Buying or Selling a Home? Legal Advice Essential

With mortgage rates at historic lows, it’s a great time to buy or sell a home. But in all the excitement, don’t forget that home purchases are legal transactions, and that the law is deeply involved in every step of the process.

With thousands — and often hundreds of thousands — of dollars at stake, you owe it to yourself to have someone in your corner who represents your interests, and your interests alone. As personal finance expert Jane Bryant Quinn advises in Making the Most of Your Money,”whether you’re a buyer or a seller, your lawyer works…exclusively for you….Hire your own, local lawyer who knows local procedures and whose only obligation is to look after your interests”.

Your lawyer can:

  • Help you negotiate all the many legal documents required and secure the best possible arrangement for you.
  • See to it that you receive the full benefit of state and federal laws that govern home purchases.
  • Make sure that title to the property is conveyed properly.
  • Help you select the best way to hold legal title to the property.
  • Advise you on how the transaction affects your taxes and your estate plan.
  • A good rule of thumb is not to sign any piece of paper without your attorney’s approval, or at lease not sign unless the contract gives you the opportunity to secure attorney approval before it is final.

The Brokerage Agreement. If you’re selling property and using a broker, you’ll be asked to sign a listing agreement. Asking your lawyer to advise you on this legally binding contract is the first of many safeguards of having a lawyer on your side.

Though brokers use preprinted forms, these agreements are “standard” only in that all brokers who are members of the Multiple Listing Service use them. Like all legal contracts, they are subject to negotiation.

Among the negotiable points are type of listing (can you sell it yourself and avoid a commission); when the commission is due (when the sale is actually consummated or when the broker finds a ready, willing and able buyer?); the percentage of sales price that is due as commission (it may sometimes be negotiated down); whether the broker can represent a prospective buyer as well as the seller; and how long the listing is with the agent (less time will be better if you become dissatisfied with the agent).

For Sale by Owner? If you decide to sell your property without a broker, you may save considerable money, but you’ll also do more work. You’ll probably want to hire an appraiser to give you a good idea what the property is worth. Your attorney can help by advising throughout the process, making sure you adhere to the laws governing real estate transactions, preparing the sales contract, and perhaps even by negotiating with buyers (having a third-party represent you often works best in these negotiations). Of course, if you’re the buyer in such a transaction you’ll want your own lawyer to protect your interests.

The Sales Contract. It may be called a bid, binder, offer to purchase, or a sales memo, but by any name it’s a legally binding contract when signed by both sides, and it sets the terms for the whole transaction. That means that purchase price is NOT the only important term, and makes the review of the contract by your attorney essential.

In many parts of the country, buyers and sellers sign the contract before having it reviewed by their respective lawyers, as long as the contract provides that it is subject to the approval of the parties’ attorneys within a specified period of days (often 5 or 10).

Important legal topics often covered by the contract include, among many others:

  • Provisions relating to earnest money (amount of earnest money or initial payment, who holds the money, rate of interest, terms under which it may be returned/forfeited).
  • How the balance of the purchase price will be paid (cash or cashiers check, assumption of existing mortgage, purchase contract under which monthly payments are made directly to seller).
  • Contingency clauses, including financing (usually contract can be rescinded if financing at specified terms — rate, years of mortgage — cannot be secured in a specified amount of time), inspection (for what, in how many days, what happens if problems found), and of course legal review.
  • Provisions governing what happens if property not delivered at closing and other kinds of default.
  • Legal description of the property (may require a survey).
  • “Good title” provisions (good title to be furnished by the seller, as indicated by policy of title insurance or other means).
  • Limitations (if any) on the title, including easements, covenants, encroachments, liens and encumbrances.
  • Whether seller or buyer pays or receives a credit for property taxes, condominium special assessments, and similar expenses.
  • Which party is at risk for fire or other hazards before the closing.
  • Of course, either party can add language to the contract, including whole clauses, and that will become part of the contract as long as both parties sign and both parties’ attorneys agree.

Financing. It’s great that there are so many financing options around, from VA and FHA loans to adjustable rate mortgages, hybrid loans, shared appreciation mortgages, special low-down-payment loans, and dozens of others.

Terms and conditions can vary widely among lenders, so it pays to shop carefully and ask lots of questions.

And don’t forget that there’s a big legal dimension to this side of home buying, including whether you should use a mortgage broker (and your contract with the broker if you do), your rights under law vis-a-vis lenders (provisions against discrimination, your right to know the annual percentage rate [APR], etc.), the tax consequences of the various options, and effects on financial planning (including estate planning).

The promissory note you’ll sign is a legal contract setting out the terms and conditions of your loan. The mortgage itself (in some localities called a “deed of trust”) is a legal document providing security to the lender by giving the lender an interest in the property until the loan is repaid. You can lose the property to foreclosure if you don’t live up to your end of the bargain.

Buyers and sellers sometimes agree to an arrangement in which the buyer moves into the home, makes payments directly to the seller over a period of years, and receives title when all the payments are made. As you might imagine, these are complicated arrangements that should be covered by an extensive contract carefully reviewed by the lawyers for both sides.

The Closing. The closing is the meeting that wraps up the transaction. At that meeting, the parties and their attorneys will see to it that:

  • All the provisions of the sales contract are adhered to.
  • All other appropriate documents are signed, including the promissory note and mortgage.
  • All payments are made and all credits granted.
  • The property is formally conveyed from seller to buyer.
  • There are many costs associated with closings. Depending on the location and kind of transaction, buyer and seller might be faced with recording fees, transaction taxes, appraisal fees, survey fees, title fees, title insurance costs, and many others. Buyer and seller can negotiate over who pays what in the sales contract. If they don’t, local custom will usually dictate which fees are paid by whom.


Here’s a quick look at some other important points.

Taxes. The buyer will be able to deduct the cost of mortgage interest and real estate taxes from his income (as long as he or she itemizes) and this will provide a very welcome tax break. Certain other costs (such as points paid on a mortgage issued when the property is purchased) are also deductible.

From the seller’s perspective, there’s good news too — no capital gains taxes on any profits made in the sale, as long as the profits aren’t larger than $250,000 ($500,000 for a couple) and the owner lived in the property two out of the last five years.

How to Hold Title. Many married couples simply take title jointly, with right to survivorship. That way title will automatically be transferred to the surviving spouse when one spouse dies. But there are several other alternatives for married couples. And you and your lawyer ought to explore whether a more esoteric alternative might better fit your needs, especially for estate planning. Possibilities include a qualified personal residence trust, a family limited partnership, or even a charitable remainder trust.

Return to Main Newsletters Page