Springfield Business Journal Articles


Choices You Make At Closing

A home is probably the most expensive item that a person will ever own. Unfortunately, the purchase of a home is often a mysterious transaction. When faced with a huge stack of papers at closing, many people simply sign and hope for the best. Here are a few of the documents that are in that never ending stack of paper and some of the choices that buyers may be making without even realizing it.

Deed. The sellers of the home execute the deed transferring the property to the buyers. The deed is generally a "warranty deed." As the name implies, this type of deed includes certain warranties from the seller to the buyer. The sellers are promising that they have good title to the property and that there are no liens on the property. If there are liens on the property discovered after closing, the buyers can sue the sellers for the amount of the liens.

Buyers must be aware, however, that the liens remain valid. For example, if the sellers had a new roof put on the home and did not pay for the roof, the roofer can file a mechanics lien against the property. If the buyers discover the mechanics lien after closing, they can sue the seller for the amount of the lien, but the roofer can still enforce his lien against the property. Therefore, it is critical that a title search be performed on the property.

An alternative form of deed is a quit claim deed. A quit claim deed does not contain any warranties of ownership but merely transfers to the buyer whatever interest the seller has in the property, if any. For example, if I quit claim to you all of my interest in the Brooklyn Bridge, I will have transferred to you all of my interest in the bridge. Of course, my interest is nothing, but I have made no warranties to you in the deed. Generally, it is not advisable to accept a quit claim deed because of the lack of warranties and because it can cause future problems with title insurance.

Type of Ownership. The deed will establish the type of ownership of the property if there are multiple buyers, such as a husband and wife. A husband and wife can hold title as tenants in common, joint tenants with rights of survivorship or as tenants by the entirety. This is a choice most buyers do not realize they have.

Unless the buyers request otherwise, most deeds are prepared as joint tenants with rights of survivorship. This means that if one of the owners dies, title automatically passes to the other owner. This may be fine in most situations, but not necessarily. For example, assume that the wife has children from a prior marriage and her will leaves all of her property to her children. If she and her husband own their home as joint tenants with rights of survivorship, at the wife’s death, her interest in the home will pass to her husband. It will not pass under her will to her children.

If a husband and wife do want to own their home with rights of survivorship, the better choice for most people is to own the home as tenants by the entirety. This is a special type of ownership that is only available for married couples and only for their primary residence. With tenancy by the entireties, property automatically passes to the surviving spouse on the death of the first spouse, as with joint tenancy, but the house is also protected from many creditors. With tenancy by the entireties, if a creditor obtains a judgment against one spouse but not the other, the creditor cannot take the home in satisfaction of its judgment. For example, assume that a husband is in a car accident which severely injures someone and a large judgment is entered against the husband. The injured party cannot take the home. If the home was owned as joint tenants, the injured party could take the husband's interest in the home and force a sale of the home.

Title Company. The title company is generally responsible for the title search. The title company searches the deed records of the county and produces a report of all items affecting the property – liens, easements, deed restrictions, etc. The title company then issues two insurance policies, one for the buyers and one for the lender. These policies insure that the buyer is purchasing good title to the property. The seller generally pays for the buyer’s title insurance, and the buyer generally pays for the lender’s policy.

There are some major exceptions on most title policies, which can cause a buyer a great deal of stress. One is any item that would be disclosed by an accurate survey of the property. Unlike many states, residential real estate sales in Illinois generally do not include a survey of the property which would show the legal boundaries of the property. Therefore if a buyer purchases a home and is subsequently told by his neighbor that the buyer’s garage actually extends onto the neighbor’s property, the buyer may be forced to tear down the garage and have no recourse against the seller or the title company. The seller will not be liable because the location of the garage was obvious and therefore agreed to by the buyer. The title company will not be liable because the title insurance policy will have a survey exception. The only way to be sure that this situation will not occur is to obtain a survey of the property before closing. Of course, this adds time and expense to the transaction, and most people choose to forego the survey and accept the risk. That is the buyer’s choice, but again many buyers do not even realize they are making that choice.

HUD. The HUD statement is a form created by the Department of Housing and Urban Development. This statement sets forth all of the charges associated with the sale and who will pay them. Buyers and sellers should carefully review the HUD to ensure that costs are correct and being charged to the proper party.

PTAX. The PTAX form is the Illinois Department of Revenue Form that must be filed with the deed. Illinois taxes real estate sales at approximately .15 percent. This means that the transfer taxes on a $100,000 home will be $150. The transfer taxes are generally paid by the seller.

In order to avoid or at least minimize unpleasant surprises, buyers should carefully review all of their closing documents before signing, but if the thought of reading all that fine print gives you a headache, you can always hire a lawyer to review the documents for you.
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