Should I have a real estate purchase contract, or are escrow instructions enough?
What is a purchase offer?
Should I have an attorney review my purchase documents?
What information is in the preliminary title report?
Do I really need title insurance?
What kind of deed should I get?
How should I take title?
Is an environmental site assessment important?
What is a “1031 exchange”?
What does a HUD-1 Settlement Statement include?
Q: Should I have a real estate purchase contract, or are escrow instructions enough?
A: Escrow instructions do not usually address issues related to buyer or seller performance, remedies of a buyer or seller if the other does not perform as agreed, representations and warranties between buyer and seller, tax advice or legal advice for either buyer or seller, or items to be handled outside of escrow. Many disputes between buyer and seller, both during escrow and afterwards, arise from these kinds of matters. Resolving them will be difficult without the written understanding of the parties at the time as to the responsibilities of the parties, and remedies for breaches. Back to Top
A. A purchase offer or agreement contains all the details of the offer tp purchase a piece of property. An agreement is binding only once the document has been agreed to and signed by the buyer and seller. The Arizona Department of Real Estate has standard forms for purchase/sale of residential property, vacant land, and commercial property. You may use these forms, if you wish. At a minimum, these standard form agreements can serve as effective checklists of issues you may want to address, and should be reviewed by an attorney to make sure they cover all the issues of your particular circumstance.
Often in the purchase of real estate, there are several offers and counter offers until an agreement is reached. Back to Top
Q: Should I have an attorney review my purchase documents?
A: In some states, attorneys draft the purchase documents, act as the escrow agent, distribute the funds and record the deeds and/or mortgages. Arizona is not one of those states. Escrow offices are available and offer such services as holding and distributing funds, providing title insurance through their title plants, and providing accounting servicing for some continuing debt. Title insurance protects the buyers from most claims against the title. We strongly advise against closing any real estate purchase or sale without checking for title defects and obtaining title insurance. You may know that you haven’t taken out a second lien on your property, but do you know for a certainty that no one else has made a typographical error in a legal description that now includes your property? Real estate transactions must be in writing to be enforceable. Back to Top
Q: What information is in the preliminary title report?
A: A preliminary title report is prepared by the escrow office’s title department after escrow opens and prior to closing. It contains information for the buyer including how title is currently held and what kind of exceptions to title are currently of record (for example, easements, liens and encumbrances). The buyer usually has a specific number of days to review the report, ask questions, and request changes. If the seller cannot or does not make the changes requested, or if the questions cannot be resolved to the buyer’s satisfaction, the buyer may be able to withdraw from the transaction. Back to Top
Q: Do I really need title insurance?
A: Title insurance can be purchased in many forms, subject to certain exceptions, and with endorsements for special circumstances. Title insurance provides assurance to interested parties that there is good and marketable title to the property being insured. However, does not mean that title insurance guarantees perfect title.
Exceptions to title are noted in the preliminary title report. These include specific exceptions listed on the property to be insured, as well as standard exceptions. One standard exception is that the insurance will only be provided for exceptions to title that are reflected by the public records.
Endorsements are available for an additional cost, which varies depending on the title company and the nature of the matter covered by the endorsement. A qualified attorney can consult with you on the endorsements available and advisable in your particular circumstance.
There are also different types of title insurance policies. Traditionally, the seller pays for standard coverage for the buyer that insures that the deed from the seller conveys title that as it purports to convey, subject to exceptions in the title report. An owner’s policy (usually purchased by the buyer), can provide additional protection against third party claims such as mechanic’s liens, the buyer can purchase an owner’s policy. If a commercial loan is involved, a lender’s policy specifically insures the lender against title defects. Back to Top
Q: What kind of deed should I get?
A: The type of deed can make a big difference. In some states, the typical conveyance is a grant deed, which conveys the seller’s interest in the property, but not necessarily with any representations or warranties as to title. Warranty deeds go a step further and warrant that the seller has good title to the interest being conveyed. A quitclaim deed conveys whatever interest the seller has in the property, if any.
A Davis Miles could draft the deed that is appropriate for you, or instruct the escrow agent to draft the deed. Back to Top
A: In a commercial transaction, the choices are to take title individually or through a business entity. Individually, you might have significantly more liability exposure than you are comfortable with, and some business entities, such as corporations, may offer protection from liability but have more tax debt than you want to pay.
Any time you take title in your name personally, you should have a clear understanding of the legal differences of taking title as joint tenants, as tenants in common, as a partnership, or as community property. All of these types of ownership have significant ownership implications and rights of survivorship.
Professional advice from a qualified attorney is advisable to assist you in making your decision. The attorneys at Davis Miles can counsel you on your rights and the rights of your co-owners in these ownership matters. Back to Top
Q: Is an environmental site assessment important?
A: Some lenders may require an environmental site assessment. As a purchaser, you may want to strongly consider going to some expense for one, especially if the business you are buying is a service station or manufacturing company. A Phase I report includes an inspection of the property and review of various records, without conducting any boring, drilling, or testing of soil and water samples. With a little forethought and planning, you could add language to your purchase contract so that you could get the results of the Phase I and then decide if the expense of a Phase II is warranted.
The biggest potential concerns to owning business property come from hazardous waste or environmental cleanup problems. Even if you, as the current owner, did not cause the problem, you may have the primary responsibility for fixing it. The mere fact that you once owned the property could subject you to future expenses of cleanup, which could be substantial. Back to Top
A: A “1031 exchange” refers to a method of deferring tax on the sale of an interest in real property allowed under section 1031 of the Internal Revenue Code. In brief, it allows a seller to defer tax on a gain that would otherwise be realized on a sale of property if the proceeds from the sale are reinvested in like-kind property. There are explicit rules governing timing and transfer, and several different formulae for qualifying purchase property. If you are planning on using Section 1031 as a tax planning tool in your sale, be sure to discuss your alternatives thoroughly with a qualified attorney or accountant prior to entering into the purchase agreement. The purchase agreement must contain specific language and the exchange must be conducted precisely in order to qualify for deferred tax treatment. Back to Top
Q: What does a HUD-1 Settlement Statement include?
A: The HUD-1 Settlement Statement shows the actual settlement costs of the loan transaction. The form clearly shows all charges imposed on borrowers and sellers in connection with the settlement. The Real Estate Settlement Procedures Act (“RESPA”) allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement date. The settlement agent must provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time. Back to Top
