BUYING YOUR NEW HOUSE: ONE STEP AT A TIME
© 1997 by Barbara J. Savery, Esq. All Rights ReserveD
Finding your new house takes a lot of time, but finding the house is only the first step. Buying the house involves a number of additional steps. If you take the process of buying your new house one step at a time, you will avoid problems, save yourself money and arrive at moving day a lot sooner. Here are eight steps you need to take, and some suggestions on how to make the process of buying easier.
The developer will usually provide you with a pre-printed form agreement. Take the time to review this agreement with the sales agent. If you do not understand it, even after going over it with the agent, spend a half hour or an hour with an attorney who can explain the agreement to you. Some of the provisions in the agreement can have important legal consequences for you. For example, the agreement may contain a liquidated damages clause, which is a provision which determines ahead of time how much you will have to pay the developer if you don't buy the house. You do not have to agree to this provision, and it may not be in your best interest to do so. The purchase agreement may also contain a mediation or arbitration clause. Again, you do not have to agree to mediate or arbitrate if you get into a dispute with the developer. Contrary to popular belief, it may be less expensive in the long run to be able to go to court right away.
You should also understand what your obligations are under the purchase agreement, and when you must meet those obligations. Many purchase agreements require you to provide a commitment letter from a lender within a specific period of time after you sign the purchase agreement. If you delay in meeting your obligations under the agreement, you may lose the right to buy the house you have selected and you could lose your deposit. Be sure you thoroughly understand what you are supposed to do when you sign the purchase agreement.
At a minimum, you are entitled to a public report from the California Department of Real Estate and a preliminary title report. The developer must tell you if the house is located in a special studies zone regarding earthquakes or in a seismic hazard zone. If the house lies within a Mello Roos district - a special tax district formed to pay for community improvements - you must be notified. Finally, you must be told if there are any environmentally hazardous substances on the property, such as radon gas or asbestos. Depending on the location of the house, and the circumstances under which you are purchasing, other disclosures may be required. You should read these reports and disclosures carefully. If you don't understand them, discuss them with someone who can explain them to you. The information contained in these reports may make it more expensive for you to live in your house, or harder to sell it if you decide to move.
You will be given a preliminary title report shortly after you sign your purchase agreement. A title report tells you who the current owner of your house is (it should be the developer) and what kinds of things are recorded against title. Under the section entitled "Exceptions", you will probably notice the developer's blanket deed of trust and possibly some easements and recorded covenants. Be sure you understand how these exceptions will affect your title to the property and your right to use it. If there is a utility easement in your backyard, for example, you may not be able to plant trees or build sheds or other structures in the easement. If there are covenants recorded against your title, get a copy of the covenants from the title company and read them. The covenants may obligate you to pay fees to a road maintenance association, or restrict what you can do with your property. Finally, be sure that any deeds of trust that show as exceptions will be removed before you close escrow. Otherwise, you will take title subject to those deeds of trust, and the holder of the deed of trust will be able to foreclose against your house if the loans that they secure are not paid promptly.
You or the developer will select a title company to act as an escrow agent. An escrow agent is an uninvolved third party who receives funds and documents, including deeds, and then transfers the funds and documents to the parties who are supposed to receive them when escrow "closes". The title company has to have non-conflicting instructions from both the buyer and seller before it can close. You and the developer will pick a closing date, which will be included in your purchase agreement. Before that date, the title company will prepare buyer's instructions for you to review and an estimated closing statement. You will need to sign both documents. The instructions tell the title company to record the deed from the seller to you as soon as it has received the purchase money from you. The estimated closing statement will tell you how much money you need to deliver to the title company before the transaction can close. Read both of these documents carefully. For example, if your purchase agreement says that the seller is going to pay for transfer tax and your estimated closing statement requires you to pay it, you need to ask the title company to correct the statement. On the closing date, the title company will record the deed and wire the purchase money to the developer. Once this is done, you own the house.
At some point before escrow closes, you will conduct a final walk-through of your new house. Take this opportunity to make a thorough inspection of the house. Don't let anyone rush you. Be sure you make a written list of any problems you observe and provide the developer with a copy of your list. This walk through is important because it may determine what is covered by the warranties in your purchase agreement. Your agreement may say, for example, that the developer will not be responsible for any problem which is not brought to his attention within a year. Such a limitation may not be enforceable under California law. However, you will have a better chance of getting any problems fixed promptly if you identify them quickly and in writing.
Step Six: Take Title in the Proper Form
Buyers, especially married buyers, are often confused about how they should take title. This is a matter which should be given careful thought since it will have significant consequences if you divorce or if one of you dies. The three most common ways for a couple to take title are as tenants in common, as joint tenants or as community property. Tenants in common own an equal or unequal percentage interest in property which they can separately sell or bequeath to their heirs. Married couples seldom own property as tenants in common. Joint tenants each own an equal percentage interest in property until the next to the last joint tenant dies. When there is only one joint tenant left, that person becomes the owner of the entire property automatically. This is called the "right of survivorship" and many married couples use this form of ownership because the survivor only needs to record an affidavit of death of joint tenant to confirm that he or she is the owner of the entire property. Holding property in joint tenancy is, in most cases, the worst method you can use. Although it avoids probate, there are much better ways to avoid probate. Placing title in joint tenancy can have serious adverse gift tax, estate tax, and income tax consequences. It can also subject the entire property to the claims of the other joint tenant's creditors. I seldom recommend holding title in joint tenancy. Don't be lured into the joint tenancy trap.
Holding title as community property gives a married couple more flexibility. For example, if one member of a couple dies without a will, his community property share of the house will be transferred to the surviving spouse under California law. The community property form of ownership also allows the spouses to execute wills or trust agreements which will distribute their shares in the property to other heirs or to trusts. Such distributions may significantly reduce estate taxes with proper planning. Holding property as community property can also save significant taxes if the property is sold after the first spouse dies. You should understand that you can change the way you hold title by recording a second deed after you close escrow. If you have any questions about how to hold title or how it will affect your estate planning goals, you should consult with your attorney either before or immediately after you close on your new house. Remember that once one of you dies, it will be too late to change how title is held.
Delays in closing are common, especially with new homes. The weather may affect whether your house gets built on time, and delays in processing your loan application may affect whether you will be able to get the purchase money to the title company in time for the scheduled closing date. California law gives both parties some leeway in closing; the scheduled date is - in most cases - a target date. If it looks like too much time is going by, or if you are concerned about the transaction for any other reason, consult an attorney immediately. Don't be an "LWID", a "look what I did" who comes into an attorney's office after the transaction has fallen apart. Come in before things have collapsed, when things can be pulled back together.
Enjoy your new home! You will find that getting the keys wasn't so hard if you understand the process, and take it step by step.