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Resources Real Estate Terms You Should Know

Buyer’s Agency

Real estate agents are ordinarily paid by commission and typically the commission is paid by the seller; this relationship gave rise to legal argument that the agent working with a buyer is actually an agent of the seller. As a Buyer’s Agent, a Realtor® commits themselves to working for the benefit of the buyer, even though they are paid by the seller. Some buyer’s agency agreements require the buyer to pay the commission due the Realtor® in the event that the seller is not legally obligated to; such as a FSBO.

Private Mortgage Insurance

If you do not have 20% to put down on a home, most lenders will require you to obtain mortgage insurance as a condition of obtaining the loan. Mortgage insurance does not protect YOU, it insures the lender in the event that you default on the loan. Mortgage insurance is costly and the only way to get rid of it is to build up your equity in the property; you can do this by making pre-payments on your loan, or refinancing if your property values increase.

Radon

An invisible, odorless gas that may cause cancer and which you do not want in your house, so a test is done to establish whether or not it exists in the structure. If the test reveals an elevated level of Radon, then you can request that the seller correct the problem.

Lead Paint

Lead in paint is bad and has not been used for some years, but older structures may have lead-based paint and this disclosure will be made to you. Lead pain disclosures are required by law on all residential properties built prior to 1978.

Mold

Can be harmful and, if present, should be removed before closing. (As a purchaser you are entitled to perform a mold test.)

Property Inspection Report

Even new houses may have defects not apparent to the average consumer, so inspections are done. As a buyer you should plan on attending the property inspection so you can see the defects that the inspector is concerned about and ask questions. However, keep in mind that just because a property is inspected is no guaranty that the home is free from problems. Inspectors do miss defective items and while you may wish to sue the inspector to be compensated for your losses; many inspectors limit their liability in their contracts so that their only obligation is to refund the inspection fee.

Master Statement

Summarizes the financial components of the transaction and must accurately show where the money comes from and to whom it is paid. (It’s a closing statement, prepared by the title company, which reflects where the money being paid for the property is going.)

Closing Disclosure (CD)

This documents outlines the terms of your loan and reflects the various costs the lender and other third parties are charging you for the loan. The lender is required to get this to you at least 3 business days prior to the closing.

Predatory Lending

Certain types of loans have been identified as “predatory” and if you are going to receive one of these loans, you must have counseling in advance of the closing to educate you about the loans and alternatives to them.

Business Disclosure Statement

If one of the lawyers representing a party is also acting as a registered title insurance agent in the transaction and getting paid for doing so, you will be so informed.

ABA Disclosure (Affiliated Business Arrangement)

HUD form to accomplish the same purpose as above, but may also be used if the real estate company or lender provides insurance or other products and is paid for them.

City of Chicago: Energy Cost

Estimates the costs of heating and cooling the property on an annual basis and may contain past energy bills which are pretty much worthless since you don’t know how the former occupants lived.

Insulation Rating

Required for new construction but as a practical matter is information that has been available and required by reasonable consumers for all properties built within the last 40 years.

Condominium Disclosures (22.1)

If the property is a condominium, or a home or town home located within a common interest community association, the law requires that the developer (if new) or owner selling (in a resale) provide information about the project and the condominium association, its financial condition and other operational issues. (This is an important disclosure and can identify associations that may be experiencing financial difficulty where a special assessment may be needed.)

Loan Application

This form will be prepared on computer, printed and given to you for review and signature at the closing. I advise you to read it carefully and make sure you let me know if there are any inaccuracies in it such as: it shows your income as too high or more money in the bank than you really have or that you intend to occupy the premises as your primary residence if that is not the case. Your signature will certify the information is accurate and you do not want to lie on an application for a federally related mortgage loan.

Importance Of Attorneys

An experienced real estate transactional attorney has handled hundreds of closings and should be familiar with the multitude of documents and disclosures that you will be required to sign at the closing and as such is an invaluable resource to a buyer and seller alike.

Keep in mind that the actual closing of the transaction represents the culmination of the attorney’s efforts; that is, 80 to 90% of the work required of your attorney (review of the sales agreement, negotiation of contract modifications, clearing of title, examination of the survey, inspection results, HOA documents, etc.) is typically performed prior to the closing. This is intended to insure that your closing is smooth and uneventful, however, issues can and do arise at the closing table and you need an experienced attorney with your interests in mind to guide and protect you.

Finally, of all the participants involved in your real estate transaction (Realtors®, property inspectors, mortgage brokers, attorneys), in Illinois, ATTORNEYS are the only persons who can represent you and provide you with legal advice. As your attorney I act as a “non-interested” party; that is, whether or not I get paid does not hinge on whether or not you purchase the property, rather I am compensated for my time expertise, knowledge, advice and guidance.

When you buy a house, you own it with all of the issues that come with it, as such, you need to have a non-interested professional (one who is not paid only if your deal closes) on your side to guide you and give you advice on how to proceed.

You need a qualified attorney in your corner.

Once you purchase the house, the seller is no longer responsible for it; in fact, there may be some defects in the house when you buy it for which the seller will not be responsible for. You may borrow money to purchase the house, but your loan is a separate transaction from the sale and the lender is not responsible for the house. In addition to the loan payments, you are responsible for maintenance of the property and the payment of real estate taxes. Your disappointment with the schools or actions of the local municipal government does not relieve you of the responsibility to pay taxes. You must keep the property insured against casualty loss. If you fail to pay taxes or keep the property insured, the lender may do so and add the amounts it pays to the principal balance of your loan. Such failure on your part is also likely an act of default under the note in which you promised to repay the money you borrowed to buy the house and that can lead to foreclosure.

If you buy the house with a spouse and the two of you become divorced, the bank doesn’t really care; your mortgage loan payments must still be paid. If they are not paid the lender will foreclose and sue both you and your spouse to get their money. (The bank is not affected by the terms of your divorce decree.) Under your mortgage agreement the property must be maintained, kept insured and the real estate taxes must be paid in a timely fashion.

The value of the house may go down rather than up. Nevertheless, the regular loan payments must be kept current, the property must be insured and maintained and the real estate taxes must be paid. No one else really cares and no one else is responsible for these matters. You are.

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You may believe that the sellers, the real estate agents, the home inspector and any number of other folks have misrepresented the condition of the premises. And you may, in fact, be able to sue such persons successfully. Nevertheless, during the time before any final judgment is entered in your favor in such a lawsuit and, yes, even before you collect any damages awarded to you, your mortgage payments must be made, the property must be insured and the real estate taxes must be paid.

The neighbors may be neighbors from hell, letting their dogs and cats run loose all over your yard, partying at all hours of the day and night, (even possibly participating in criminal activities) not making even the tiniest effort to maintain their own house, perhaps letting their home go into foreclosure. While these activities may reduce the value of your home, you still have the obligation to see that your mortgage payments are made, the property is insured and the real estate taxes are paid.

Your home may be located in a subdivision that is subject to Covenants, Conditions and Restrictions of record. Such CCRs control what you can and cannot do with your property, and are managed by a Homeowners Association. The Association can require you to pay assessments to maintain the “common” areas, and can impose penalties and fines against you for refusing to follow the rules. Whether or not you feel that this is un-American, you are still required to make your assessment payments and your refusal to do so can result in you actually being evicted from your home by the HOA.

Buying a Foreclosure or REO (Real Estate Owned by Bank) property can have its own pitfalls. With these properties the lenders typically do not provide a survey, do not warrant anything (that is the property is being sold “As-Is”), don’t insure that any mechanical equipment or appliances will be in the home at the time of closing and they typically limit their contractual liability. So if they don’t honor the contract for any reason, their only obligation is to return to you, your earnest money. Often times as the buyer you are waiving, or giving up, your rights to sue the seller for specific performance; that is, the ability to force the seller to actually honor the contract and sell you the property. In addition, the lender will most likely shift to you the obligation to pay certain expenses customarily paid by the seller; such as, transfer taxes and other closing fees.

Bottom line, when your purchase property from a bank, it is a “my way or the highway” approach. On the other hand, if you as the buyer fail to close the transaction when you promised and you require additional time, the bank often reserves the ability to charge you additional amounts of money; i.e. "Penalties", to extend the closing date.

Finally, keep in mind that under IL law if the property you are purchasing from the REO is in a homeowners association in which assessments are paid, as the buyer you could be responsible for paying up to six (6) months of past due assessments and the Association's fees incurred to collect the same. (Currently a movement in Springfield to limit the amount HOAs can recover to a total of nine (9) months of assessments.)

Short Sales

Short Sales are another animal all together. Here the seller, in order to go ahead with the contract must get his lender(s) to agree to accept less money than what is actually owed on the home. The process of getting this approval often takes several months to work through and all without any guaranty that the investor will ultimately reach an agreement with the seller.

As the result of these delays, buyers typically don’t want to spend money on inspections or loan applications until the seller’s lender approves of the deal, which further extends the date of closing. Unfortunately, if the lender does approve the deal they will want it to close it within a very short time frame to limit their losses. These concerns are inconsistent with each other and can often result in jeopardizing the outcome of the deal. Therefore, buyer's of short sale properties should look at the deal as an investment and be prepared to spend monies up front to be in a position to quickly close once the lender provides their approval.

In addition, since it is the seller’s lender that ultimately must approve of the deal, you may find that any closing cost credits or other concessions the seller agreed to provide you when they accepted the deal are being withdrawn from the table and are now no longer part of the transaction. In these situations, your only option may be limited to not proceeding with the deal.

While the short sale process is becoming more streamlined and thus arguably easier to complete, you need to review your situation with your attorney so you know what you need to do to best position yourself for a successful transaction.

Still believe in the American Dream of owning your own house? I hope so. For owning the physical structure that is a house, and proudly and regularly observing all the obligations of home ownership is an important part of making that house a home. Not that renters don’t have homes, too. But home ownership carries with it that pride of commitment and sacrifice for the good of the family, the future and the larger community. To your family, your home is your little corner of the world and that’s why the obligations are yours. People may be born and people may die in that home. Triumphs will be celebrated and tragedies mourned. Memories will be built that will last beyond a lifetime.