LLOYD MARTIN PLC

Introduction

This article is intended to assist you, the prospective home buyer, in understanding the myriad legal issues you face when making what could be the largest single investment of your lifetime.  Each step in the process, selecting the right home, entering into the contract, obtaining financing and closing, must be undertaken with prudence.  The process is complicated and filled with hidden risks.  You should seek the advice of a competent real estate attorney to guide and assist you through this maze of Legaleze.

Legal Issues

There are numerous legal issues you will face when entering into a residential real estate contract for the purchase of your home.  Although not all issues will apply to every transaction, it is important that you consider those which will directly impact your purchase.  Some of the issues to consider include –

• What are your contractual rights and duties?
• What real and personal property is included?
• How should you take title to the property?
• What are the best financing terms for you?
• What encumbrances (e.g., liens, etc.) exist against the property?
• What is the true physical condition of the property?
• What zoning regulations affect the property?
• What real estate taxes apply?  Are they current?
• What easements or covenants restrict the use of the property?

The Sales Contract

The real estate sales contract is the document by which the buyer agrees to buy and the seller agrees to sell the home.  The contract is the most important document in the process.  It sets forth all the terms, conditions of the transaction, and contingencies, rights, duties and responsibilities of the parties.  It serves as the "road map" to guide you from contract offer to home occupancy.

The contract must be in writing to be legally enforceable.  An oral agreement to purchase real estate usually is not binding.  The contract must be signed by all owners of the property to be legally binding.  For example, if the present owners are husband and wife, both husband and wife must sign the contract.

Real estate brokers and agents use form contracts which have been devised by local REALTORS' associations.  These forms often have been modified to include terms peculiar to the firm using the contract form and many contain clauses which favor the seller over you, the buyer.  A printed form contract is not as innocuous as it may seem!  You must read and understand each and every provision, clause, term and contingency.  Even where a real estate agent or broker is involved, a lawyer should be consulted before your contract is finalized.  

The lawyer will review the contract and assist you and your real estate agent in drafting contract terms with your interests in mind, and will explain the complete legal meaning of your contract to you.

If you are using a printed form contract, usually a simple one sentence contingency added to the contract, making final agreement contingent on favorable review by your lawyer within three or four business days, will allow you time to seek the advice and assistance of a lawyer before the contract is fully effective. 

Tax Issues

Tax issues must be considered when purchasing a home.  The primary focus of such consideration is on your intended use of the property and what your expect to be your ultimate disposition of the home.  For example, will this be your primary residence, a second home or a vacation property, or possibly an investment/rental property.

Generally, all the interest you pay on your for your principal or second homes loan is tax-deductible for federal and state income tax purposes, as well as all the real estate property taxes you pay for your principal and second residences.  Also, all the capital gain you make on you principal residence (up to $250,000 for a single person and $500,000 for a married couple) will be exempt from capital gains taxes when you sell your property.  However, when it comes to capital gains taxes, the Internal Revenue Service draws a hard line between homes used as principal residences and investment properties. You can usually sell your primary home without worrying about taxes, but different rules apply to vacation homes and rental properties.

The Housing Assistance Act of 2008 put the kibosh on being able to exclude $250,000 or $500,000 from capital gains tax on the sale of a second home, although this legislation applies mostly to investment properties. You may qualify for a partial exclusion, however, if you lived in the residence for two years or more and treated it as an investment property the rest of the time. For example, if you owned the property for five years, and if you rented it out for the first three years then moved in yourself for the remaining two years, you would be able to exclude 40 percent of your profit from capital gains tax because you used the property as your primary residence 40 percent of the time. If you lived in the property for two years then rented it out for three years, however, you would qualify for the exclusion because it was your primary residence first.

If you treated your second home as an investment property, you could potentially escape capital gains tax through a 1031 exchange, but this means reinvesting in a relatively short period of time. A 1031 exchange involves placing your profits from the sale with a third party, such as a bank or a title company. You must then select a new property to invest in within 15 days of the sale of the first property and close on its purchase within six months.

Condition of the Property

The physical condition of the property is just as important to a would-be home buyer as the financing arrangements, and, the condition of the property at time of contract versus the time of taking title are distinct, separate points of concern.  Each must be covered in the contract!

Obvious defects and deficiencies such as broken windows, observable water damage, missing sidewalk blocks and cracked basement walls, are assumed to have been taken into account by you at the time of making the offer to purchase.  "What you see is what you buy," unless specifically stated otherwise in your contract.  Latent defects, on the other hand, are not assumed to have been considered; however, as a buyer, it is usually your responsibility to discover these defects before closing on the contract.  

The Virginia Residential Property Disclosure Act requires property owners to disclose to potential buyers defects of which the owner has actual knowledge regarding the property's: (i) water system; (ii) insulation; (iii) structure, including roof, walls, foundation and basement; (iv) plumbing, electrical, heating and air conditioning systems; (v) wood-destroying insect infestation; (vi) land-use matters; (vii) hazardous or regulated materials, including asbestos, lead-based paint, radon and underground storage tanks; and (viii) any other material defects known to the owner.

As an alternative to disclosure, an owner may provide a disclaimer statement, making no representations or warranties as to the condition of the property and stating that the buyer will receive the property "as is," with all defects which may exist, except as otherwise stated in the real estate purchase contract.

There are nine statutory exemptions to providing either the disclosure or disclaimer: (i) transfers pursuant to a court order; (ii) transfers to the beneficiary of a deed of trust, or transfers by a trustee pursuant to a foreclosure and transfers involving a deed in lieu of foreclosure; (iii) transfers by a fiduciary in administering a decedent's estate, a guardianship, conservatorship or trust; (iv) transfers from one co-owner to another co-owner; (v) transfers made solely to any combination of a spouse of a person or persons in lineal line of consanguinity (Legaleze for kinship or blood relationship) of one or more transferor; (vi) transfers between spouses as part of a divorce or property settlement agreement; (vii) transfers in lieu of payment of delinquent taxes; (viii) transfers to or from any government agency or quasi-public housing authority or agency; and (ix) transfers involving the first sale of a dwelling, except that a builder must disclose any known defect which would constitute a building code violation.

Even when a seller makes the disclosures under the law, you, as a buyer, must still diligently attempt to satisfy yourself that the condition of the property is acceptable to you.  Disclosures given by a seller are limited to the seller's actual knowledge of defects.  It is still usually your responsibility to discover latent defects unknown to the seller.

Inspections

Unless you have both the time and expertise to poke around and evaluate the structure and all its important systems, experts should be retained to inspect the property and give you the peace-of-mind assurances you need.  These experts can identify both major and subtle flaws in the structure, evaluate the true extent of deficiencies, and estimate the remaining useful life of appliances, heating and cooling equipment, roof, etc.

You should also seek assurances that the water and sewage disposal systems are satisfactory, that the property improvements are free from termites or other destructive insects, and that there is no dangerous presence in the home of toxic insulation or radon gas.

You should include a contingency in your contract which allows you to have professionals inspect and test the property and its systems before the contract is final.  If the property passes the tests and inspections, the transaction can go forward to closing.  If the property fails, you should give the seller an opportunity to correct the defects, reduce the sales price, or to give you a cash credit at closing which will allow you to correct them later.  If you and the seller cannot agree, then the contingency clause should allow you to cancel the contract.

You should participate in all inspections to learn about the property and so you can properly evaluate the reports.  The seller should also participate to offer information to you and the inspector about any of the inspector's findings.  If your contract is terminated because of an inspection contingency, copies of the reports should be given to the seller for future use.
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