February 2015 • Volume 103 • Number 2 • Page 22
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Real Estate Law
The Top 10 Things to Do Before Your First Residential Real Estate Transaction
Hoping to represent home sellers and buyers? Taking these steps before you meet your first client will help you get off to a smooth start.
In today's market, there is a good chance that many attorneys will become involved in a residential real estate transaction at some point in their career - even those who do not concentrate in real estate law. With a bit of advance preparation and planning, you should be able to take on a residential real estate client with confidence. The list below should help to get you started.
1. Create office procedures
Unlike other areas of the law, the attorneys who are involved in a real estate transaction are not usually contacted until after the parties have signed the contract due to time constraints that come into play when making an offer on a home. Thus, it is important to have procedures in place so that the clients are contacted and the contract is reviewed immediately to ensure all deadlines are met without any issues. Make sure that all members of your staff are ready to follow these procedures any time a new real estate contract is received.
2. Read and understand the 6.0 contract
In my experience, the most commonly used contract is the Multi-Board Residential Real Estate Contract 6.0 that was developed by the Illinois Real Estate Lawyers Association ("IRELA"). For more information and to check out IRELA's resources, go to http://www.irela.org. Although you may see other form contracts, the 6.0 Contract is all-inclusive and thoroughly covers just about every issue you will deal with in the standard residential real estate transaction. For this reason, it is a good contract to study before your first transaction.
3. Start a relationship with a title company
Depending on where your office is located, you will probably have a number of title companies in your area. Most title companies have agents who would be happy to meet with you to discuss their business, fees, title procedures, and attorney agency program.
You should discuss the agency program with the title company at this stage, as there are minimum malpractice coverage requirements you must meet if you become an attorney agent. Through these agency programs, you will participate in the title process and take on some of the liability. You should be aware that all title company agency programs are not the same. For this reason, it is imperative that you discuss the procedures with the title company before signing up for their agency program as you must make sure you are comfortable with, and capable of, the level of title responsibility they will require of you. As this takes some time, you should take these steps prior to taking on your first real estate transaction.
Most real estate attorneys that I know participate in attorney agency programs with at least one title company. However, it is important to note that there are a handful of real estate attorneys who do not participate in an attorney agency program, either because they feel uncomfortable with the process or feel the agency fee is unethical. I have not come across many real estate attorneys who feel this way, and I personally disagree with this position. You need to make your own decision with regard to whether you enter into an attorney agency relationship with one or more title companies.
4. Become familiar with professional inspections
The typical transaction involves various professional inspection contingencies, including home, radon, and wood destroying insect infestation. The home inspection contingency only covers the major components of the property, including, but not limited to, central heating system(s), central cooling system(s), plumbing and well system, electrical system, roof, walls, windows, ceilings, floors, appliances, and foundation. A major component is considered to be in operating condition if it performs the function for which it is intended and does not constitute a threat to health or safety. The age of the major component does not matter as long as it meets the two elements above.
The radon inspection contingency should be handled in much the same way as the home inspection contingency. Although a radon test is not always necessary, it is very important if the home is older or if it has been vacant and closed-up for a period of time. The radon test result should show a radon level below 4.0 pCi/L. The IEMA produces a pamphlet and a form "Disclosure of Information on Radon" that explain the radon issue in detail. Both can be found at https://iema.illinois.gov.
The wood-destroying insect infestation contingency is typically referred to as the pest inspection and must be completed by a licensed inspector, certified in the subcategory of termites. The inspection must confirm that there is no visible evidence of any active infestation of termites or other wood-destroying insects.
5. Understand the lending process
One of the most important aspects of a real estate transaction is financing. Unless you have the rare cash deal, financing can make or break just about any transaction. If you are new to the world of real estate, I would recommend contacting a local, reputable lender and asking someone on staff who handles residential mortgages to meet you for coffee to discuss their lending procedures. Not only will this be a great learning experience, it could also become a great source of referral business.
Although the process may vary, each lender typically follows the same steps. The lender cannot do much until he receives a fully-executed contract and financial documentation from the buyer. It is my understanding that the loan officer will gather all of this documentation first and then send the entire packet to his loan processor.
Shortly after the lender receives the contract, he will order an appraisal of the property as the loan (and the contract) are contingent upon the appraisal of the property showing a value that is at least equal to the purchase price. The lender has very little control over the appraisal process and can have no direct contact with the appraiser.
Typically, the appraisal process takes approximately three weeks. After the loan officer gathers all necessary documentation and orders the appraisal, the packet is sent to the lender's processor. Once the loan processor has reviewed the buyer's packet to confirm that everything is in order, she will send it to underwriting. Underwriters also review the appraisal to make sure it is accurate and the property is worth the purchase price. Basically, the underwriters have control over whether the loan is approved or denied.
6. Know how to read a survey
Although not all surveys are laid out exactly the same, all of the basic parts should be present on every survey. The legal description must be on every survey. Underneath the legal description, you will see the map of the property in question, which will be outlined with a darker line to show the boundary lines of the property. All of the seller's property should be within the darker black borders and none of the neighbor's property should be within the darker black borders. An encroachment occurs when the buildings or other items on one property extend onto another's property and this is a problem.
Directly within the boundary lines, you will see larger numbers that tell you the dimensions of the lot. The survey will also always show you the residence and other buildings on the parcel. The outline of the residence is also often a slightly darker line than the other lines on a survey. There are small numbers on the inside of the residence lines that show the lengths of each wall.
Throughout the survey, you will also see a number of dotted lines with initials on the lines. "B.S.L." stands for "Building Setback Line." A building setback line will be found on most non-rural properties and is typically set by local ordinance and/or the covenants and restrictions of a plat of subdivision. Basically, a building setback line is exactly what it sounds like: any building must be set back behind that line.
"U.E." stands for "Utility Easement." You will also find utility easements on almost every residential survey. A utility easement is an easement that gives a utility company the right to use and access a specific area of the property.
"D.E." stands for "Drainage Easement." A drainage easement gives access to part of the property to a third party for the purpose of maintaining drainage. Basically, a drainage easement is the same thing as a utility easement, but the easement is for drainage purposes instead of utilities.
7. Know how to read a title commitment
A title commitment is a written promise to insure title to the property through an "Owner's Policy" and, typically, a "Lender's Policy" (aka "Loan Policy" or "Mortgage Policy") to protect the lender's interest. You will not receive the actual policies until after the closing, so your title commitment is very important. I often explain title insurance to my clients by telling them it is similar to car insurance. Basically, title insurance protects their title interest in the property.
Although title commitments do vary in presentation, the majority of title commitments have the same sections and information. This would also be a very good thing to have the title company's agent thoroughly explain to you. However, in summary, every title commitment will include two sections - Schedule A and Schedule B.
Schedule A includes all the basic information that will be included on the final insurance policies. It will include the effective date of the commitment, which is the date on which the insurance policies will be effective and is typically the date that the records search was completed by the title company. This date must not be any earlier than your Date of Acceptance.
Schedule B of the title commitment will typically include two sections: requirements and exceptions. The requirements must be complied with prior to the closing and should always be examined to determine what you must provide to the title company.
Schedule B also lists all of the exceptions to the title commitment. In other words, it tells you all of the things that your title insurance will not cover. Basically, this section says: we will cover all title issues except for these issues listed here. A number of those exceptions (which are referred to as "standard exceptions") will be taken care of at the closing and will be waived by the title company at that time. If an exception is waived, it will not appear as an exception on the actual policies.
Unlike the standard exceptions, the exclusions that also appear in Schedule B will remain on the title policies and these issues will be excluded from the coverage of the policy. Some properties will have very few exclusions, but others will have many. Most exclusions are not detrimental to the property and are just a part of living within our society, such as a utility easement. Other exclusions are not standard and do hinder the normal use of the property.
8. Know how to prepare a deed
There are a number of documents that you must prepare for the standard real estate closing. Although none are particularly difficult, all are incredibly important to ensure that your client's rights are protected, especially the deed. Although you will see a variety of formats, the standard form of a deed should be the same. The top right-hand corner must be blank to provide adequate space for the file-stamp of the recorder's office; if it is not, it will be rejected or cost more to record. Check with your county recorder's office to confirm their requirements.
A deed also needs to include the contact information for the person who prepared it and whom it should be returned to after it is recorded. It will need to include the grantee's information along with who the tax bill should be mailed to, which are both typically the buyer in a real estate transaction.
A deed must also follow the requirements of the recorder's office in the county the property is located, as some can be very particular. Again, check with your county's office to confirm its requirements. The body paragraphs of the deed must include the date of the transfer, the seller's and buyer's names exactly as they appear in the title work and lender's documents, and how the buyers will be taking title.
In addition, you must include the exact legal description of the property. The legal description on a deed is incredibly important as that description will determine what real estate is actually transferred. Although we also include the property identification number (PIN) and common address, the legal description will control and must match both the title work and survey.
Under the legal description, you will typically also include the PIN and common address. All deeds should also state that all rights are being transferred subject to any outstanding real estate taxes and any covenants, easements, conditions, and restrictions of record. Of course, the deed will also need to be signed by all Sellers before a notary. If municipal transfer stamps are required, there must be a blank space at the bottom of the second page to affix the stamps.
9. Know what to expect at closing
The actual closing for a real estate transaction should be quick and easy. Many of my closings last only 45 minutes and few last over an hour. Of course, this can only happen if everyone involved does what they are supposed to do in a timely fashion prior to arriving at the closing table.
At most closings, everyone involved will sit at one table. The title company's employee will typically sit at one end of the table, unless they have a desk in the closing room.
Either way, the buyer and buyer's attorney should sit on one side and the seller and seller's attorney should sit on the other. It is best if the attorneys sit at the end of the table closest to the title agent (across from each other) as you will need to be handing her documents and discussing matters with her on a regular basis. You will also be handing documents to the other attorney.
The lender and the real estate agents typically sit in any other available chairs in the room as they typically do not take an active role in the closing. It should be noted that, although the details above describe the standard arrangement, it is common in some counties to put the buyer and seller in different closing rooms.
As soon as your client arrives, you should get to work. Whether you represent the seller or the buyer, the first thing you should do is gather your client's driver's license or other photo identification. You should take them from your client and place them at the title agent's seat as she will need to make copies of their identification for her file. You should also gather any documentation your client was supposed to bring to the closing, such as any municipal transfer stamps he was required to purchase, and place all of this in the pile for the title agent.
The title agent should give you a stack of documents for your clients to sign. The title company will usually need to send certain signed documents to the lender for review prior to funding, so you should sign the funding documents first in order to avoid unnecessary delays.
You should make sure to explain each document to your client fully. As you gain experience in real estate transactions, you will develop your own spiel about each document. Additionally, make sure your client signs their signature exactly how it is typed on the documents. A missed initial could mean that all documents will have to be re-signed.
10. Make friends with an experienced real estate attorney
As any attorney knows, no matter how much you prepare, there is always that one transaction that will have an issue you have never encountered before and do not know how to handle. If this happens, the best resource you have is an experienced real estate attorney who is willing to talk through the issue with you and, hopefully, provide advice to resolve it.
Reach out to one or more experienced real estate attorneys now and make that connection. In my experience, most lawyers are more than willing to pay it forward and help another attorney in this way.
Although this article cannot hope to provide everything you need to know before handling your first real estate transaction, the list above will certainly help you prepare. If you make these advance preparations before you receive that first contract, your transaction should proceed in a much less stressful manner, which will benefit both you and your client.
Heather M. Fritsch is the author of Basic Residential Real Estate: From Contract to Closing (ISBA 2014) and a coauthor of The Illinois Survival Guide: Best Practices for New Lawyers (ABA 2011). A past chair of the ISBA Young Lawyers Division, she is a sole practitioner in Sycamore.
The Journal has run a number of articles on residential real estate practice, and all of them back through November of '98 are available at http://www.isba.org/ibj/archives. Two by Helen Gunnarsson are particularly noteworthy for new lawyers.
- How to Be a Good Closer (June 2011) (http://www.isba.org/ibj/2011/06). In baseball and residential real estate practice alike, it often comes down to the last inning when a lights-out closer can make the difference. Read tips from veteran lawyers about what you might encounter at a real estate closing and how to handle it.
- Beyond "Deed and Green": the Strange Truth About Lawyers' Roles in Illinois Real Estate Sales (August 2006) (http://www.isba.org/ibj/2006/08). When it comes to residential real estate deals, why are lawyers welcome in some parts of the state and not others? How can they claim a bigger role? Do lawyers who limit their participation to preparing the deed and transfer-tax form risk running afoul of ethics rules?