- Lawyer Selection
- Realtor Selection
- Estimated Costs
- Capital gains
- The Process
- Terms in a Contract of Sale
- The Closing
I think that the first three steps to consider before putting the house for sale are to consult an attorney, perhaps an accountant, depending on what the attorney recommends; to have a plan for moving out that is suitable to your needs, if you live in the house, and to consider whether you will be able to afford your next abode.
LAWYER SELECTION
Driving through New England a while ago, I saw some signs sponsored by CATIC, a title insurance company, that read something like this: “Want to buy a house? Want good advise? Consult an attorney.” This is as true for a purchaser as it is for a seller.
Most residential property sellers start the process by consulting with and listing the property for sale by a realtor. Next comes the attorney.
An experienced lawyer can guide you through the process in a way that most realtors don’t. And, once you have selected a realtor, you should bring the listing agreement to the lawyer for review and advise before you sign it. The listing agreement may include terms that you may find onerous at a future time. For example, can you sell the house on your own without paying a commission? Can you sell the house to relatives or friends without paying a commission? Can you withdraw the house from the market after signing a listing agreement and, if so, under what conditions? How long is the listing valid? How long must you wait before you can sell the house to someone who visited the house during the time the listing was in effect without having to pay a commission?
It is also important to have an idea of what your expenses may be and if you have a gain on which you may have to pay a tax.
REALTOR SELECTION
Here are some considerations:
- Experience in selling houses;
- Familiarity with your area;
- Honesty in pricing your house. You may not want to hear it, but it is best to price a property right from the beginning. If you overprice it, people will not come to see it. Other relators in the area are not going to waste their time showing a property that they know will not sell, because a buyer may be wise enough to realize that the property is overpriced, or for fear that a lender will not appraise it for the price you seek. A realtor may tell you what you want to hear, list the property at a high price, whether from inexperience or just to get the listing. But once listed at a very high price, reducing the price will not help, as the harm has already been done. It may take many months before interested buyers come to view the house.
ESTIMATED COSTS
The following is a checklist of expenses to look out for:
- Broker’s commission: to be negotiated before accepting an offer;
- Transfer taxes: 0.4% statewide for prices up to $3 million and .65% for prices above.. In New York City, for one–to-three family dwellings, 1% of the sales price if same is $500,000.00 or less and 1.425% if the price is more than $500,000.00. For all other properties, 1.425% of the price up to $500,000.00, and 2.625% of the price, if the price is more than $500,000.00. There is a “Mansion Tax” when the price is $1 million or more and the house is a one-to-three family dwelling. But this is imposed on the purchaser unless otherwise negotiated. Make sure that your contract so specifies. And, remember, in New York City, transfer taxes are imposed on the basis of the tax classification of the property, not the legal occupancy, and the two may not be the same;
- Legal fees: you should have already consulted the attorney you plan to retain and should know the attorney’s legal fees. This may sound self-serving, but keep in mind that you are retaining a professional service and the value of that service should be measured by different factors, such as experience, the bar committees the attorney belongs to, his/her knowledge of the subject matter, etc. You are not buying a can of soda which, at whatever price and in whatever store, is the same can of soda;
- Cost of recording a mortgage satisfaction (release of lien) if you have a mortgage;
- Title closer fee: if you have a mortgage, the title company representative (the title closer) will charge a fee for handling the pay-off of the mortgage(s).
CAPITAL GAINS
If you’re lucky, you have a huge capital gain and have to pay a tax on it. But, I think it’s a good idea to know how much of a tax you may have to pay, if that is the case. If you have used the house as your primary residence for at least two of the past five years, the first $250,000.00 ($500,000.00 if your spouse lived with you) may not be taxable. However, this exclusion only applies to the portion of the house that you used as your primary residence. For example: if you own a two-family dwelling and occupied one of the apartments, but rented the other, you may avail yourself of the exclusion for only half the gain, but may have to pay capital gains taxes on the other half. In addition, it may be worth considering a Section 1031 like-kind exchange, depending on what you plan to do with the proceeds from the sale.
I think that knowing whether you have a capital gain, whether you have to pay a tax on it, or whether a 1031 exchange is suitable for you, are considerations that you should undertake before listing a house for sale.
THE PROCESS
Once you have accepted an offer, you are ready to go to contract. Your attorney will prepare the contract and send it to the purchaser’s attorney for review, comments, changes and signature. After the purchaser signs the contract, same is returned to your attorney with a check for the contract deposit. This deposit is customarily paid to the seller’s attorney and it gets deposited in an escrow account with that attorney until closing. The amount of the deposit is to be negotiated, but strive for a deposit of 10% of the price. The larger the amount, the least a purchaser will feel tempted to have “buyer’s remorse.”
Once you sign the contract, both sides are bound by its terms.
TERMS IN A CONTRACT OF SALE
- Address of the property.
- Price.
- The contract deposit and who is it payable to. It should be paid in trust to the attorney for the seller. The deposit should not be released to the seller except at closing.
- The mortgage contingency: if the purchaser is applying for a mortgage, the contract should be conditioned upon the purchaser obtaining a mortgage in the amount agreed to by the seller in the binder.
- Title clearance contingency: title to the property should be delivered to the purchaser free and clear of any liens, such as mortgages, judgments, outstanding property taxes and many other possible “clouds” on title.
- Contingency for violations: local government authorities that have jurisdiction over the property may issue violations for non-compliance of codes and ordinances. The responsibility for removing them generally falls on the seller.
- The contract should include the representations that the seller is making regarding the condition of the house, such as that the plumbing, heating, electrical system and appliances included in the sale will be in working order at the time of closing, and that the roof will be free of leaks.
- The contract should spell out who is responsible to pay the transfer taxes, a burden generally imposed on the seller. Keep in mind that parties can negotiate who pays the transfer taxes.
- Federal law provides that a purchaser has the right to conduct an inspection of the house to determine the existence of lead paint. You must also provide information to the purchaser as to whether you know or have had reports of the existence of lead paint inside the house.
- The contract should spell out the damages that either party will face if that party defaults in performing the terms of the contract.
- The contract should provide the names of the realtors involved in the transaction and who’s responsible to pay the commission, generally the seller.
- The closing date is an important term. The desired language should read “on or about…” This gives flexibility to both sides in scheduling a closing.
- Possession of the house after closing is to be negotiated and included in the contract. If you reside in the house and need the money from the sale to move or don’t want to vacate the house until you have concluded the sale, you should negotiate to stay in possession after the closing for a short period of time, customarily five to ten days. During this time you will pay the purchaser the interest on the purchaser’s mortgage, and the real estate taxes, all on a pro-rated basis. Generally some money will be held in escrow after closing by the seller’s attorney, to insure that the seller moves out within the negotiated time. The agreement will also provide that if the seller does not move out within that time, the seller will pay a substantial sum of money for every additional day that the seller stays in possession beyond the initial period.
- Customarily, a contract will include a provision allowing the purchaser a period of time after signing the contract, usually 10 to 15 days, to conduct a termite inspection. If the inspection discloses termite activity and/or damage, the seller will have the option to cancel the contract and instruct the attorney to release the contract deposit to the purchaser, or treat the condition and/or repair the damage.
- If applicable, and the seller did not answer the property condition questionnaire pursuant to the Property Condition Disclosure Act, the contract will so state, and provide that at closing the seller will give a credit to the purchaser of $500.00 pursuant to the provisions of said Act.
The above are customary terms in a contract. There may be special provisions that apply to a specific transaction and those should be included in the contract.
THE CLOSING
Once any title objections have been cleared and the purchaser’s lender is ready to close, a closing will be scheduled at a date, time and place convenient to all parties, at least in theory. In practice, the closing will be scheduled when the lender decides. At the closing, from the sales price, all your costs and your mortgage (if any) will be paid off and the balance will be paid over to you. You tender the deed to the house to the purchaser and, if you have moved out, you tender the keys. If you have not vacated the house pursuant to the terms of the contract, you will tender the keys when you move out. The transaction has been concluded.
Good luck on your new life!
The Trillo Bylines 