To purchase real estate or, more properly, a home is something that many of us in the service will be forced to do in the future. For some of us the experience will be a pleasant and memorable one, for others nothing more than a prolonged headache. The headache in many instances will be directly traced to legal difficulties, and for that reason it may be well to consider some of the legal issues involved in the purchase of a home.
To date, a few articles have been written by service personnel in regard to the advisability of buying a home. With that point we will not concern ourselves. Rather, let us take up where those articles have left off and consider, in nonlegal language, some of the legal pitfalls that await the prospective purchaser of a home.
Let us assume that you have found a house for sale that meets all your requirements and that you have reached the point where you want to take positive steps to effect the purchase. Let us further assume that you have learned of the house through a real estate agent since the presence of an agent raises legal matters worthy of knowing. A word therefore about the real estate agent.
A real estate agent is normally the agent of the seller and as such he primarily owes allegiance to the seller. Although the majority of agents are honest and show some consideration for the buyer, it must be borne in mind that the business of the agent is to sell houses, that he operates on a commission basis, and that he is very anxious that the sale be consummated. Usually in his desire to sell he may make certain representations to the buyer. The buyer must be able to distinguish between misrepresentations and merely “puffing.” The latter is allowed and the purchaser of real estate will get more than his share of it. Misrepresentation is not allowed and the making thereof may lead the agent into trouble. What.is puffing and what is misrepresentation?
Puffing, which incidentally is a term well recognized in law, is the attempt to enhance the value of an object, in this case real estate, by means of generalities, the truth of which the buyer should be able to weigh for himself. For example—statements that the “property is a beauty,” that “it is the best buy in town,” that “in all the agent’s business experience he has never seen anything like it,” that “the property will not remain long in the market” are all instances of puffing and the intelligent buyer will usually take them with a grain of salt.
On the other hand, a misrepresentation is a statement of a material fact made with the knowledge of its falsity and with the intent of influencing the purchaser to buy the property. For example—statements that the “house was painted within a month,” that “the piping is all copper,” that the “roof is an asbestos shingle roof,” if false, are misrepresentations. The line of demarcation between puffing and misrepresentation is faint and it is sometimes difficult to say which is which. There is another point which complicates the matter. An opinion is not normally a misrepresentation, i.e., the agent may precede or follow each one of his utterances with an “I think,” or “in my opinion.” If he does so without bad faith he is not generally misrepresenting.
The difficulties attendant upon suing for misrepresentation are obvious. The agent will no doubt deny each and every allegation and the chances of proving his guilt are normally slim. Therefore, the sales talk of the agent should be watched, and a distinction made between puffing and misrepresentation. If you note that the agent has a tendency towards the latter, pin him down and do so in front of witnesses.
Of great importance in dealing with an agent is the realization that the law frowns on any attempt to deprive the agent of his commission. Normally, once an agent has shown a prospective buyer a house, he is entitled to his commission, and any attempt to do business directly between the parties will not deprive him, the agent, of his just due. It is actually a breach of faith to go behind the back of the agent and it seems unwise for a person settling in a new community to begin his new life under such shadowy circumstances. The above is a warning directed more towards the seller of property, for it is he who generally pays the commission.
There is no doubt however that the agent’s commission does increase the price of a house. If, therefore, the agent can be eliminated a saving will be effected. Can this be done ethically? The answer is yes, if there is direct dealing between the buyer and the seller from the beginning. This may come about in a variety of ways but the Armed Services have an excellent opportunity to eliminate the agent by making use of the so called “Housing Offices.” Nearly every service activity has a unit whose purpose is to list houses for the benefit of all military personnel, whether they be Naval, Army, Air Force or Coast Guard. These Housing Offices are available to all service personnel and a prospective buyer should always start there. However, it often happens that these listings are not up to date, or are incomplete and the prospective buyer seeks the real estate agent in an attempt to broaden his field. Further, he finds it much easier to be taken to the houses than to wander by himself in a strange city.
While in the tow of the agent, it may happen that the buyer is taken to the home of a serviceman, and after being shown through the house, the owner informs the prospective buyer, that he has listed the house with a service Housing Office and that the price can be reduced by the amount of the agent’s commission. It is then too late and, as previously stated, the agent is entitled to the commission. Is there any way in which this situation can be prevented? Only by the use of the previously mentioned Housing Offices, for if the agent has in fact been instrumental in bringing the buyer to the seller, he is entitled to his commission.
One last word in regard to the real estate agent. The agent with whom you are dealing may have an exclusive listing on the property. The term admits of no ambiguity. Normally, he alone can sell the property and his exclusiveness, in some jurisdiction, effectively eliminates not only all other agents, but also the seller, from the picture. Therefore if selling instead of buying real estate, make certain that it is your desire to eliminate yourself as a prospective seller before listing exclusively. Of course, the seller should always insert in his contract a clause to the effect that he retains the right to sell his own property. Having covered the agent’s role, let us delve into the actual mechanics in the purchase of a home.
The purchase of a home, even for those who plan to resell after the expiration of their tour of duty, is an event that should not be taken lightly. Aside from the many intangibles involved, the present high cost of housing should make any purchaser weigh the matter very carefully. Ordinarily, we are likely to rush the preliminaries in the mistaken belief that the big event merely involves the transfer of the deed, taking possession, and making the down payment. Is this true? As far as we are physically concerned . . . yes; legally . . . no. Let us look into it.
Land is surrounded with an aura of romanticism and reverence by the law. It is immaterial to the layman why this should be and it would serve no purpose to turn back the pages of history to delve into the matter. Let us become familiar, however, with an extremely important principle of the law . . . the principle of equitable conversion.
What is equitable conversion? Stripped of all legal verbiage it means simply this. When a contract is made to purchase real estate, the buyer, legally speaking, becomes the owner of the property when the contract is made and not when the deed is delivered. Is this particularly significant? An example will supply the answer.
Let us assume that you offer to buy a home from John Doe; that John Doe accepts the offer and that therefore a written contract has come into existence. Under the doctrine of equitable conversion you are now the owner of the property. Let us further assume that the policy of fire insurance held by John Doe has a clause, as some of them do, to the effect that any change in the ownership of the property not communicated to the insurance company will void the insurance; and, let us further assume that a day after the contract is made the house burns down and nothing is left but the four walls. Who stands the loss? Let us review the position of the parties.
The insurance company will normally refuse to pay the loss on the grounds that the terms of the policy have been violated. John Doe expresses his regrets but tells you that you are the owner of the property. You will no doubt scream and shout that you are the victim of a dastardly plot; that you have not even moved into the house. It is all to no avail. Eventually you will be told by counsel that all you have is the land, and that at the time designated you must be ready with the down payment. Is the above unfair? Perhaps, but it all depends on which side of the fence you happen to be on. Can it be avoided? The answer is yes. How? By being extremely careful in drawing up the contract for the purchase of real estate.
Let us therefore, and perhaps for the first time in our lives, give this contract some thought, for if the above is true (and it is), some of us have skated on some very thin ice. Obviously here is a contract that requires the most minute attention on our part and yet most of us are willing to blindly accept whatever the real estate agent presents to us in the so-called “standard form.”
This “standard form” is usually obtained from any legal stationery store by the real estate agent and may or may not be a contract favorable to the buyer. It should not be forgotten that contracts are nothing more than agreements between persons and that when individuals are striving for bargains they contract on terms favorable to themselves. Obviously, the buyer has a different viewpoint than the seller and thus it is possible to have contracts which are favorable to the buyer and contracts which are favorable to the seller. Note that the good faith of the real estate agent is not being placed in issue. The latter may be acting in good faith but he has probably been using the form for years and the nonoccurrence of a situation such as the one presented previously has failed to point out the inherent deficiencies of his “standard” contract. But the inherent danger or dangers are present, and thus it is that it cannot be urged too strongly that before such a contract is signed, an attorney be consulted.
Countless words may be written on the subject of the contract but no amount of abstract writing can so clearly portray the lurking pitfalls as the writer’s experience in the recent purchase of a home. Let us examine the contract as presented by the real estate agent and the changes insisted on by the writer.
First—the contract had a statement to the effect that, if “the title was defective beyond remedy, then the purchaser at his option could avoid the contract.” What was the significance of such a phrase? Simply this. That the purchaser was bound to the contract for whatever time it took the courts to clear any cloud on the title. Clearly the average service man purchasing a home cannot afford to tie himself up to that extent. The slowness of our court procedures is a matter of common knowledge and men in the service do not have the time nor the financial backing to wait such lengthy periods of time. The practical effect of signing such a contract was to deprive the purchaser of his right to enter into negotiations for another house. That is to say, he could purchase another house, but if the cloud on the title of the first house was removed within a reasonable time, he was still bound to go through with the first contract.
Here it may be well to digress for a moment and take up another legal principle of great importance to the purchaser of a home.
We have stated that land is surrounded with an aura of romanticism and reverence by the law. We further stated that we would not delve into the reasons for the above. Although we do not have to do business with the heart of the matter, we must still deal with one of its appendages—the principle of specific performance.
Let us again reduce a legal phrase to the language of the street. What does specific performance stand for? Basically this. That a contract that the law deems capable of being specifically performed must be performed according to its terms. The law applies this principle to very few contracts since money is the usual compensation for breach of contract, but a contract for the purchase of real estate is one of the select few. Beware, therefore, of the contract for the purchase of real estate. If for any reason you decide not to go through with it, do so with the knowledge that unless released or unless the other party is willing to accept money damages, he normally has it within his power to make you perform specifically, i.e., to make you buy the property as you contracted to do when you signed the contract.
We necessarily had to digress in order to cover the above, but let us not wander too far. Let us get back to that objectional clause, i.e., that if “the title was defective beyond remedy then the purchaser, at his option, could avoid the contract. ” How could the objectionable feature be removed? Simply by removing the words “beyond remedy.” Their exclusion permitted the purchaser to avoid the contract, if he so desired, if the title were defective for any reason whatsoever.
Second—A term in the contract provided that the buyer would pay all costs for searching the title. This is normal, but what if the title turned out to be defective and the buyer decided to avoid the contract? Under the terms of the contract, the prospective buyer was still bound to pay for the search of the title even though he decided not to go through with the sale. Obviously, there was little justification for this since if the title was defective and the buyer avoided the sale, the costs should be borne by the seller, i.e., the one to whose advantage it was to have the property in a saleable condition. This was circumvented by adding a sentence to the effect that if the title was found to be defective, and if for that reason the buyer decided not to consummate the sale, then the cost or searching the title would be borne by the seller.
Third—There was no provision to safeguard the purchaser in the event of the destruction of the property from the time that the contract was made to the time that the buyer’s insurance became effective (usually the day the deed is transferred). This is the point that has been previously considered and which left the buyer in an unenviable position when the insurance company refused to pay the insurance on the property. This was remedied by inserting a clause to the effect that the seller guaranteed to deliver the property in the same condition that it was at the time that the contract of sale was consummated.
From the above, it should be obvious that the contract presented to the buyer was a “seller’s” contract. Actually, none of the eventualities guarded against did take place, but it is unwise to be lulled into a sense of false security. That these eventualities have taken place more than once is evidenced by the numerous cases on the subject in our law books. The above should point out to the prospective home buyer the advisability of having expert advice when contracting for the purchase of real estate. It is here emphasized that a contract is an agreement between parties, that it should clearly state what is on the minds of the parties, and that the so-called “standard contracts” may or may not fit your particular situation.
Having contracted for the property, your next step should be to prepare yourself for the day of settlement, i.e., the day on which the deed is delivered to you, you pay the down payment, and mortgage your property as security for the balance of the purchase price.
First of all. What is a deed? It is nothing more than tangible evidence of title to the property, i.e., it is the instrument that evidences your ownership of the property. You ordinarily will, and should in all cases, demand a general warranty deed. This type of deed carries certain promises, the most important of which to the purchaser is that of warranty, i.e., that the seller binds himself and his heirs to warrant and defend the title and possession of the property to the buyer and his heirs. This differs from a quitclaim deed in that in the latter, the seller merely passes whatever interest he has in the property. If he has nothing, the grantee gets nothing.
It goes without saying that the deed should be recorded, i.e., it should be made part of the public records so that the whole world may know that you are the owner of the property. Why is this necessary? Let us again use an illustration.
Suppose that you fail to record the deed and that the former owner decides to sell the property to somebody else after he has sold to you. The title company in searching the public records, finds no evidence of the transfer of the property to you and thus gives a green light to the new purchaser. The latter buys. What is your position? Many jurisdictions protect the second purchaser on the theory that he is bona fide innocent purchaser and that you, by your failure to record the deed, have placed him in an unfavorable position. It is true that you still have recourse against the unscrupulous seller, but the latter by his actions has given evidence that he is not the type to deal with and, of course, much less to collect damages from. In all probability by the time you discover his fraud, he will be out of the jurisdiction.
Secondly—what is a mortgage? It is the evidence of the security that you have given to the one who lends you the balance of the purchase price. It is an encumbrance on the property, publicly recorded in the same office as the deed, and must be satisfied before you can call the property your own. There may be a second as well as a first mortgage. It is believed that the relative values of these is generally known and no further explanation will be made of a second mortgage.
In addition to the mortgage the purchaser will be called upon to sign a bond. A bond is a written promise by the purchaser to pay the balance of the purchase price. It should be understood that although normally the mortgage and the bond are spoken of in the same breath, they are totally distinct from each other. The bond is a personal obligation; it binds the purchaser to pay any amount still owing on the balance of the purchase price if the property at foreclosure fails to bring enough money to satisfy the amount which is owed to the mortgage holder. An example will make this clear.
Suppose that you buy a house for $20,000; pay $5,000 down and mortgage the property for the remaining $15,000. Let us further assume that over a period of three years you reduce the mortgage to $12,500, but at that time due to financial difficulties you cannot meet your payment and the property is foreclosed. Upon foreclosure the property only brings $10,000. You are still bound by virtue of the bond (your personal promise) to pay the mortgage holder $2,500.
In mortgaging property, it is advisable to insist on the right to accelerate or prepay the mortgage obligation. This means that the buyer should be allowed to pay off the mortgage ahead of schedule. This is important if you should wish to pay off the mortgage ahead of time in order to save the interest payments. Also, if you later wish to refinance because of a drop in interest rates. It is also important if it is your intention to turn over the property in the future for your prospective buyer may prefer to mortgage with someone else. If you, by failure to insist on acceleration, force him to assume a mortgage not as advantageous as he could obtain from someone else, he will probably insist on a lower price.
Banks and mortgage companies usually permit acceleration of payments, but they usually do not permit full payment until five years have elapsed. This on the theory that it takes them that length of time to recover the expenses incurred in mortgaging the property.
Mortgages normally have an inherent characteristic called the equity of redemption. This is the legal right of a mortgagor within a given time interval after he has lost his property through foreclosure to get it back by payment of the amount due. It is a period of grace varying in different states, and it is something to bear in mind if ever buying property at a foreclosure. This is important for one may buy property and subsequently lose it to the mortgagor who exercises his equity of redemption. There is normally no immediate financial loss involved but the inconvenience may be great. In some jurisdictions, notably the District of Columbia there are no mortgages, but rather “deeds of trust.” These are in essence mortgages but differ from the latter in the following important respects. In a mortgage the buyer is given title to the property (subject to the encumbrance) while in a deed of trust title is placed in a disinterested trustee or a number of trustees who retain the title until the mortgage is paid off. Further, in a deed of trust there is no equity of redemption. Once the property is lost through foreclosure, there is no period of grace to repurchase.
A deed, a mortgage, and a bond are all instruments that will be presented to you at the time of settlement. These are involved legal documents and it is beyond the capability of a layman to fully read and understand them in the short period of time in which settlement takes place. The safest, and in the long run, the most satisfying thing to do at settlement is to be accompanied by an attorney. If this appears unwarranted the prospective purchaser would do well to obtain copies of the documents prior to settlement so that he may study them at his leisure. The real estate agent should be able to obtain these for him free or for a minimum charge.
After the deed is delivered, the mortgage and bond signed, and down payment and settlement costs paid, you are in every sense of the word the owner of the property.
The above are some of the legal matters involved in the purchase of a home. There are others, but the above may highlight to you the many pitfalls that await you if luck happens to be against you. Before closing the article one last point, although not a legal one, deserves mention.
Any prospective buyer is vitally concerned that the home he buys is a sound piece of property from the standpoint of construction. It avails him nothing to have good title and to have protected himself legally if the home he finally buys is a “lemon.” By all means have your future home checked by an architect or a responsible builder. The services of one of these, as well as those of an attorney may save the buyer untold worries, inconveniences, and financial detriment. At the present time there are many appraisers for the Veteran’s Administration, who as extra curricular activity do this sort of work. Their fees range from $15 to $25. If you have had no experience in purchasing a home, this small amount of money will bring you untold peace of mind. Further the appraisal of the house gives you an idea how much the first mortgage on the house should be and strengthens your bargaining position when shopping around for mortgage money. One word of caution, however. Some of the appraisers are not as experienced as builders and architects to judge the finer points of construction. Make sure that the one you employ is more than just an appraiser. If merely the latter, you should have the additional service of the architect or the builder.
Buying a house can be a pleasant and exciting experience. It is, however, a complicated matter that can, if not done properly, bring about untold misery. Buy wisely, slowly, and carefully, and don’t forget the old maxim of “caveat emptor" which means “let the buyer beware.”