What Should You Know Before Buying Real Estate?
By: Larry E. Bray
Everybody wants to buy real estate. And you can’t figure out why everyone else is making a fortune buying and selling property while you don’t even know what a deed is. Well, you’re not alone. And you should feel some comfort to know that not everyone is buying investment properties, many of those that do are utilizing dangerous financing vehicles (i.e. “interest only” and variable rate mortgages) which will haunt them in a few more years. Further, now may not be the time to start “flipping” because the inventory and prices are just too high. In fact sometimes, buying properties other than a primary residence is just a plain bad idea, especially for those people who aren’t handy enough to take advantage of a bargain “handyman’s special”. It’s just not for everyone so don’t beat yourself up.
This article is not an attempt to educate the heads of families about the ins, outs and complexities of real estate flipping and investing. Rather, I will attempt to simply point out some of the most basic elements of a real estate transaction so that you have a starting point from which to grow your knowledge and, perhaps, become the next Robert Allen (you know, the guy who has those seminars about how to buy property with “nothing down”). For those of you who buy and sell all the time, this will be overly basic for you. I do plan however, to explore some of the more complex issues and strategies in a later issue. For those of you who have never purchased before, or perhaps didn’t even know what that flurry of papers going back and forth across the closing table was, this information will, I think, be a good starting point for you.
For purposes of this article let’s assume that the property you are purchasing is a home in which your family will live (many of the issues I discuss are applicable to investment property as well however).
Most purchase contracts provide for a cash deposit to show the seller that the buyer is serious. It should contain details about who will hold the deposit and how it will be applied. If the buyer doesn’t go through with the deal, the deposit may be lost.
Your home is probably the largest purchase you will ever make in your life. At the closing table, when legal title is transferred to you by way of a deed, you will have to pay the price for the home as well as closing costs. These costs abound and usually add up to between 4 and 6 percent of the purchase price of the property. Every penny transacted must, by law, be set forth on a federal HUD1 Settlement Statement. For most buyers, sellers and realtors, this is an almost incomprehensible document to understand. And KNOW ONE THING, your realtor will not fight for your money because they do not represent you; they represent the transaction. This equally incomprehensible concept is supposed to mean that they will deal fairly and advise both parties. But they have no obligation to fight for money if the HUD is incorrectly prepared. I have never seen a realtor comb through the HUD and insist that a change be made. The title company, likewise, is not there to protect or fight for anyone. The title agent prepares the HUD as he/she thinks is routine and is there to close the deal. But, it is not the title closer’s job to negotiate for you.
Just some of the costs which will be included on the HUD include: Buyer’s expenses— tax stamps- $.35 per $100 of the face amount borrowed; Intangible tax on the mortgage-$.002 of the loan amount; title insurance (owner’s policy)- approximately $6 per $1000 of the purchase price of the property; title insurance (mortgagee’s policy)- approximately $200 if simultaneously issued; title endorsement-s $50 each less 10% of the insurance amount; title search- $125; Exam Fee- between $50 and $100; Closing/settlement fee-$150 – $250; a survey -between $400 and $600 unless the seller has a recent one; attorneys fees usually between $600 and $800; Recording fees for the mortgage- $10 for the first page and $4.50 thereafter; Seller’s Expenses– Documentary Stamps on the deed; $.70 per $100 (rounded up to the nearest 100); Courier fees- between $35 and $75; Title Insurance- Please see the title charges listed above. Note: interestingly, in Palm Beach and Martin Counties, it is the custom that the Seller of the property shall pay for the owner’s policy of insurance-in almost all other counties in the state and the country, title insurance would be the buyer’s cost since it protects the buyer;
Taxes must also be apportioned and prorated on the HUD-l. It is important to note that both Ad Valorem and Non-Advalorem taxes are calculated. This can be confusing as the non-advalorem taxes run from October 1 of the previous year through September 30, of the current year while advalorem taxes are calculated on the calendar year.
A lawyer can help with the process by preparing or reviewing the sales contract, advising you about financing, title insurance, tax, document preparation and review of the HUD1. The truth is, only a lawyer that you hire will be an advocate for you. No one else will because it is not their job. And if you read your listing agreement closely you will see that it says just that.