Buying Residential Real Estate in Vermont
Buying a house in Vermont is an adventure: full of challenge, complexity, and a certain degree of risk. Hopefully, it’s also exiting and maybe even just plain fun. No article can take the place of expert advice, but having a grasp of some common issues can smooth the ride. Readers should keep in mind that every state is different, and Vermont is quirkier than most, so these comments may not apply in other states, and are not intended to provide legal advice for any particular transaction.
First- Get Prequalified
As soon as possible, sit down with your friendly local loan officer and get an idea of the financing you’ll qualify for. This helps you avoid disappointment down the road, but more importantly, you may learn easy ways to restructure your personal finances in order to improve your credit and your borrowing power. Tuning up your credit can take a few months, so don’t wait until you fall in love with a home to think about your financing. When you do make an offer, if you’ve already discussed financing with a lender, you’ll have a Prequalification Letter from your bank assuring the Seller that you’re not just a starry-eyed dreamer.
Talk to a Realtor
Once you know what you can afford and where the money will come from, shop away! The most obvious route is searching the online MLS and setting up times to see houses you’re interested in. Properties are listed on the MLS by the Seller’s real estate agent. You can either contact the Listing Agent, or arrange to work with your own agent, a Buyer Broker.
The world of real estate agency can be confusing. Most often, the Seller pays an agreed-upon percentage of the sale price to the Listing Agent as a commission, and the Listing Agent also agrees that if a Buyer works with her own agent, the Listing Agent will share the commission with the Buyer’s agent. For Example, Sam Seller hires Lenny Listing Agent to sell his house. Sam agrees to pay Lenny 6% commission. Bonnie Buyer works with Betsy Buyer Broker. At closing, 3% of the sale price goes to Lenny and 3% goes to Betsy. Even though Sam Seller pays for Betsy Buyer Broker’s fees, Betsy is the buyer’s agent. An “agent” has a high duty of loyalty to the person he or she represents. A good real estate agent will be completely loyal to his or her client in all phases of the negotiation, putting the client’s interest ahead of everyone else’s, including the agent’s. An excellent agent can do that while also fostering rapport, goodwill, and mutual respect on all sides of a transaction.
When you’re shopping for the perfect property, having a hard-working agent in your corner can be indispensable. She or he will provide helpful guidance in the process, may send you preview tips on properties brand new to the market, and will have input on different communities, neighborhoods, and local trends. while you’re considering agents for that partnership, don’t be afraid to ask them to clarify how the whole agency thing works and what they’ll expect from you.
In addition to properties listed on MLS, check out for-sale-by-owner properties in local classifieds and FSBO sites. If there’s not a listing agent involved, check with your buyer broker about how to handle that. If you can’t find a realtor willing to spend time on a FSBO property, a good real estate attorney will be happy to answer questions and help you navigate the process.
Once you find a property you’re interested in buying, you’ll make an offer. If you can come to an agreement on terms of the deal, you’ll put it all in writing and sign it. This written agreement is a binding commitment for buyer and seller to meet on a particular date in the future for a closing, at which a certain amount of money and the deed will change hands, as well as a pile of other related paperwork, and the property will be yours.
In a typical transaction, the buyer first makes an offer, which is generally in the form of a proposed contract, already signed by the buyer, to show that the buyer sincerely intends to enter into the contract with seller. (All the seller has to do is sign.) The seller can reject, accept, or propose a counter-offer. If buyer and seller can agree to specific terms, they both sign the written Purchase and Sale contract. After the “P&S” contract is signed, both parties get ready for closing. At the time the contract is signed, the purchaser usually hands over an Earnest Money Deposit, to be held until closing by the seller’s agent or some other escrow agent. If the purchaser then goes ahead with the deal under the terms of the contract, the deposit is generally applied toward the purchase price. If the purchaser defaults on her agreement and doesn’t close as required, the seller is usually entitled to keep the deposit, and might also be entitled to pursue other remedies for the breach.
Almost all purchase and sale contracts are subject to certain contingencies – unknowns that need to be satisfied before one or both party is bound to perform under the contract on closing day. For example, you’ll want your contract to be subject to an inspection contingency: the right to have a building inspector examine the property and give you a satisfactory report. If the inspection reveals serious defects, the buyer (but often not the seller) may have the right to terminate the contract, get the deposit back, and go on her merry way.
Most Purchase and Sale contracts are subject to an inspection contingency, a financing contingency, and a title search contingency, among others.
Why not resolve those questions before making a deal and entering into a P&S? Because the diligence that a prudent buyer will undertake is time consuming and expensive. Before paying a crew of experts to examine the property from every angle, you want a binding commitment from the seller to sell it to you and no one else, for an agreed-upon sum, on a date certain.
A word on negotiating the terms of a purchase and sale agreement: brace yourself for ups and downs- it’s always something. The purchase of a home is an emotional experience, and it’s difficult to make rational business decisions in the midst of it. But you must. You’re making a tremendous investment of money, time and energy. How wisely you negotiate your purchase will have an impact on you and your family for many years to come. In moments when you’re overcome by excitement, or fear of losing the deal, recognize those emotions and do your best not to let them steer the boat. Be patient. Give yourself a pause to reflect for a moment or a weekend before responding, if you can. Seek the feedback of someone you trust. Be aware of what you don’t know, and figure out how to get that information. And don’t assume anything- confirm.
When should I consult with an Attorney?
Call an attorney early in the process. In the overview above, you saw a lot of “typically”, “generally”, and “often”. That’s because the rights a buyer and seller have in a given transaction are largely not determined by standard practice, or convention, not even by local law. They are determined by the language of the Purchase and Sale Contract. There are common brokers’ forms, but no two contracts are alike. Small tweaks in wording can make a big difference. Once the contract is signed, it’s usually too late to make changes unless they are expressly addressed in the agreement, so consult a lawyer before you sign if you’d like attorney review. As an alternative, some contracts contain language like, “This contract is subject to attorney review. Either party may consult with an attorney within three (3) days after the effective date of this contract, and following such review may terminate this contract based on the attorney’s advice within those three days. After 3 days, if the contract has not been terminated, this provision shall be null and void.” In that case, you can wait until you have a sure thing before asking your attorney to review it. When you’re working with an attorney who knows you and is aware of your goals, she or he can be involved as necessary to steer you around expensive pitfalls without running up your legal bills on items you or your realtor can handle, or that don’t apply. Giving your attorney a lot of lead time to handle your upcoming closing will minimize their stress, allowing them to serve you well without breaking the bank.
OK- I have a signed Purchase and Sale Contract! Now what?
Congratulations! Now brace yourself for more ups and downs.
You’ve already contacted your attorney and confirmed that she or he will be able to represent you. Next, go through your contract carefully and put every contingency deadline on your calendar. Once those deadlines go by, that particular contingency is waived, and no longer grounds to terminate the contract. Even if you don’t want to terminate the contract, the existence of the contingency gives you some leverage with the seller to negotiate resolutions. For example, if your inspection reveals that there are high levels of radon in the basement, you can ask the seller to install a radon mitigation system at the seller’s expense. They’re not obligated to do so, but will often prefer to do so than lose the deal and have to start all over again (with the radon problem remaining). Negotiating those resolutions needs to happen while the contingency is still in effect, and that takes time. If the deadline is approaching, don’t panic- ask the seller for an extension. If you’ve been on the ball getting your inspections lined up, but you still need more time, a seller will almost always give you an extension. An extension needs to be an addendum to your contract, in writing and signed by buyer and seller, and that can take a few days. Ask for an extension as soon as you find out you might need it.
Next, set up your inspections. You’ll want a structural inspection of the house and its systems. You’ll also want to test the drinking water if it’s not on a municipal water supply, and test for radon. Your building inspector can do water and radon testing for an extra fee, or you can do that yourself- Radon test kits are available at most hardware stores, or at http://www.prolabinc.com/radon-test-kits.html . You can test drinking water yourself through the Vermont Department of Health at (802) 863-7336. Recent changes in Vermont law are leading to increased testing of drinking water, and contaminants are being found where water has always been thought to be perfectly fine. A “Kit C” battery of water tests is highly recommended, in addition to the traditional “Kit A” test for coliform bacteria. If it turns out the water has contaminants, you want to know that before your inspection contingency expires. Kit C results can take three weeks or more, so plan accordingly.
In addition to structure and systems, radon, and water, be sure to have an inspection of the septic system if the property is not served by a municipal sewer. In Vermont, a failed septic system can cost tens of thousands of dollars or more. For that very reason, systems that are marginal or worse are often nursed along beyond their useful life. Shop around for a septic company: not all septic inspectors are equal. They all start with pumping out the septic tank, for a fee. A company that will send a fiber-optic camera down into the leach field and give you a detailed report is recommended. When you’re comparing companies, ask them to send you a sample inspection report.
Environmental Site Assessment
When deciding what inspections you want, always consider the risk of environmental contamination. If you buy a contaminated property, you may be liable for cleanup, even if you didn’t participate in the contamination, or even know about it! Since hazardous contamination can spread into groundwater and onto other properties, environmental contamination is a serious risk and can result in liability that far exceeds the value of the property. You can mitigate that risk by having a qualified environmental consulting firm perform a Phase I Environmental Site Assessment. If you do a Phase I ESA before you own the property and it doesn’t raise red flags, the law provides you some immunity from liability if contamination is ever discovered in the future. For many properties, the cost of a Phase I ESA outweighs the risk of contamination, but there are certain warning signs that make some properties riskier: if there are or have ever been underground petroleum storage tanks; garage floor drains; commercial uses like gas stations, dry cleaners, auto body shops; farm dumps; etc., a Phase I ESA is imperative. If the property has ever been through a tax sale or foreclosure, it has a higher risk. Whether you opt for a Phase I ESA or not is ultimately up to you, but pay attention to warning signs, ask questions, and don’t ignore those strange blue barrels stacked out behind the barn.
If the property hasn’t ever been surveyed, consider a hiring a surveyor to give you an opinion as to precisely where the boundaries are prepare a survey map. Many Vermont properties haven’t ever been surveyed, and some property descriptions in deeds are as simple as, “Smith hereby conveys to Jones everything that was purchased from Roberts in 1985, which in turn is a portion of the property purchased by Roberts from Jennings in 1953.” Needless to say, some boundaries and acreage calculations are more than a little unclear. Most of the time this ambiguity is not problematic, and the established boundaries serve just fine, but if you have doubts or a precise determination of boundary location or acreage is important, consult with a surveyor. Surveyors perform in-depth research in the land records beyond the scope of an attorney’s title search, and so they also may find very old easements, encroachments, or other items affecting the property that might otherwise not be discovered. Surveys require a lot of work and take considerable time, so if you’re thinking about a survey before closing, be clear about how and when it will fit into your closing preparation. A survey might have its own contract contingency, and could require a later closing date.
For any inspection, it’s well worthwhile to be there in person to observe. Bring a camera and note pad. You’ll learn more than you ever wanted to know about the property that might just one day be yours!
During inspections, issues surface that need to be addressed, from little hidden quirks to catastrophic defects. If buyer and seller can negotiate a way to resolve those issues to their mutual satisfaction, the deal can proceed. If not, then you may decide to terminate the contract. Whether you’re resolving an issue or giving notice that you’ve decided to terminate the contract, you need a written document to that effect, drafted, executed and delivered before relevant deadlines. Ask your attorney to help you prepare a written addendum to your contract to minimize your risk and effectively move forward.
Most of the time, you’ll end up with mixed reviews from your inspectors. If you’re scratching your head thinking, Now what?, consult with your realtor or attorney for options and perspective.
While you’re lining up your inspections, review the language of your financing contingency. Your contract probably contains a provision that, in order for that contingency to be valid, you must promptly submit a complete loan application to at least one lender, probably by a certain date. Be sure to do that. To document satisfying that requirement of the P&S, shoot your loan officer an email that says, “Hi Jen, thanks for all of your help, please confirm that our loan app is complete.” Then save Jen’s confirmation email.
Your bank will hire an independent appraiser to give them an opinion of the property’s value. You’ll pay for the appraisal, and your bank will coordinate with the appraiser.
As you work your way through the deadlines on your calendar, keep your attorney and your bank up to speed. Ask your loan officer when they’ll order their appraisal of the property’s value, and ask your attorney when she’ll begin the title search. Then check with both to be sure those things are happening on schedule.
What’s a title search?
Unlike the title to your car, legal title to real estate is not a document. It’s a complex interaction between a series of documents of different types, most recorded in the municipal land records, but sometimes not. During a title search, an attorney or trained paralegal will examine the land records, and then an attorney will review all documents of record that affect the property and prepare an opinion as to what the title contains. Most title searches go back at least 40 years, and search the deeds in the chain of ownership, as well as performing searches of each owner’s name to discover any claim or interest that some other person or entity may have in the property, or just plain old mistakes in transferring ownership. Most properties have mortgages, which need to be carefully resolved at closing. Similar claims can be in the form of liens like mechanic’s liens, judgment liens, or UCC-1 financing statements. Sometimes, title searchers discover mistakes in the way prior deeds were drafted or executed that impact what the current “owner” really owns. All of these things need to be corrected before or at closing.
Other items may not be corrected: third parties may have interests in the property interests like restrictive covenants, or easements, which may “run with title to the property” from owner to owner. There may be items contained in maps or surveys of record that affect the property, like encroaching neighbors, easements or rights of way, ancient roads, or boundary line disagreements. If the property is burdened by an interest that runs with title to the land, you need to know about it before closing and consider whether it interferes with your intended use of the property. Depending on how the language of your contract is drafted, you may or may not have a right to terminate the contract based on a valid easement or other encumbrance burdening the property.
Finally, Vermont permitting laws are multi-layered and complex. There are municipal zoning and subdivision requirements, State Wastewater and Potable Water Supply Permit requirements, and sometimes Vermont Act 250 Permitting requirements. Before issuing an opinion as to the title of your property, an attorney will confirm that permitting requirements have been met for your intended use of the property.
While a title search can’t find items that aren’t properly indexed and recorded in the land records, or are older than the period of the search, a good 40 year search is absolutely critical to avoid inheriting costly problems.
What’ a Title Opinion?
Once the title search has been done, your attorney will issue an opinion that, based on the 40 year search, the Seller has good and marketable title, subject to whatever features of record affect the title. That is called a Preliminary Title Certificate, or a Preliminary Attorney’s Title Opinion. After you close, your new deed will be recorded in the Land Records. Your attorney will then go back to the town clerk’s office and update the search, confirming that the new deed is properly recorded and indexed in your name, and will issue a Final Title Opinion, revised to show that now you have good and marketable title, and that any prior mortgages have been discharged and any necessary cleanup has been done.
What’s Title Insurance?
A title opinion is good, but it’s not perfect: your attorney can’t take responsibility for items that weren’t discovered because they were improperly indexed or recorded, or for items that were recorded prior to the period of the search. In some Vermont towns, the land records are very well organized and the risk of a misplaced or mis-indexed document is relatively low. In other towns, the risk might not be so low…
In addition, the attorney’s assurances aren’t much good if they turn out to be incorrect a few decades later, and the attorney is long gone.
For these reasons, most lenders want more than just an attorney’s opinion: they want insurance coverage for the legal title in the property they’re accepting as collateral for their loan. Title Insurance does just that. Based on an attorney’s title search, the title insurance company agrees to cover the risk that an unknown title problem will come to light in the future. Your bank will probably require that you purchase a policy covering them, in the amount of their loan to you. As the owner, you’re not covered by the Lender’s Policy, but you can also buy an Owner’s Policy covering your interest. A title insurance premium is a one-time fee, and an Owner’s Policy will cover you forever. (Even after you sell the property.) If you decide to buy an Owner’s Policy, any premium you pay for your Lender’s Policy at the same time will be discounted from the cost of your Owner’s Policy.
Most real estate attorneys are equipped to provide title insurance, and can help you decide whether the benefit of title insurance in any given case is worth the cost. Keep in mind that the attorney who sells you a policy will usually keep a portion of the premium. If you want to do your own research, Vermont Attorney’s Title Co. has a helpful website at http://vermontattorneystitle.com/title-insurance/
Before you know it, you’ll have traveled a long and winding road, and you’ll be sitting at the closing table. Cheers!
© 2019 Adam L. Powers, Esq.; Powers & Powers P.C.