Legal Aspects of Selling your Home
Legally speaking, selling a house is less complicated than buying a house. There are fewer issues that sellers need to think through, but it is nonetheless important that sellers be aware of what they are actually promising when they sign a contract and proceed toward closing.
Before Getting an Offer
When you are ready to put your house on the market, it is time to identify and start communicating with the attorney you plan to use. Shop around. Fee arrangements vary, but many attorneys offer reasonable flat fees for sellers, both with and without real estate agents. Discuss fee arrangements and learn what the attorney includes in his or her fee. Feel free to ask questions about the selling process and anything legal about which you might be concerned.
One step you will take before getting an offer is filling out a Real Estate Condition Report. This is an important document, in which you disclose any known physical, legal or mechanical problems (“defects” that would affect value) with the property. I advise my clients to err or the side of overdisclosure. Even if you’re not sure that a problem reaches the level of “defect”, it is better to let a potential buyer know about it ahead of time, rather than have it discovered through an inspection after getting an accepted offer. In the Condition Report, you are certifying that you are disclosing everything you know about your property. You can protect yourself from having a buyer get out of an accepted offer via the inspection contingency (see below) by disclosing known defects on the condition report. By overdisclosing, you will rarely scare off a potential buyer, but it may motivate him or her to include additional inspection contingencies. For example, if you disclosed a known problem in the basement or foundation, the buyer may make the offer contingent on getting a clean bill of health for that element of the building (or total repairs needed to not exceed a certain amount).
Getting an Offer
When you get an offer, have it faxed or e-mailed to the attorney with whom you are working. The attorney will review the offer for you and talk you through the advantages and disadvantages of the various clauses. Often times, a response or counter offer is due within a matter of days, so as they say, “time is of the essence”. A good attorney will be able to accommodate your tight timeline.
Whether you decide to accept an offer or make a counter offer will depend on the overall “package” contained in the offer to purchase. You will weigh the balance of the contingencies, the proposed closing timeline, and offered price, to determine the commitment of the buyer and the compatibility of the offer with your goals for the sale.
Major considerations for many sellers include:
1. Price. This is highly personal, and needs to take into account, among other factors, how much debt you carry on your property, the condition of the property, and market conditions. Remember that assessed value does not equal fair market value (i.e. how much a property can sell for). Don’t take it personally when a buyer offers well below your asking price. It is a chance for you to revisit whether you priced your home correctly (see related articles Market Value versus Assessed Value and Pricing your Home), and to consider how much you are willing to compromise.
2. Earnest Money. When considering how much earnest money to require, remember that the earnest money represents what you get to keep if the deal falls through before closing. In most accepted offers, a seller has two remedies if the buyer breaks the contract: keep the earnest money and call it even, or return the earnest money and sue the buyer for actual damages. Most sellers whose deals collapse decide against suing for actual damages, because the amount they are out is not worth a law suit, and they opt instead for the earnest money. The earnest money can be held by either party’s real estate agent, attorney or the title company. The offer usually contains terms for how earnest money gets disbursed if your deal falls through. Factors to consider when deciding how much earnest money to ask for include: the closing date, the seller’s level of comfort with the buyer, the risk that the buyer will break the contract, and market conditions. For example, a seller might accept 1% of the purchase price as earnest money for a closing scheduled within two months (in the spring or summer). If the closing were seven months away and in November, however, a seller would be wise to require more earnest money to make sure there was better compensation if the buyer pulled out.
3. Inspection Contingency. It is usual for an offer to purchase to contain an inspection contingency. Once again, do not take this personally. The buyer is reserving the right to back out of the offer if an inspection should reveal unforeseen serious problems (defects) with the property. An inspection contingency will either give the seller the “right to cure”, or remedy any defects before closing, or not. If you are not given the right to cure, that means that a buyer, upon discovery of a defect, can give notice and end the offer. Practically speaking, whether the seller is given the right to cure or not, most buyers do not want to get out of a deal, but will use the discovery of defects to negotiate a credit toward the sale price. This can be good for the seller, in that there is that much less for you to do before closing, and you do not have to worry about liability to the buyer after closing for a contractor’s potentially shoddy work.
4. Financing Contingency. Many buyers include a financing contingency in their offer. This protects a buyer from getting into an accepted offer and then not qualifying for the needed financing. Keep an eye on the deadline. This is one contingency for which buyers need to affirmatively provide proof of financing to sellers. If the deadline passes and you do not receive a commitment of financing, you may still accept it later. Alternatively, if you have another buyer standing by, a missed financing contingency is your chance to cancel the offer without penalty. When you receive an offer, if you are not positive that the buyer will qualify for the proposed financing, it is a good idea to counter with a provision making the offer contingent on the buyer providing you with a preapproval or comfort letter within a few days of accepatance. This narrows the window within which you do not know if financing is probable.
5. Sale of Home Contingency. Often times, a potential buyer is also trying to sell his or her current home. This may (and often does) work out fine, but a seller should always include a clause that allows the seller to continue to market his or her property and to accept secondary offers. In the standard Wisconsin residential offer to purchase, if a seller accepts a secondary offer, the seller gives the buyer notice of the secondary offer and the buyer then has a period of time in which to decide whether or not to waive the sale of home contingency (i.e. decide to go ahead with purchasing the seller’s property even though the buyer’s home has not sold).
After an Accepted Offer
Once you have an accepted offer, there are a few things the seller has to take care of. These include ordering title insurance and making sure contingencies are lifted by the buyer.
The legal term “title” and the role of title companies is confusing to many buyers and sellers. “Title” can be described as what you are actually selling, the extent to which you exercise control over the real estate. You can be the only owner on the deed for a property but there can be several additional parties that rights to the property. These can take the form of easements for driveways and public utilities, rights of way for roads, agreements made decades ago by a former owner to let a neighbor use part of a parcel for hunting, rights of tenants, liens from court judgments or contractors, mortgages, condominium documents, etc. The bottom line is that a seller can only sell the rights that he or she possesses. A new buyer takes ownership subject to the rights of third parties. In the offer to purchase, the seller warrants and promises to insure the title. This is accomplished through title insurance.
The title company’s role is twofold. First, it conducts a search of public records and finds these exceptions to ownership. It then issues a proposed insurance policy (the “title commitment”) that insures title for the buyer, except for the exceptions. The reason this is important is that if it becomes apparent down the road that someone else has claims to the property, then the buyer is compensated by the title company.
The second role of title companies, conducting the closing, is discussed later in this article.
When you have an accepted offer, contact a title company and set up the order. It will need a complete copy of the accepted offer, with all amendments and counter offers. Unless you agreed otherwise in your accepted offer, the seller is responsible for paying for the new owner’s title policy, for preparation of the final settlement statement and assessment documents, and for the state-mandated real estate transfer fee. The title policy and transfer fee are calculated based on the purchase price of the property. Check with your title company for pricing and transaction details.
There is not much that a seller has to actually do about contingencies, but you do need to keep an eye on any deadlines in the offer. Most contingencies are worded so that if the buyer chooses not to do anything, they are waived (or are automatically removed from the offer). The most common example is a radon or inspection contingency. In the offer, the buyer may have reserved the right to have an inspection and to give notice within so many days of acceptance of the offer if a problem is found. If the buyer never has the radon test done or the home inspecton comes back without defects, there is nothing that the buyer must do to lift the contingency.
The financing contingency is the most common exception. The way most offers are worded, the buyer has a certain number of days after acceptance to provide the seller with a “commitment letter” from the buyer’s lender. This certifies that financing on the terms in the accepted offer is secured. Unlike most contingencies, if the deadline for provision of the commitment letter passes and seller has not received one, the seller can give notice to the buyer that the contract is canceled.
Closing the Sale
Before closing, the seller is responsible for preparing the deed and real estate transfer return. If you are using an attorney, your attorney will prepare this for you (and save you around $75 on your title company closing costs). If you do not have an attorney, the title company will pay someone to draft it and add the cost to your closing fees.
The second role of the title company in many communities is to conduct the closing. Its employees will help sellers tie up loose ends of property ownership, such as ordering the final water bill payoff amounts, making sure property taxes were paid, ensuring no special assessments by the municipality are outstanding, and so forth. The title company will prepare the paperwork for the closing, and walk the parties through the closing itself, down to prompting the seller to turn over the keys and garage door opener.
Otherwise, at closing the seller is very much the side show. The buyer will have to sign and initial many documents, whereas you as the seller sign an owner’s affidavit (stating that you have not accepted any other offers, taken out additional lines of credit, had work done by contractors and not paid them within six months, etc). In addition to the owner’s affidavit, you will sign a few disclosure forms, the transfer return (which transfers the tax bill to the buyer), and the deed. In fact, if you are not able to make it to the closing, it is very easy to arrange to pre-sign all of the necessary documents. Once all of the signing is done, you hand over the keys and the title company cuts you a (hopefully) handsome check.
Selling a house is not rocket science (although it may feel like it sometimes), but there are a lot of details that need attention. This article is not able to touch on every or even most issues, and in no way should be taken as legal advice. Every real estate transaction is different, no matter how standard the forms. Considering the size of the transaction and the small details that can turn into contract breakers, it is a good idea to consult with real estate professionals to ensure that your interests are protected.
Disclaimer: All material in this article is for general informational purposes only and does not constitute legal advice. No information on this website constitutes a legal opinion about specific maters, facts or issues. Therefore, do not act on the basis of any material in this article without first seeking legal or other professional advice concerning the particular facts and circumstances of your matter. The author and Herrick and Kasdorf, LLP, disclaim all liability for any actions or omission that are based on the material of this website.
This article is provided courtesy of Juscha Robinson and DaneCountyMarket.com. For more information, please contact Juscha at 608-257-1369 or firstname.lastname@example.org.