out of the contract. You will want a condition that allows you to cancel the contract if you cannot obtain a loan on favorable terms or if the inspections reveal substantial defects or problems with the home. You may also need a condition that allows you to cancel the sale if you cannot sell your current home. Please understand, however, the more conditions you have, the less likely the seller is to accept your offer.

This agreement should also set forth what will happen to your deposit if you cancel the sale, what will happen if you and the seller have a disagreement over the terms of the sale, and how the brokers will be paid. The agreement should also indicate whether you are purchasing the property in "as is condition" or if the seller is warranting the condition of the property. Take the time to go over each and every term of the agreement with your agent before you sign the agreement.

Alright, you've signed your agreement to purchase your house. What goes on before the deal is done?

4. You're getting cold feet? Can you change your mind about buying the house?

You should not make an offer to purchase a house unless you are serious about buying it. You can, however, revoke your offer before it is accepted by the seller. This revocation should be in writing. If your offer has already been accepted by the seller, you may be able to terminate or revise your offer if you are unhappy with what your inspections reveal or if other conditions of the offer are not met.

The Residential Purchase Agreement and Receipt for Deposit contains several provisions that discuss what will happen in the event the sale does not go through. There is a mediation provision, an arbitration provision and a liquidated damages provision. The liquidated damages provision can result in you losing most if not all of your deposit (up to 3 percent of the contract price) in the event you elect not to complete the purchase price, and your election is without good cause. There is no provision in the standard contract for liquidated damages in favor of the buyer in the event the seller wrongfully refuses to go through with the sale. You do not have to agree to this provision.

I advise buyers to always consult their attorney before purchasing a house, if for no other reason, than to explain the ramifications of signing the mediation and arbitration clauses of the real estate contract. As with most contracts, some aspects of mediation and arbitration may work really well, but you also will place severe limits on yourself in the event that things don't go as planned. Carefully discuss the pros and cons of initialing these provisions with your attorney if at all possible.

OK, you've decided to go through with the purchase. What is an escrow?

5. The escrow process.

For the protection of the seller and the buyer, a person or company that has no connection with you or the seller holds the money and papers involved in the purchase. This procedure is called escrow. The escrow holder's job is to make sure that all of the terms and conditions of the agreement are met. He or she will also coordinate all of the activities of the broker, the lender and the title insurance company. The escrow holder will deliver the deed to the county for recording when it can pay the seller the money. Escrow services can be provided by title companies, banks, savings and loan associations, independent escrow companies, realtors or lawyers.

The escrow holder does not act as a mediator, a lawyer or an advisor. The escrow holder is required by law to remain neutral. Its only job is to carry out the terms of the escrow instructions. In Southern California, escrow instructions are signed when the escrow is opened. They are modified throughout the course of the escrow as the agreement between the buyer and seller change. In Northern California, escrow instructions are executed just prior to the close of escrow. These instructions should be clear and certain as to the intentions of the parties and the duties of the escrow holder. Make sure your Purchase Agreement does not conflict with your escrow instructions. If they do conflict, the escrow instructions may be considered your final agreement as to the terms of the purchase. If you are uncertain as to what the instructions say, discuss them with your agent, your lawyer, and the escrow holder.

6. What information must the seller provide you in escrow?

In most cases, when you are preparing to buy a home, the seller must provide you with a Real Estate Transfer Disclosure Statement. This is a pre-printed form that lists conditions about the home, the land, and the area where the home is located, as well as many features of the home. The seller must list on this form any possible problems he or she is aware of that might affect your willingness to purchase the home. This includes, for example, easements, rights of others to control how you use the property, environmental problems, non-functioning equipment, zoning and building violations, and special assessments. The seller's agent must visually inspect the home and report all facts that he or she feels might affect your decision to buy this property. If you want information that is not covered in the Real Estate Disclosure Statement or additional information that is disclosed, put your questions in writing and ask the seller to respond in writing.

You should review the Disclosure Statement immediately and carefully. In most instances, you will have a limited period of time to decide whether you wish to proceed with the purchase despite the stated disclosures. Depending upon your purchase agreement, some sellers will require a written acceptance of the conditions contained in the statement. Other sellers will consider your silence as acceptance of all of the conditions contained in the Disclosure Statement.

If you buy a condominium, or a house which is subject to a homeowner's association, the seller must give you copies of the homeowners association's rules and bylaws, as well as financial statements, and must inform you if there are any unpaid assessments. You should also ask to see the past minutes of the association board meetings. You might find that there are pending or future lawsuits or defects in the construction of the complex being discussed in these meetings. All of these would affect the value of what you are buying.

7. Should the house be inspected?

YES! Before buying any property, it is advisable to have it inspected by trained specialists. The kinds of inspections you need depend on the location and condition of the property. For example, in a hillside area, you might want a soil stability inspection. If you are buying a home built before 1978, you should seriously consider an inspection for lead-based paint. At a minimum, you should have the home inspected to determine if it is structurally sound, a pest control inspection to see if the house has been infected by termites or dry rot, and a natural hazards inspection to see if the home is located in an area subject to fire, earthquakes or flooding. Your real estate agent can advise you about additional inspections that might be warranted under the circumstances.

Keep in mind that while the seller has to tell you about anything he or she is aware of that is wrong with the house, he or she is not insuring the quality of the house; for this reason, an inspection is a good idea.

Now on to the biggest contingency in the home purchase.

8. How can you get a loan and what do you need to know?

It used to be that most home loans were made by financial institutions such as banks, savings and loan associations, and credit unions. These days, there are many more opportunities for the consumer, such as finance lenders, mortgage loan brokers, insurance companies, pension funds and investment trusts. Lenders charge different fees and offer different interest rates so it pays to shop around. Your agent, and perhaps your lawyer, will be able to recommend lenders to you.

When you apply for a home loan, the lender will check your credit rating and review your past employment, income history, and credit and debt obligations. It will also obtain information about the property that will be security for the loan. This will include an appraisal or estimate of the fair market value of the home, a review of the preliminary report prepared by the title insurance company to determine what liens, easements and other conditions will be superior to its loan, and a review of any taxes, assessments and zoning regulations that affect the property.

Some lenders will charge you a loan application fee, document preparation fee, appraisal fee and other fees to consider or close the sale. You should discuss these fees with your lender before you submit your application.

In exchange for cash from the lender, you agree to pay interest and to make payments over a period of time. In most instances, the property you purchase will be security for repayment of the loan. It is beyond the scope of this report to provide a detailed analysis of all of the different types of loan products on the market today. I will however, touch on some loan basics to empower you when you talk to a lender. I recommend that you always talk to a knowledgeable loan consultant who can advise you accordingly (whether he or she arranges your loan or even if you go elsewhere).

Sometimes a seller will offer a seller-financed or carry back deed of trust. This financing method is often used when a seller wants to receive income over a period of time or when lenders are stringent in their loan requirements. The terms of these loans should be discussed with your agent or attorney. He or she is best qualified to determine if the loan documents and agreement meet all legal requirements.

Occasionally, you can assume a loan or take over a loan that the seller has been paying off. You should be careful in assuming any loan. Most loans have an acceleration or due on sale clause. This means that the lender can demand that the seller's loan be paid in full when the property is sold. If you wish to assume a loan, you should have your agent or attorney review all of the seller's loan documents and make approval by the lender a condition to your offer.

Most home loans that are available to Californians offer one of two interest rate structures. A fixed rate loan offers a set interest rate, so that your monthly payment never changes. Some fixed rate loans are federally insured or guaranteed, such as a Veteran's loan or an FHA loan. These loans usually have a lower interest rate and require smaller down payments.

Another type of loan that is available is an adjustable rate mortgage loan, sometimes called an ARM. An ARM is a mortgage loan which provides for adjustment of its interest rate as market rate interest rates change. The ARM's interest rate is tied to an index that reflects changes in the market rates of interest. There are a number of different indexes, among which are the Cost-of-Funds Index published by the Office of Thrift Supervision, and the Federal Reserve Discount Rate. These loans usually have interest rates that are lower than the fixed rate loan interest. ARMs can be complicated. Make sure that you understand all of the terms of these loans before you agree to accept one. A knowledgeable loan agent can help you tremendously in this area.

Sometimes new mortgage plans become available that are intended to meet specific needs of a community. These include loans for first-time home buyers, and loans for teachers. Again, a knowledgeable loan agent is your best source of information.

Whew! That's a crash course in home loans. What else do you need to know about what goes on in escrow?

9. What is title insurance and do you need it?

Title insurance is necessary for your protection when you buy a home. It is, however, not a guarantee that problems will not arise after the close of escrow. When you make an offer to buy a home, you, as the buyer, have the right to choose the title company. This decision should be based on the local office's expertise, and the company's record for fairly handling claims under its policies. You should discuss these issues with your agent.

Once you have chosen a company, you should make one of the conditions of the close of escrow clear title to the property. "Clear title" means that when the sale to you is completed, the title to the property will be free from liens, judgments and other claims that you have not agreed to accept. You should also discuss with your agent the need for a survey of the property and title insurance coverage for boundary line disputes. In many instances, especially in rural areas, boundary lines are not where they should be. A survey and survey coverage can help eliminate future disputes with your new neighbors.

Before a title company issues an insurance policy, it will make an investigation to find out if anyone besides the seller claims to own the property. It will also search the public records for claims against the property. The title company will provide you with a report, called a preliminary report. You should carefully review this report to determine if it describes all of the property you are interested in buying. You should also review this report and determine what items you are willing to accept when you purchase the property and what items you wish removed or taken care of as a condition of the close of escrow. If you are uncertain as to what the report says, you should discuss the matter with your agent and your attorney.

There are different kinds of title insurance available. Often the difference in cost for the better policies is nominal. "Basic" or "Standard" coverage is, in most instances, not the best policy available. For an additional one-time cost or no charge at all, you can obtain protection for losses resulting from illegal construction, zoning violations, unrecorded liens, prescriptive easement claims, and post policy forgeries. Be aware that different companies charge different rates. Discuss with your agent and the escrow holder what policies are available in your area and the differences in prices on each of the policies.

10. How should title to the home be held?

Prior to the close of escrow, the escrow holder will ask you how you wish to hold title to your new home. How someone holds title will affect what will happen to the property in the event of the death of one of the owners. It also will affect whether certain taxes will be incurred or whether a probate of the estate will be necessary. You should always discuss your options with your attorney before you make your selection.

You can hold title to the home by yourself, as separate property, with your spouse, as community property, or with your spouse or a third party, as joint tenants or tenants in common. You can also hold title to the property in a family trust.

11. What occurs when I "close" on my new home?

To close escrow, you and the seller must have completed all of the contingencies involved with the purchase of your new home. This will include both the home inspection and any repairs or alterations agreed upon by you and the seller, as well as any other matters of concern. Generally, the final item to occur in your new home purchase is signing off on your loan paperwork. The funding of your loan is tied into the last day of your escrow, so that you will own your new home and start accruing interest for your new loan on your first day of ownership, not before title passes to you.

After the close of escrow, the escrow holder will provide you with a Settlement Statement. This document will show you, as the buyer, all of the costs incurred by you in purchasing the property. You should review this document carefully and save this statement for later. Many of these costs may be deductible from either your state or federal taxes. If you have any questions or concerns about the charges you incurred, immediately contact your agent or attorney, and the escrow holder, and ask for an explanation.

12. Congratulations!

Whether you are purchasing a home for the first time or for the fourth time, the day of closing should be a cause for celebration. And since a portion of your purchase price is paying for the expertise of the agents and the escrow holder, utilize their services throughout the process leading up to the day of closing. Ask questions; ask for an explanation of any item you do not understand. Request copies of any documents you do not understand; keep copies of all documents relating to the purchase of your home. And, if necessary, seek advice from a qualified real estate attorney. Asking questions during the purchase of your home will help insure that you and your family will enjoy your new home for many years to come.

My mission is to obtain the best result for my clients, at the lowest feasible cost, in a timely manner and on a personal basis. I help people avoid costly mistakes, arrange successful transactions, and where necessary, resolve legal disputes.

I know that it's a lot to absorb, but your home purchase is a major event, and should be treated accordingly. If you have any questions or comments, just give me a call at my office at 818-883-8733 and I'll be happy to set up an appointment with you to discuss it further.

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Established in 1999, Windrich Group, Inc. is a proud member of the Better Business Bureau.