Dear Potential Buyer:
In this letter I will address many of the issues that arise in purchases (including new construction) of property in New Jersey.
My real estate practice is focused on the Mercer, Middlesex, and Somerset County areas, but I practice throughout the state. Before we proceed, let me state that my practice is not limited to real estate. If you need assistance in any other area of the law, especially involving negligence, municipal court, or employment law, do not hesitate to contact me.
Table of Contents
- Dear Potential Buyer:
- Attorney Review
- Legal Fees
- Initial Costs & Closing Costs
- Inspection Process
- Loan Process
- Title Company
- Closing Date
- Final Walk-through, Check & Closing
First a note about the Attorney Review process. Either attorney in a transaction may cancel the contracts or initiate changes to them provided that he or she sends a letter to the other side within three business days from the date that the last party signs and delivers the contracts. Once either attorney sends a letter under the Attorney Review asking for changes to the contracts, the Attorney Review does not end until both sides reach agreement. This means that the Attorney Review may end within the three days if agreement is reached within that time or may extend beyond those three days until such time as agreement is reached, if at all.
Before we are out of the Attorney Review on your buy, there are a few issues which you must review for yourself and with me.
- First, if you have a house to sell in order to be able to buy this property, you should discuss this with me immediately, as it may affect whether you should proceed with your contracts. I will assume that this is not an issue in your situation unless I hear from you to the contrary. If this is an issue, I would like you to contact me both by phone and by email so that the issue is not missed.
- Second, if the property that you are purchasing is in a development and involves an Association, you should try to review the By-Laws and Conditions, Covenants & Restrictions before the end of the Attorney Review to determine whether there are any limitations on the use of the property which prevent you from using the property in the manner intended by you. (If you cannot review the By-Laws and Conditions, Covenants & Restrictions before the end of the Attorney Review, in my Attorney Review Letter I will try to require that the Sellers provide them to you and give you three days to review them; but if you fail to do so within that time, you will lose your right to cancel the contracts for reasons related to those documents.
Resale Property Attorney Review Issues
- If the property which you are purchasing is a “resale”, the following additional issues need to be reviewed prior to completing the Attorney Review. Understand that although I am familiar with the contracts, I have no knowledge about the condition of or specific items which exist at the property that you will be buying.
- Therefore, before the Attorney Review is completed advise me whether you are aware of a possible underground oil tank. If you think that there might be an underground oil tank but are not certain, you should arrange for a scan to confirm. If there is, we should discuss necessary testing and removal of the tank.
- If the property has a finished basement, addition or deck, or any other construction which might have required a permit, you should alert me, and you or your realtor should check with the municipality to confirm whether permits and approvals were obtained by the Sellers or their predecessors from the Township. Whether or not I ask for them in the Attorney Review, you should follow up to insure that you receive copies of any permits.
- Lastly, as the engineering (home inspection) contingency is limited to actual defects, if there is a condition of the property which concerns you that is cosmetic or involves something which is at the end of its “useful life” but is not otherwise defective (like an old roof or HVAC unit which is otherwise operating properly), advise me before we are out of the Attorney Review as we will not be able to raise items which are not actually defective later under the inspection contingency.
- Be aware that Buyers pay a “mansion tax” of 1% of the gross sales price of a property for properties with a sales price more than $1,000,000.00 regardless of whether the property is new construction or a resale.
New Construction Attorney Review Issues
If the property which you are purchasing is new construction, you should check the builder’s reputation with others who have bought from the builder to determine 1) how closely the builder delivers on time, 2) how closely the builder delivers what it promised, and 3) how thoroughly the builder completes any post-closing punch list issues. The builder will likely perform in the future as it did in the past.
An additional point should be made about new construction. Just as almost every New Jersey builder’s contract allows the builder to delay the closing, they also require that the buyers must close upon their substantial completion of the property. The issuance of a Certificate of Occupancy is evidence of substantial completion. I have never found a builder agreeable to alter this language other than possibly to allow a cancellation by Buyers if the delay exceeds some period of at least 6 to 12 months. Therefore, if the builder receives its Certificate of Occupancy, it can force you to close even though there may be several items that do not meet your satisfaction. These items generally are placed on your “punch list” inspection sheet for future correction. The fact that you are made to close should not prevent you from going after the builder after the closing to compel him to complete the items if they are not otherwise completed after the closing. It does mean that you will have to close if the builder receives a Certificate of Occupancy. Since the builder can compel the closing, it would be extremely rare for the builder to agree to an escrow for uncompleted items. I should add that generally most builders eventually complete most, if not all, of the “punch list” items. As mentioned previously, before the contract becomes final, you should always attempt to check the reputation of the builder (e.g., with others in the development or elsewhere who have purchased from the builder) to determine the builder’s past history for closing on time and for completing what has been promised.
Do Not Forget
- Even if you are not reminded, your deposit is usually due within 10 days of the end of the Attorney Review (see paragraphs 2 and 3 of the Contract).
- As soon as we are out of the Attorney Review, if you have not otherwise done so, you should arrange for your home inspection and apply for your loan, as both have time limitations.
My legal fee for a standard closing is $1,250 plus $150 costs. That fee may be increased to reflect use of excessive time (charged at $200 per hour), preparation of a Use and Occupancy Agreement or Power of Attorney or closing a second mortgage or for a purchase of $1,300,000 and over (as my professional liability insurance is higher when the sale price is over that amount). We also charge separately, as referenced above, for photocopying, telephone toll charges, FAX, postage, messenger services, or other out-of-pocket expenses (usually $150.00). In addition to our legal fee and disbursements, it is your obligation to pay for other costs such as inspections, homeowners’ insurance, title company charges, lender charges, survey fees, recording fees, and other charges. If the closing does not occur, you might not be charged my full $1,250.00 fee, but you will be charged a legal fee based upon the time we spent on your behalf. Also be advised that current practice is that Buyers’ attorneys rarely appear at the actual closing.
Like all attorneys in the area, we use a title company to do title searches, coordinate with your lender, conduct the closing, make disbursements, and perform certain post-closing functions, for which the title company will make charges to its bill (which is figured into the estimate below).
Initial Costs & Closing Costs
As a rough rule of thumb, the closing costs are roughly approximately 3% of the sale/purchase price of the home, assuming that you are borrowing 80% of the purchase price, there are no mortgage origination/discount fees, and there is no mortgage insurance (PMI).
|When you first start the process, you will have the following costs||approximations|
|Septic / Sewer Line / Level 2 Chimney (if applicable)||Explore|
|Approximate costs at closing are as follows||approximations|
|Prepaid interest (varies with closing date)||$1,100.00|
|4.5 months taxes (payment and escrow)||Calculate|
|PMI – usually betw. .4% + .8% (if applicable)||Calculate|
|Misc. bank charges (varies)||$700.00|
|for $300,000 home||$2,000|
|for $600,000 home||$3,000|
|for $900,000 home||$4,000|
|Survey (without corner markers)|
(I recommend you authorize me to order a survey even if not required by your lender)
|Telephone, Fax, postage & photocopy||$150.00|
|Condo/Homeowners fee (if applicable)||Calculate|
|Oil in tank, if oil heat (if applicable)||Calculate|
Most lenders want a homeowner’s insurance policy with a one year’s paid receipt prior to closing. They will not accept a binder or application. The policy should have a mortgagee clause naming the lender and giving its address. You should discuss the specific language and requirements with your lender.
If the property is a condominium, please let me know the name of the condominium, and I will attempt to obtain “blanket” insurance from the Association (regardless, you should obtain insurance to protect yourself for liability and your belongings).
Once we are out of the Attorney Review for the purchase of a resale you must arrange for an engineering/ home inspection to be completed with a report scanned and send to both of us early enough that we can discuss the results so that I can send a letter to the other attorney within fourteen (14) days of the end of Attorney Review (try to schedule the inspection within 9 days of the end of Attorney Review so that we can receive the report, discuss it, and a request letter can be sent to the other side in time). If we do not give timely notice, you will lose your right to raise inspection problems.
If the property is new construction, it would be unusual for a builder to allow an engineering inspection; however, the Township Building Department will conduct its own governmental inspections during the progress of the construction culminating in their issuing a Certificate of Occupancy.
There are some other issues which you should consider at the time you schedule the inspection of a resale:
- If there is a well or septic, the lender will want inspections of each (the Seller should arrange and pay for the well report). If there is a septic system, you should arrange for and obtain a full, invasive inspection.
- If the property might have synthetic/artificial stucco, you should hire a certified EIFS (Exterior Insulation Finishing System) inspector to confirm what it is and whether there are any moisture issues.
- Even if there is a public sewer, you should consider a sewer line inspection to check for obstructions, especially tree roots and “bellies”.
- If there is an underground oil tank, the tank and surrounding soil should be tested (you should ask that the Seller have the tank removed, which hopefully will be dealt with during the Attorney Review).
- If the property has a fireplace, you should consider using an inspector who can do a Level 2 (camera up the chimney flue) inspection to look for cracks or missing mortar in the flue. Please make arrangements to have the inspector(s) send the report directly to me as soon as it/they are available.
- A few lenders also want a woodboring insect certification prior to the closing. Please send any reports to me whenever you receive them regardless of whether you believe that the inspector is sending it to me.
As referenced above, once you receive your inspection report you must call and write me regarding any problems, as we must notify the sellers within the time required by contract. Of course I will need the report so that I can provide it to the other side. If I receive the report without hearing from you, I may not know that certain items are of concern to you unless I hear from you. I can advise you and decide with you, but not for you, as to what items should be raised with the other side.
As soon as you have selected your lender, you should let me know the name of that lender, its address and phone number, the name of the contact person, the email address, and the amount borrowed. I must notify our title company of that information. Also, please let both me and your lender know whether the property which you are buying is a single-family dwelling or a townhouse or condominium and the name of the development if it is in a development. As a side note, before you finalize on a lender, you might want to check with me, as some lenders are particularly difficult to deal with, which could cause you delays.
Both the title company and the lender will need certain marital information to complete their searches.
The closing date does not always occur on the contract date (see the Closing Date section below). If the transaction involves a resale, because the closing date can be delayed, do not let your mortgage commitment expire in less than 10 days after the contract date, even if your lender offers a better rate if you do. If the closing is delayed and your mortgage commitment has expired, you will likely lose your rate and pay for extensions.
If the transaction involves new construction, although your new construction closing may be in the distant future, please note that the mortgage contingency in most contracts is only for thirty or forty-five days.
If you do not apply for the mortgage until closer to the closing date, you may lose your mortgage contingency.
Please also note that contingency is very important. It is true that your mortgage commitment will likely expire well before your new construction closing. However, even if your closing is more than 90 days from the time that you apply for the mortgage, it is better to have the commitment extended by the lender, or even to have it expire before the closing, than to lose your contingency. Of course, if you are absolutely confident that you will receive a mortgage commitment, the contingency may be an irrelevant concern. Feel free to discuss this further with me.
Title companies serve two primary functions: they insure that there will be no liens against the property when you purchase it and they coordinate the mortgage process and costs with the lender.
Some lenders and builders will try to entice you to order title insurance through them. In spite of what they say, the title insurance industry is a regulated industry in New Jersey; therefore, the charges of all title companies are exactly the same. Also, be careful about their quotes. It is my experience that they only quote the charge for the insurance aspect of the bill without adding the charges for searches, endorsements, and examination, which are required to close. So that your title insurance is not ordered from two different title companies, do not authorize the lender to order your title work unless you first discuss it with me. Otherwise, you may pay twice for the title work.
Generally, there is not sufficient time to close on the contract date if we wait for the mortgage commitment before ordering the title and survey. It is my practice to order these approximately one month before the anticipated closing date, regardless of the status of the mortgage commitment so that I can have them and submit them to the lender with sufficient time to close as scheduled. There is some financial consequence to this approach. If the closing does not occur, a cancellation fee may be charged by the title company and the full survey fee also will be due, both usually totaling about $1,000.00.
You should note that the closing date in the contract is not an absolute deadline. Beyond that, this issue differs greatly whether the property which you are purchasing is new construction or a resale. Assuming a resale closing, under New Jersey case law, effectively either party can delay the closing for up to 10 days without financial consequence to the party delaying the closing for no more than 10 days, although it tends to cause animosity, especially if not raised early. Assuming that the mortgage commitment comes on time, the closing is usually on time or otherwise within ten (10) days of the date originally set. When you apply for the mortgage, make sure that the mortgage rate does not expire less than 10 days after the contract closing date. On the other hand, if the property is new construction, you are at the mercy of the builder. Under all New Construction contracts, essentially you must close when the builder is ready. If there are construction delays, which is likely, the builder will not be liable to you for your added costs associated with those delays. Be prepared.
Lenders expect that all Buyers will appear at the closing with the title company although it generally is expected that the Buyers’ attorney will not attend, as the lender papers essentially will have been worked out before the closing. Not all lenders accept Powers of Attorney, and those that do accept them require that the Power of Attorney be executed by the non-attending party and reviewed by the lender well in advance of closing. Almost all lenders want at least one of the borrowers to appear and want a compelling reason why the other one will not. Advise me and the lender well in advance if you believe that a Power of Attorney will be necessary.
Final Walk-through, Check & Closing
You will do a final walk-through before the closing to confirm that there are no adverse changes to the property as of the day (or day before) of closing. As written above, it is expected that the Buyers’ attorney will not attend the closing, as the lender papers essentially will have been worked out before the closing. On the other hand, you will need to attend the closing and either wire or bring a cashier’s check to the closing (New Jersey Court Rules and Statutes prohibit us from accepting a personal check for more than $500). The cashier’s check must be made payable to the title company. Unfortunately, most of the figures needed for the closing come from the lender, and the lender does not give the title company its figures until late in the day on the day before closing. If you check with us in advance, you can bring an estimated cashier’s check to closing greater than what may be needed if we cannot give you the actual amount due in time for you to get the exact check which you will need. If your check is for more than we need, the title company can write a check back to you for the difference. If the check is not enough, they only can accept a personal check if it is for less than $500 so any estimate must be greater than what is owed, and excess will be written back to you.
Everything will be set to occur with the Buyers at the title company office (although new construction closings occur at the Builder’s attorney’s office) without the attendance of the Buyers’ attorney. The title company will make all the distributions at the closing from the money they receive from your lender together with your funds.
Feel free to call me with any questions which you have about your purchase of property. If you would like information regarding my legal representations, you may look at www.barsonlaw.com . Although my office is in Princeton, NJ, I assist clients in Greater Princeton Area and Central New Jersey.
Very truly yours,
Ray J. Barson, Esq