Real Estate Law

This article is an overview of the laws regarding real estate transactions, or real property law, and the obligations that arise under purchase and sale contracts. Real property means land and things permanently attached to the land such as houses, buildings and other structures. There are numerous federal and state laws affecting real estate transactions, and each state's laws contain significant differences. Specific real estate transactions include purchases, sales and leases, and contract law governs the sale of real estate. This article will focus on laws related to residential property.

Keywords Closing Agent; Closing; Community Property; Contract of Sale; Covenant; Deed; Easement; Encumbrance; Equal Credit Opportunity Act (ECOA); Fair Housing Act; Home Mortgage Disclosure Act (HMDA); Joint Tenancy; Lien; Listing Agreement; Mortgage; Mortgage Closing; Ownership Interest; Promissory Note; Real Estate Settlement Procedures Act (RESPA); Real Property; Residential Property; Sole Ownership; Survey; Tenants by the Entirety; Tenants in Common; Title Insurance; Truth-in-Lending Act (TILA)

Law > Real Estate Law

Overview

The number of people becoming homeowners continues to rise, and more people are investing in real estate than at any time in history. Despite increases in housing prices, this trend is likely to continue. There are many federal and state laws that govern real estate transactions. The following is a brief summary of the federal laws:

Federal Real Estate Law

The Fair Housing Act

This law was initially authorized by Congress in the 1960's and was aimed at prohibiting discrimination in the rental or sale of a home based on race, color, religion or national origin. The Act was amended in 1974 to include sex as one of the protected classes and again in 1988 to include family status and disability.

The Equal Credit Opportunity Act (ECOA)

This Act prohibits lenders from denying credit to a mortgage loan applicant based on the same criteria set forth in the Fair Housing Act.

The Real Estate Settlement Procedures Act (RESPA)

RESPA is a disclosure regulation that requires lenders to disclose to loan applicants the costs that will be charged for the loan, known as closing costs. Such costs include origination fees, application fees, mortgage broker compensations and title charges. Lenders are required to provide a good faith estimate (GFE) of these charges within 72 hours of the taking or the completion of an application. Closing costs average 2 percent of the loan balance (Dreier et al., 2012).

The Truth-in-Lending Act (TILA)

TILA is another federal disclosure law that requires lenders to provide complete and accurate information to loan applicants about the cost of credit and the terms of payment.

The Home Mortgage Disclosure Act (HMDA)

HMDA is a federal law that requires banks and mortgage lenders to collect, report and disclose information about mortgage applicants. The Act is aimed at preventing discrimination based on the above-mentioned criteria (Clark 2006).

State Real Estate Law

These are just some of the laws that affect real estate transactions. There are also state laws that come into play and these vary widely from state to state. For example, the requirements for closing agents can differ greatly. A closing agent is the responsible party for conducting a mortgage closing, ensuring that all parties are paid, and that all required documents are properly prepared, executed and recorded, as well as reviewing title issues. In many states preparing form documents is considered the practice of law, and so only attorneys admitted to the bar can prepare documents. In other states, settlement agents are allowed prepare those documents. A settlement agent is usually an agent of a title insurance provider.

Not only are there different state laws that affect real estate transactions, the actual practices involved in the sale and purchase of real estate differ state by state. The balance of this article will be a general description of those practices and legal concerns in New York.

Applications

Real property is the legal term for real estate and ownership of real estate. Real property, in turn, means land and things permanently attached to the land such as homes, buildings and other structures.

Ownership Interests

There are a number of types of ownership interests:

• Joint Tenancy: property that is owned by two or more people in equal interests. Each tenant has the right to possess the entire property, and ownership interests pass to the surviving tenant in the event of death.
• Tenancy in the Entirety: a form of joint tenancy when the joint tenants are husband and wife.
• Sole Ownership: property owned by one person.
• Tenants in Common: property that is owned by two or more people but not necessarily in equal interests or with equal rights of possession. Property passes to heirs in the event of death.
• Community Property: applies only in states that recognize community property — a form of joint tenancy between husband and wife with each owning half, and whose interests pass to heirs upon death. Please note that New York is not a community property state. A state that does recognize community property is California. (Beck and Arad, LLP, October 1997).

Purchase & Sale

A person can assume ownership of real property in a number of ways, but the most common method by which one becomes a homeowner is by a purchase and sale. In a real estate transaction, a seller often uses a real estate broker, and the broker acts as an agent of the seller. Acting as an agent requires the broker to meet certain ethical standards to ensure that they will use their best efforts to locate a buyer for the property at a price that the market will bear. Real estate brokers are required to be licensed by the state. While the seller and the broker are not required to entire into a formal written agreement, they usually have an agreement that is also referred to as a listing agreement. The various types of listing agreements are as follows:

• Non-Exclusive Agreement: Sometimes referred to as an open listing. Here the owner can hire several brokers and a commission is paid only to the broker who finds a buyer.
• Exclusive Agency Agreement: The seller is only permitted to hire one broker, but the seller can also find a buyer without the broker's assistance. In such a case, the broker is not entitled to a commission.
• Exclusive Right to Sell: The broker has the exclusive right to sell. This means that the broker must be paid a commission even if the seller finds the buyer.
• Multiple Listings: In this scenario, a listing broker lists the property with a number of brokers. The broker who sells the property splits the commission with the listing broker. The listing broker customarily also receives a fee for providing listing services. (Beck & Arad, LLP. October 1997).

Contracts

Once a buyer and seller have been brought together, they will enter into a real estate sales contract. There are certain basic requirements for a sales contract to be valid. The contract must be in writing, and it must include all relevant provisions regarding the purchase of the property, including but not limited to, the name(s) of the seller(s) and the buyer(s), the property address and the legal description, the purchase price, whether the property is being sold "as is" (this means that the buyer is required to make any needed improvements to the property or repairs to any of the structures on the property), or in the alternative, if the seller is required to make any such repairs.

Further, the contract should also indicate whether the seller is entitled to an upfront commitment fee (usually a percentage of the sales price), and whether that fee is refundable in the event that the buyer cannot secure financing for the property. In this regard, it can be helpful for the buyer to obtain a "pre-approval" from a bank or mortgage lender. (Please note that a pre-approval does not commit the lender to make a loan to a prospective borrower). It is also probably in the best interest of the seller to have a deadline for when the sale will be consummated. In some cases, a buyer's ability to secure financing can be delayed by a host of factors. This can cause undue harm to the seller if the proceeds of the transaction are being used to pay for the purchase of a new home or meet another financial obligation or agreement. Finally, all the parties involved must sign the contract, and the contract must be dated.

In general, the seller's attorney will prepare the contract. In order to do so, the attorney will need to review a number of the underlying legal documents including the deed, survey, title insurance policy, outstanding promissory notes and mortgages, and leases if any. In some cases, a pre-existing note or mortgage may have a restrictive covenant regarding the sale of the property. For example, certain properties may have been developed with grants from federal or state agencies for purposes of building low-income housing. In those cases, a housing authority usually will hold a mortgage on the property, and at times such a mortgage may contain a clause that prohibits the sale of the property to a person that does not meet certain income criteria. This has implications for the buyer's ability to secure financing as well. Certain banks and mortgage lenders may not approve a loan in these cases. This is so because the lender will be restricted from selling the property in the event of a foreclosure. Leases should also be reviewed to determine if they survive the sale of the property.

Certificates of Occupancy

The seller's attorney must also verify that there are valid certificates of occupancy. In addition, the seller's attorney should determine the amount of unpaid tax bills as well as fuel and utility bills. The buyer's attorney is also required to review the above-mentioned legal documents. The buyer's attorney must also verify that the seller has valid title to the property by reviewing the title commitment and the title insurance policy. The commitment will indicate if there are judgments or liens against the property. The commitment will also include a legal description of the property. The legal description will indicate the metes and bounds of the property and also indicate if there are any easements or encumbrances on the property. The metes and bounds are the measurements and boundaries of the property. The legal description should concur with the survey, and if there are any conflicts, either a new survey must be ordered or the title insurance provider needs to prepare a corrected legal description.

Easements

An easement is merely the right to use another person's real estate for a specific purpose. The most common type of easement is a right of way, or the right to travel over another person's property. Owners of real property usually grant such easements to utility companies for the placement of utility poles and lines, water lines, sewer lines and the like. An encumbrance is a claim or lien on a parcel of land or property. These include mortgages, deeds of trust, unpaid property taxes, tax liens, mechanic's liens and the like. A mechanic's lien can be placed on real property by home improvement contractors, plumbers, electricians, or any other such person owed money for work performed on the property. While the owner has legal title, any encumbrance must be paid in order to ensure clear title, and the eventual passing of title from the seller to the buyer as contemplated by the sales contract.

Finally, the buyer's attorney should arrange for a property inspection and be aware of other matters such as the date when the property may be occupied, the terms of any underlying mortgage, local zoning ordinances or restrictions, and whether any modifications have been made on the property. If there have been modifications, the buyer's attorney should verify that these adhere to applicable building codes and regulations, and that a new certificate of occupancy or certificate of completion has been filed with the county.

Taking Title to Property

As described in the article "An Overview of Real Property in the United States," the legal term for assuming ownership of property is "taking title to the property" (Beck & Arad, LLP. October 1997). In a purchase, it is advisable for the buyer to obtain owner's title insurance. This will protect the buyer from any pre-existing claims against the property that may not have been recorded. In any event, a bank or lender will require title insurance and the title insurance premium and other charges will be charged to the buyer in addition to any fees the buyer incurs for owner's title insurance. In some cases, the seller and the buyer may agree to share the fees for the lender's title insurance and this will be reflected in the contract of sale.

Deeds

The legal instrument that actually transfers title of real property from the seller to the buyer is known as a deed. There are various types of deeds such as a quitclaim deed, a bargain and sale deed and a warranty deed. A quitclaim deed is more frequently seen in a refinance transaction or a family deed transfer where one or more title holders are deeding their ownership to another person. A bargain and sale deed only contains basic protection (or covenants) against acts of the grantor (or the seller). There are three types of warranty deeds: Warranty deed with full covenants includes covenants by the seller that they have the right sell, transfer or convey the property and that there are no encumbrances against the property; a general warranty deed protects the buyer against defects that arose before and during the time the grantor held title; and a special warranty deed only protects the buyer against defects that arose during the time the grantor actually held title.

The closing agent is required to record the mortgage and deed with the county clerk. This seems straightforward, but there are differences in recording procedures in different counties. In any case, recordation should take place as quickly as possible in order to protect the buyer from any claims that can arise from the time of the loan closing until recordation.

Loan Closing

The loan closing is the procedure where the purchase and sale is finalized. In New York, a closing is required to be conducted by an attorney, or someone under the direct supervision of an attorney, such as a paralegal. In many cases, the closing will take place at the bank's or lenders office, but the closing can also be held at the attorney's office. The attorney here is usually the bank's attorney, and purchasers should be aware that the bank's attorney is representing the bank, not the seller or the buyer. Because they might not have the same interests, it is advisable for each party to have their own attorney.

At the closing, all proceeds from the sale will be disbursed, meaning that the seller will be paid the balance of the purchase price, and the fees being charged by the lender, by the attorneys, title charges and any other fees (such as a mortgage broker fee) will also be paid. Any outstanding taxes on the property as well any portions owed to the seller for utilities and other matters will be paid. The proceeds of the loan will pay for most of these items; however, borrowers may at times be required to arrive at the closing with certified checks to cover some of these expenses. After the closing, the borrower is given the keys to the dwelling, and they will be able to occupy the dwelling as the contract allows.

Conclusion

Based on the foregoing, the purchase and sale of real estate can be a lengthy and complex transaction. Numerous factors are involved, and there are a host of legal concerns by virtue of the federal and state laws that govern real estate transactions. For most people, the largest investment they will make will be the purchase of a home.

Obtaining a mortgage loan can be a tedious process, and there are a number of ways that a borrower can secure financing. Banks and mortgage lenders are the primary sources of funding for residential property. In some cases, the seller may also agree to hold a mortgage on the property. In other instances, the buyer may have enlisted the services of a mortgage broker to assist with securing a loan. Further, there are many different types of mortgage products available to homebuyers today.

A loan can be a traditional loan, that is a fixed rate loan with a term of 30 years. When interest rates are low, the safety of locking in a fixed rate appeals to many borrowers (Revell, 2012). However, there are also a number of other loans: adjustable rate mortgages (mortgages where the interest rate is fixed for a certain period and then increases according to a set schedule); interest only mortgages, where the borrower pays only interest on the note for an initial period and then payments are applied to both principal and interest; loans that have terms of 40 years where the monthly payments are lower for the first 10 years, and then increases for the remainder of the term (also known as a step up loan), and any other number of variations to the traditional 30 year fixed interest rate loan.

Borrowers who have held their mortgages long enough to see market interest rates go down frequently refinance, or take out a new loan. “Locking in a lower rate can cut your monthly payment, but you could also choose a shorter term and pay off the loan sooner,” says Patricia Esswein in Kiplinger’s Personal Finance. “To see how much you could save with a lower rate and to test various scenarios, use [an online] mortgage calculator.” She also counsels “Since the mortgage meltdown and housing bust, most borrowers have steered toward the shelter of fixed-rate loans, despite adjustable-rate mortgages that are even lower … the bigger the mortgage, the greater the savings with an adjustable-rate loan. Notorious versions of ARMs that kept payments so low that the amount of the mortgage actually increased instead of decreasing have disappeared from the lending menu. So have interest-only ARMs and ARMs that feature balloon rates.”

Because of the complexities involved, a prospective buyer should retain an attorney in order to handle the numerous legal matters. A buyer's attorney should be acting in the buyer's best interest, so the buyer will have protection in the event that legal conflicts arise. Moreover, the attorney can assist the buyer with arranging for financing.

Finally, this paper is intended to be an overview of the federal laws that govern real estate transactions, and the procedures and legal issues that affect real estate transactions in New York. Accordingly this paper should not be construed as, or relied upon for, legal advice.

Terms & Concepts

Closing: The meeting where the purchase and sale of real estate is consummated and all parties are paid as contemplated by the sales contract and in accordance with the mortgage lender's requirements.

Closing Agent: The person responsible for preparing mortgage documents and arranging for title insurance among other things.

Community Property: Applies only in states that recognize community property — a form of joint tenancy between husband and wife with each owning half, and whose interests pass to heirs upon death.

Contract of Sale: The agreement between a seller and a buyer that is required to transfer ownership of real property.

Covenant: A representation in a deed that protects the owner from certain claims.

Deed: The legal instrument or document that transfers title from the seller (sometimes referred to as the "grantor") to the buyer (also referred to as the "grantee"). There are three types of deeds: (i) a quitclaim deed, (ii) a bargain and sale deed, and (iii) a warranty deed.

Easement: A right of way on or over real property.

Equal Credit Opportunity Act (ECOA): Keeps lenders from discriminating against borrowers based on the protected classes set forth in the Fair Housing Act.

Encumbrance: A claim against real property.

Fair Housing Act: Federal law aimed at prohibiting discrimination in the rental or purchase of a home based on race, color, religion, national origin, sex, family status or disability.

Home Mortgage Disclosure Act (HMDA): Federal law aimed at preventing discrimination in mortgage lending.

Joint Tenancy: A form of ownership in which two or more people have equal interests. Each tenant has the right to posses the entire property, and ownership interests pass to the surviving tenant in the event of death.

Lien: A legal claim or attachment against property as security for payment of an obligation.

Listing Agreement: An agreement between a seller and a real estate broker that determines how a property will be marketed. A listing agreement can be a non-exclusive agreement, exclusive agency agreement, exclusive right to sell, or a multiple listing.

Mortgage: A loan to finance the purchase of real estate.

Ownership Interest: The manner by which a person takes title to real property (e.g. sole ownership).

Promissory Note: The legal instrument that enforces a mortgage between a lender and a borrower.

Real Property: The legal term for real estate and the ownership interests of real estate.

Residential Property: Real property that is intended to be used for residential purposes (i.e. for persons to dwell in).

Real Estate Settlement Procedures Act (RESPA): A disclosure regulation that requires lenders to disclose to loan applicants the costs that will be charged for the loan.

Sole Ownership: Real estate owned by one person.

Tenants by the Entirety: A form of joint tenancy when the joint tenants are husband and wife.

Tenants in Common: Property that is owned by two or more people but not necessarily in equal interests or with equal rights of possession. Property passes to heirs in the event of death.

Truth-in-Lending Act (TILA): A federal disclosure law that requires lenders to provide complete and accurate information to loan applicants about the cost of credit and the terms of payment.

Title Insurance: Insurance that protects a borrower against claims on real property is known as owner's title insurance. Mortgage lenders also require title insurance and this is known as lender's insurance.

Survey: A diagram of real property that details measurements and boundaries, structures on the property and any easements and encumbrances.

Bibliography

Beck & Arad, LLP. (1997, October) Overview of real property law in the United States. International Counselor. Retrieved December 12, 2006 from Justia database.

Clark, C. V. (2006) Padrick's RESPA, TILA, HOEPA and ECOA in real estate transactions. St. Paul, Minn: Thomson/West.

Dreier, T., Fried, C., Garskof, J., Lee, A. C., Mangla, I., Valdes-Dapena, P., & Yahalom, T. (2012). Real estate. (cover story).Money, 41, 66-67. Retrieved November 22, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=74412451&site=ehost-live

Esswein, P. (2011). Save money on your mortgage. Kiplinger's Personal Finance, 65, 62. Retrieved November 22, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=67173605&site=ehost-live

Hudgins, M. (2005). Taking the law into many hands. National Real Estate Investor, 47, 57-62. Retrieved December 12, 2006, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=18204141&site=ehost-live

Jolly, B. (2004). RESPA revisited. Credit Union Magazine, 70, 50. Retrieved December 12, 2006, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=13709675&site=ehost-live

Revell, J. (2012). Adjust your thinking about mortgages. Fortune, 166, 40. Retrieved November 22, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=79274224&site=ehost-live

Sichleman, L. (2005). Taking a look at state difference in closing agent requirements. National Mortgage News, 29, 6. Retrieved December 12, 2006, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=18211030&site=ehost-live

Suggested Reading

Finklestein, B. (2006). RESPA Remains at the top of the agenda. National Mortgage News, 30, 1-33. Retrieved December 12, 2006, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21699273&site=ehost-live

Krainer, J. (2006). Residential investment over the real estate cycle. FRBSF Economic Letter, 2006, 1-4. Retrieved December 12, 2006, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21567418&site=ehost-live

Slifer, D. L. & Schieber, P. H. (June). Beware of "kickbacks": HUD'S recent RESPA enforcement actions. Banking Law Journal, 123, 519-525. Retrieved December 12, 2006, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21382939&site=ehost-live