1. What is Title Insurance and why would I want it?
Typically,
when you buy real estate (whether it's a home or a commercial site), you first
have an attorney do a title search. This title search is performed to make
sure that: (a) the person selling to you is really the owner of the property;
(b) there are no liens against the property which would become your
responsibility as the owner; and (c) there are no other matters which would
adversely affect your use and enjoyment of the property. When you do this,
you are trusting that your attorney will find any problems and make sure they
are corrected before you pay for the property. If your attorney makes a
mistake or doesn't discover a problem, and you learn about it later, your only
remedies are to sue either the seller, your attorney, or both for whatever
damages you suffer. Title Insurance is an actual insurance policy issued
by a company licensed by the state to do so which provides additional protection
for you and/or the bank you mortgaged the property with. If you obtained
Title Insurance when you bought your property and later learn of a problem with
the title, you need only file a claim with the Title Insurance Company.
The Company will then investigate the claim and take appropriate action.
If a lawsuit is required, the Company bears the expense, including attorney's
fees. If a lien against the property needs to be paid in order to protect
your interests, the Company is responsible for the payment. And, if all
else fails, the Company will be responsible for reimbursing you for the cost of
the property if they cannot obtain good title for you.
There are a number of reasons why you may want Title
Insurance, even if you are confident that your attorney has not made a
mistake. First, most banks now require a title insurance policy to protect
their mortgage. Because the Title Insurance Premium (a one-time fee
usually paid at closing) is based on the amount insured, it usually costs very
little more to also purchase coverage for your interest in the property in
addition to insurance for the bank's interest. Second, Title Insurance
provides more protection than does your attorney's certification. For
example, there are some matters which even a very careful and competent attorney
might not learn of during a title search. If one of those matters affects
your title to the real estate, the attorney would not be "negligent"
in not discovering the problem. If the attorney wasn't negligent, then he
or she would not be liable for your damages. However, if you obtain Title
Insurance when you purchase the property, the policy protects you whether or not
there was negligence involved. In addition, as mentioned above, if a
lawsuit is required, the Title Insurance Company will pay the attorney's
fees. In a complicated real estate case, these fees can be nearly as much
as the cost of the property, and in Pennsylvania you generally cannot recover
the cost of your attorney's fees in the lawsuit. Thus, the Title Insurance
provides another significant benefit.
At Gamble Mojock Piccione & Palmer, LLP,
we are not only experienced real eatate attorneys, but we are also agents for
Lawyers Title Insurance Corporation, one of the largest Title Insurance
Companies in the United States. This allows us to fully respond to your
needs by providing Title Insurance coverage whenever it is needed or desired, so
that you can rest comfortably and enjoy your new home.
2. What are "Closing Costs" and who pays them?
"Closing Costs" is the term used to describe a number of miscellaneous expenses which need to be paid at the time of closing on your real estate purchase. These costs include attorney's fees, realty transfer taxes, property taxes, bank fees, title insurance premiums, and any other costs (such as surveyor's fees, septic system testing, pest inspections, etc.) which were incurred in preparing for the closing. Who pays these items is a matter determined by the Sales Agreement for the property. Typically, the Sales Agreement describes who is responsible for each such item, so it is important to review that Agreement closely before you sign it. The seller is normally responsible for payment of the Realtor's commission. In most circumstances (at least in the Western Pennsylvania area), each party is responsible for their own attorney's fees. Realty transfer taxes (which generally equal 2% of the sales price, but may be higher in some areas) are normally divided equally between the buyer and the seller. Real estate taxes are normally prorated between the parties based on the date of closing (that is, the seller pays the part of the taxes attributable to his time as owner of the property up to the date of closing and the buyer pays for the remainder of the year). One issue that may arise in this proration concerns the payment of school taxes. Because school districts operate on a fiscal year rather than a calendar year, those taxes are sometimes prorated on a fiscal basis and sometimes on a calendar basis. The fiscal proration always benefits the seller, and the calendar basis always benefits the buyer. Therefore, it is important to determine what the Agreement provides regarding prorations before you sign it. Most other costs are normally the responsibility of the buyer. (To get an estimate of what your closing costs might be in a particular transaction, yuo may want to visit our "Closing Costs Estimator" Page.) However, it is important to remember that there is no law requiring any particular division of these costs and the parties are free to negotiate any terms which they like as to such payments. In the end, the terms of the written agreement control who pays what.
3. Do I really need an attorney to purchase real estate or will the Realtor and the Settlement Company conducting the closing protect me?
Whether you "need" an attorney is something you must decide for yourself. There is no law requiring you to have an attorney represent you in a real estate purchase in Pennsylvania. However, an old adage warns that "The attorney who represents himself has a fool for a client." Even though the Realtor normally does his or her best to be your friend, remember that it is the seller who pays the Realtor's commission, and it is the Seller who the Realtor represents, unless you have specifically hired a "Purchaser's agent." Similarly, the Settlement Company normally represents the bank and/or the Title Insurance Company, not the buyer. More often than not, the Settlement Company agent conducting the closing is not even an attorney and by law cannot give you legal advice or explain the effect of provisions in the documents you will be signing. If you want to know that your interests are being protected, you can do so only by making sure that your attorney has an opportunity to review the documents, including the Settlement Statement. If you rely on others, they may be fair with you, but then again, they may not. Purchasing a home is usually the most expensive transaction a person will make during his or her lifetime. It is normally not the time to "rely on the kindness of strangers."
4. How is a "Tenancy-by-the-Entireties" different from other forms of real estate ownership?
In Pennsylvania, a married couple who purchases property jointly as husband and wife owns that property as "Tenants-by-the-Entireties." In this type of ownership each of them literally owns 100% of the property. This is significant in two circumstances: the death of one of the parties and the filing of a judgment lien against one of the parties. In the case of a death, the surviving spouse already owns 100% of the property. Therefore, there is no interest passing from the deceased spouse. Because of this, there is no inheritance tax, nor does the surviving spouse need to go through the process of probating an estate to own the property. If a judgment is entered against one of the spouses, the tenancy-by-the-entireties provides protection against losing the property to the judgment creditor. While such a creditor is free to force a sheriff's sale of property owned by the judgment debtor, he or she cannot force the sale of property owned by another. Since the spouse of the debtor owns 100% of the property (as does the debtor), any sale would deprive the spouse of a property interest. Therefore the creditor cannot proceed against such property. (However, if the innocent spouse should die or if the parties divorce, the creditor may then be able to force the sale of the property.) Pennsylvania also recognizes two other forms of joint property ownership. In a "Tenancy-in-Common," each of the parties owns an equal share of the property (50% if there are two owners, 33 1/3 % if there are three, etc.). Each party is free to sell his or her interest, and it passes through a deceased party's estate. Because each interest is separate, a judgment creditor is able to execute and force a sheriff's sale against any such interest. A "Joint Tenancy with Right of Survivorship" differs from a Tenancy-in-Common only in that a party's interest reverts to the other owners when he or she dies; it does not pass through the estate of the deceased owner. While multiple owners are free to choose whether they wish to be Joint Tenants or Tenants-in-Common, only spouses may own property as "Tenants-by-the-Entireties."
5. Is it all right for me to help the person buying my home by telling his bank he is paid me more for my house than he really is?
Frequently, buyers ask sellers to agree to misrepresent the sale transaction to the buyer's bank. Normally, this takes the form of signing a Sales Agreement which overstates the actual sales price and the amount of the down payment received by the seller. The buyer rationalizes this by telling the seller "You'll get exactly the same amount of money as if I had paid the lower price. It's just this way, I can borrow more money from the bank." Unfortunately, this "little white lie" is actually something much more serious. First, you should realize that doing so will inflate both the amount of realty transfer taxes (and possibly income taxes) that you must pay. More importantly, misrepresenting the terms of the sale to a bank is not only unethical, but is also illegal. In fact, in most circumstances this form of bank fraud constitutes a federal crime. Banks loan only a certain percentage of the purchase price for a reason: mortgage defaults are common when a property owner realizes that the mortgage debt is more than the value of the property. Inflated sales prices of property was one of the primary causes of the failure of numerous Savings and Loan Associations in the 1980's, and bank inspectors and officials are constantly on guard against such scams. In addition, a required part of most real estate closings involves the execution by an affidavit by the seller, and this affidavit normally includes a provision where the seller swears that he or she has actually received all of the money shown in the Sales Agreement. Signing such a statement under false pretenses constitutes perjury, another criminal offense under Pennsylvania law. Thus, in return for doing your buyer "a little favor," you will be costing yourself money and committing both federal and state criminal offenses. The response to such a request should obviously be "Sorry, I can't do that."