What is the Contract of Sale?
In order for a Contract for the purchase and sale of real property to be enforceable, it must be in writing and signed by both parties to the agreement. Generally, when a real estate broker is involved in the transaction, he or she will prepare a form Contract of Sale that both parties will sign. Once the Contract is signed by both parties, it is fully executed. This is the point at which Attorney Review begins.
What is Attorney Review?
Attorney Review begins the business day after both parties sign the Contract. Attorneys have three business days from the date the Contract is fully executed to review the Contract with their clients and make their proposed changes to the Contract. In New Jersey, if your attorney does not send a letter disapproving the Contract within three business days of the parties signing, it becomes a binding agreement as it is written. This is true, unless your attorney requests from the other party's attorney to extend the Attorney Review period based on your needs, and the other party agrees. This happens often when a Buyer did not have full access to the property when they initially looked at the property (perhaps a tenant did not allow access for showings). In such a case, based on your needs, your attorney will request from the other party's attorney that Attorney Review be extended to a certain date.
Once your attorney sends a notice disapproving the Contract along with their proposed changes to the Contract, the other party's attorney will have an opportunity to respond. Attorney Review will go on until the parties come to a mutually acceptable agreement.
It is important to understand that during Attorney Review, either party can terminate the Contract with or without cause. Sellers may continue to show the property to prospective Buyers and consider other offers. That is why there is an incentive, particularly for Buyers, to conclude Attorney Review as quickly as possible. One of our goals is to go over the Contract of Sale with our clients as soon as we receive it, iron out all provisions that are specific to our client's transaction, and conclude Attorney Review as quickly as possible.
Once the parties reach a mutually acceptable agreement and approve of each other's changes to the Contract, Attorney Review is concluded. All time periods commence from the date Attorney Review is concluded, which is referred to as the Effective Date. At this time, your attorney will instruct you to go forward with scheduling a home inspection and applying for a mortgage.
What are Common Contingencies That My Attorney May Incorporate Into the Contract?
A contingency clause in a Contract of Sale means that there are certain conditions that must be met in order for the parties to be obligated to close the transaction. In New Jersey, it is customary for attorneys to include the following contingencies in the Contract of Sale: a Financing Contingency, Appraisal Contingency, and Home Inspection Contingency.
A Financing Contingency applies to transactions in which the Buyer requires financing in order to complete the purchase, i.e., the Buyer needs to obtain a mortgage. This provision essentially states that if the Buyer is unable to obtain a mortgage commitment after using good faith efforts, then the Buyer may terminate the deal with the return of their deposit and no further obligation to the Seller.
Another common contingency is the Appraisal Contingency, which reserves the Buyer's right to renegotiate the purchase price if the property appraises for less than the purchase price. This contingency is especially important when a Buyer is using financing to purchase the property because lenders will only lend based on the appraised value of the property. Therefore, if the property under appraises, it is crucial that the Buyer has the right to renegotiate the purchase price with the Seller. The Seller does not have to agree to reduce the purchase price, but the option is there. If the Seller does not agree to reduce the purchase price, the Buyer can either walk away from the deal with the return of their deposit and no further obligation to the Seller, or the Buyer can proceed with the purchase but will need to put more money down at closing.
There is also the Home Inspection or Due Diligence Contingency. The purpose of this contingency is to ensure that the Buyer has the right to walk away from the deal if the home inspection uncovers certain material, environmental, or structural defects associated with the property and the parties cannot come to a resolution regarding these defects.
There are nuances to each contingency and there are other contingencies that your attorney may choose to incorporate into the Contract of Sale depending on the situation. We review and explain each provision of the Contract with our clients and draft contingencies that account for potential risks our clients may incur.
What is a Mortgage and Note?
When someone takes out a mortgage, they will sign two documents: the Promissory Note and the Mortgage.
The Promissory Note is the document that represents the Borrower’s obligation to repay the loan. The Promissory Note contains all essential terms of the loan, including the terms of the interest rate, the amortization schedule, and whether or not the debt is recourse. The Promissory Note does not get recorded.
The Mortgage is the document that places a lien on the property as security for the loan. The Mortgage gets recorded with the Clerk of the Court and clouds title until the loan is paid off. The Mortgage is referred to as a security instrument because it securitizes the Note. In other words, it allows the lender to foreclose on the property the Mortgage is attached to to satisfy the Promissory Note. Without a Mortgage, in the event the Borrower defaults, the lender can only sue the Borrower for money damages on the Promissory Note. However, with the Mortgage and Promissory Note, in the event the Borrower defaults, the lender can foreclose on the property.
What are My Expected Closing Costs as a Buyer?
Loan Costs
Loan costs vary depending on the lender you use and your financial situation. Some loan costs that are paid at the time of closing include the Application Fee, Credit Report Fee, Loan Origination Fee, Appraisal Fee, Rate Lock Extension Fee (if applicable), and Private Mortgage Insurance (if applicable).
Prepayments
1. Property Taxes
The Buyer is responsible for property taxes from the date of closing going forward. If closing occurs in the middle of the tax quarter, property taxes will be prorated between the Seller and Buyer. In addition, your lender will generally collect three months' worth of property taxes to be held in escrow until they are due.
2. Homeowners Insurance
Homeowners Insurance must be effective as of the date of closing. You will generally prepay one years' worth of Homeowners Insurance at the time of closing. In addition, your lender may collect a certain number of months' worth of Homeowners Insurance to be held in escrow until it is due.
3. Prepaid Interest
4. Homeowners Association Fees (If Applicable)
If you are purchasing a property that is subject to a Homeowners Association (HOA), you will be responsible for the monthly HOA maintenance fee from the date of closing through the end of the month. In addition, some HOAs will collect three to four months' worth of HOA monthly maintenance fees at closing. Some HOAs may collect a move-in fee, working capital contribution, management fee, and/or fee for non-refundable reserves at the time of closing as well.
Title Searches, Insurance, and Survey
A title insurance policy ensures that the Buyer receives clear title to the property as of the date of closing. Clear title means title that is free of any and all liens, judgments, recorded and unrecorded mortgages, and so forth. Title insurance is a one-time premium based on the value of the property being purchased that gets paid at the time of closing and lasts for the entire time that the Buyer owns the property.
If you are purchasing a home with a mortgage, your lender will require that you purchase two title policies: an Owner's Title Policy and a Lender's Title Policy.
A survey is a metes and bounds description of the property and identifies the extent of the real property being purchased. Buyers are not required to obtain a survey unless their lender requires one. Even if your lender does not require a survey, it is a good idea to order one if, for example, boundary lines appear to be in dispute, property lines are unclear, the Buyer intends to erect a fence, or if there are any visible easements or encroachments.
Recording Fees for Deed and Mortgage
The Buyer is responsible for recording fees for the Deed and Mortgage. Recording fees vary by County. Fee schedules can usually be found on the County Recorder’s websites.
Legal Fees
We believe everyone should have access to quality, affordable legal services. We charge a flat fee for all closings and provide our clients with a detailed breakdown of the services that are included in our fee at the beginning of the Attorney-Client relationship. This ensures that our clients are never caught off guard by any hidden fees that were not disclosed.
The above list of closing costs is intended to be an example. Each Buyer's situation is different.
In addition to the above costs, there are home inspection costs, but these fees are generally paid by the Buyer directly to the home inspector prior to closing.
If you have any questions about closing costs, please call us today.
What are My Expected Closing Costs as a Seller?
Paying off Open Mortgages
If there are any open mortgages on the property, the Seller will be required to pay off the mortgage(s) at the time of closing.
Your attorney will order a payoff statement from your mortgage lender, which will state the outstanding principal balance on the mortgage, any interest owed through the anticipated payoff date, and any unpaid charges such as late fees and prepayment fees, if applicable.
Realty Transfer Tax
Any time someone sells real property in the State of New Jersey, they are required to pay a realty transfer tax to the county in which the property is located. The realty transfer tax is based on the sale price of the property and is always paid by the Seller.
Certain Sellers qualify for a full or partial exemption from this tax. Sellers over the age of 62 who are selling their primary residence qualify for a partial exemption, so long as the property is a condominium unit, one-family, or two-family property. If the Sellers are married, only one of them must be 62 years of age or older to qualify. If the Sellers are unmarried, then both Sellers must be 62 years of age or older in order to qualify.
Proration of Property Taxes and Municipal Charges
Sellers are responsible for property taxes as well as water and sewer charges up until the date of closing. If closing occurs in the middle of the tax quarter, taxes will be prorated between the Buyer and the Seller.
Real Estate Agent Commissions
If the Seller utilized the services of a real estate agent, the Seller will be responsible for paying the commission of both their real estate agent and the Buyer's real estate agent. Most commissions in New Jersey typically range from 5% to 6% of the sale price of the property, to be split between the Seller's agent and Buyer's agent. However, commissions are negotiable so it is important to consult with multiple real estate agents before choosing a real estate broker to list your home with.
Recording Fees
If there are any open mortgages on the property, they will need to be paid off at the time of closing. Once the title company disburses payment to your mortgage lender, your lender will provide you with a Paid in Full Letter and a copy of the Discharge of Mortgage. The original Discharge will be recorded with the Clerk of the Court of the county in which the property is located. Recording the Discharge is necessary in order to have the mortgage removed of record and have clear title transferred to the Buyer.
Wire Fees or Overnight Fees
If the Sellers choose to receive their sale proceeds via wire, they will usually be charged a wire fee by the title company. If the Sellers choose to receive their sale proceeds via certified check, most title companies will charge an overnight fee to overnight the check either to the Seller directly or to the Seller's attorney's office.
Legal Fees
We believe everyone should have access to quality, affordable legal services. We charge a flat fee for all closings and provide our clients with a detailed breakdown of the services that are included in our fee at the beginning of the Attorney-Client relationship. This ensures that our clients are never caught off guard by any hidden fees that were not disclosed.
The above list of closing costs is intended to be an example. Each Seller's situation is unique.
In addition to the above costs, there are both federal and state income tax implications associated with the sale of a home. We suggest that you speak with an accountant or qualified tax professional regarding these implications.
If you have any questions about closing costs, please call us today.
What Should Sellers Be Aware of as Closing Approaches?
Signing Closing Documents
Prior to closing, we will either have you come into our office to sign your closing documents or we will send your closing documents to you to sign, at your convenience, along with specific instructions for signing. Our firm will prepare the following closing documents: the Deed, which evidences the transfer of title from the Seller to the Buyer; an Affidavit of Title, which is a sworn statement designed to protect the Buyer from potential legal issues facing the Seller; a GIT/REP-3, also referred to as the Seller’s Residency Certification; a 1099-S Form; a Certification of Non-Foreign Status, as long as you are a United States Citizen or green-card holder; and a Power of Attorney, in which you will give our firm the limited authority to act on your behalf at closing so that you do not need to attend.
Sellers should know that all people who are currently on the Deed to the property must sign the Deed conveying title to the Buyer. In addition, if the Seller is married and only one spouse is on the Deed, as long as the property was used as the Seller’s marital residence (i.e., the husband and wife resided at the property while married, even if only for one day), then both spouses must sign the Deed to relinquish all marital rights to the property.
Closing Date
It is important to understand that the closing date set forth in your contract is not absolute. There are two types of closing dates that may be present in a contract: a target date or a drop-dead date. A target date is standard for New Jersey real estate closings and it means that the contract closing date is not absolute, but rather is an expected date. As long as the parties close somewhere within the target date, it will be deemed reasonable. There are certain factors that tend to push the contract closing date back, such as delays with the Buyer’s mortgage. That is why we always tell our Sellers that they should not schedule movers or assume that they are closing on the contract closing date unless they receive confirmation from our office.
If the date and time of closing is an extreme priority, we can make the closing date a drop-dead date by way of incorporating a time of essence clause into the contract. However, there are risks associated with making the closing date a drop-dead date, all of which we will explain to you in the event the situation arises.
Homeowners Insurance
Do not cancel your homeowners insurance until you receive confirmation from our office that the transaction has closed. Your insurance company may require proof that you sold your home, in which case you can provide them with a copy of your Closing Disclosure.
Day of Closing
You must leave the property vacant, in broom clean condition, and free of any personal belongings in advance of the Buyer's final walkthrough. Generally, the Buyer will perform their final walkthrough on the morning of closing. It is imperative that you leave the property vacant and broom clean so as to avoid any walkthrough issues. If there are walkthrough issues, the Buyer may request either a monetary credit or that a small portion of your sale proceeds be held in escrow until you have resolved the walkthrough issues.
You do not need to attend closing. You will have signed all of your closing documents in advance of closing and provided your real estate agent or our office with your keys to the property. As soon as your Closing Disclosure is prepared, we will go over this document with you and answer any questions you may have so that you understand exactly what you will be netting from the sale.
We will also go over with you whether you will be receiving your sale proceeds in the form of a wire transfer or certified check. Regardless of which method you choose, you will generally receive two forms of payment following closing: the deposit previously paid by the buyer and the balance of the proceeds due to you.
As soon as closing is completed, we will give you a call or email confirming the same and congratulating you on completing this milestone!
What Happens at the Time of Closing?
Closing is the process of transferring ownership of the property from the Seller to the Buyer. Generally, the Buyer will perform a final walkthrough of the property on the morning of closing to confirm that the condition of the property is the same as it was at the time of the home inspection and to ensure that all negotiated repairs were completed. The Buyer will be instructed to bring final payment for the purchase price in the form of a certified bank check as well as government-issued photo ID to closing.
Typically, Sellers do not attend closing. They will have signed all closing documents in advance of closing and will have provided keys to the property either to their real estate agent or attorney. During closing, the Buyer will review and sign all documents related to the purchase of the property. If there is financing, the Buyer will sign all mortgage-related documents. Once all documents have been signed, the lender will provide funding to the title company, and the title company will distribute funds to the Seller. The Buyer will then be provided with keys to their new home and congratulated on completing their purchase!
It will take approximately forty-five days from the date of closing for the Buyer to receive the original recorded Deed to the property, as well as their Owner's Title Insurance Policy. It is important to hold on to these documents for the duration of your ownership and keep them in a safe place.
