1. What is a deed and why is it required?
A deed is the document that is used to transfer real property from one owner to the next. A deed is recorded in the county where the property is owned and, once recorded, is public knowledge. There are several types of deeds, each offering guarantees or limiting guarantees concerning the property's title. Your attorney will carefully draft your deed (or supervise its drafting), assuring it is of the type that adequately satisfies your objectives.
2. What are some of the common forms of property ownership in Pennsylvania? What are tenants in common, joint tenants, and tenants by the entireties?
There are a variety of ways that property can be owned in Pennsylvania, the most common, being the following:
(1) Sole Ownership: A property owned by sole ownership is owned entirely by one person, subject, of course, to any mortgage or other lien-holding interests in the property. The sole ownership is typically established in a lease by words granting the property to grantees such as "Bill Smith, as sole owner," or "Mary Smith, solely," or even "John Smith" with no specificity that there is some type of joint ownership.
(2) Tenants in Common: Property owned as tenants in common is owned by two or more persons at the same time. Under this form of ownership, each individual co-owner owns an undivided interest in the property - that is, each has no exclusive right to any portion of the property, and has no rights to exclude other co-owners from any portion of the property. However, while each co-owner has an undivided interest in the property, that interest does not need to be equal. For example, one co-owner may own a 25% undivided interest in the property, with another owning other 75% undivided interest. If no percentage interest is specified in the deed, then it presumed that co-owners each own equal percentages, meaning two co-owners would each own 50%; three co-owners would each own 33-1/3% each; and so forth. Although each co-owner may have unequally defined percentages, each still has the right to the possession and enjoyment of all the property, not just his or her undivided portion.
The most distinctive characteristic of a tenancy in common is what happens to a co-owner's interest at his or her death. Tenants in common have no right of survivorship - that is, upon the death of a co-owner, that co-owner's interest does not pass to the other co-owners. Instead, the deceased's co-owner's interest passes to his/her heirs according to the decedent's will or the state's rules of intestacy (see Estate Law FAQs). In addition, a tenant in common may sell his or her interest in the property without regard to the interest of the other tenants in common. An outright sale of all interests in the property will, however, require assent of all co-owners.
A tenancy in common is established in a deed with granting words such as, granted to "John Smith, Robert Johnson, and Mary Curtis as tenants in common." In addition, where property is granted to more than one owner without specificity of as to the type of tenancy, then the grantees are presumed to take the property as tenants in common.
(3) Joint Tenancy (With Right of Survivorship): Joint tenancy with the right of survivorship, or simply, joint tenancy, refers to the ownership of property by two or more persons (generally not married to each other), where the surviving co-owners have the right to the whole property upon the death of a co-owner. As distinct from a tenancy in common, under a joint tenancy no interest in the property passes through the estate of a deceased co-owner to his or her heirs; all interests pass to the other co-owners.
Joint tenancy requires four unities - unity of time, unity of title, unity of interest and unity of possession. This means that the ownership of the property must be equal in both interest and possession, that the acquisition of title must happen at the same time and through the same conveyance for all of the parties involved in the joint tenancy.
It is possible to terminate the joint tenancy, purposefully or unwittingly, should any of the four unities be broken. A joint tenant, without the consent of the other joint tenant, may terminate the joint tenancy by simply conveying his interest in the property. The joint tenant may convey his interest to himself, thus retaining an undivided interest as a tenant in common, or may convey his interest to a third party who then becomes a tenant in common. Even though the parties may initially desire to own property with one-another and to have their interest pass to the other co-owner, each party can, without the consent of the other, sever the survivorship right, become a tenant in common, and then ultimately devise or bequeath an interest in the property.
A joint tenancy is created in a deed by granting words such as, to "John Smith, Robert Johnson, and Mary Curtis as Joint Tenants."
(4) Tenancy by the Entireties: A tenancy by the entireties is, effectively, a special form of a joint tenancy reserved specifically for married couples. As tenants by the entireties, married spouses are deemed to each own 100% of each-others interest. This distinction means that at the death of one of the spouses, the surviving spouse already owns 100% of the property. The importance of this is two-fold: (1) under these circumstances no estate has to be probated to pass the interest in the property from the deceased spouse to the surviving spouse, and (2) there is no inheritance tax due for this marital property.
In addition, a tenancy by the entireties usually protects the property from any legal judgments entered against just one of the spouses. Because the property is legally 100% owned by each spouse, executing a judgment against the property (i.e., though a sheriff sale) to satisfy a debt by only one of the spouses is deemed to deprive the innocent spouse of his or her property. However, while a creditor cannot execute a judgment against such a property while the tenancy is in tact, if the innocent spouse should die or if the married parties divorce, the creditor may then be able to force the sale of the property.
Absent the death of one of the spouses, a tenancy by the entireties can only be severed by consent of both spouses, or upon divorce or annulment of the marriage. If so severed, the tenants by the entireties then become owners of the property as tenants in common, each owning an undivided one-half interest in their total property interest.
A tenancy by the entireties is created in a deed by conveying words indicating a grant to "Bill Smith and Mary Smith, husband and wife, as tenants by the entireties," or similar words. While a well-drafted deed will contain such words, in Pennsylvania it is presumed that when a married couple takes title to property, they do so as tenants by the entireties (unless the deed specifically states otherwise).
3. What is the difference between a cooperative and a condominium arrangement?
Condominiums: In a "condo" arrangement, an owner legally owns a particular unit in a multiple unit structure of building, plus a share and a right to use common property. Such common property may include the hallways and elevators of a building, or the gardens, recreational areas and swimming pool of common grounds. Traditionally, condominiums have been perceived to be apartment-like units in downtown hi-rise buildings. However, while far from these traditional perceptions, many spacious suburban communities, most typically those whose structures are town-home residences, also meet the legal definition of condominiums.
Generally, condo owner pay monthly dues to an "association" for expenses incurred in maintaining the common property. The association is usually governed by directors elected by the association's "members" (the homeowners in the community), who oversee the management of the community in accordance with the legal documents that created the association - its declarations, articles of incorporation, by-laws and the like. In many cases these associations are managed, on a day-to-day basis, by a professional property management company.
Cooperatives: A "co-op", on the other hand, is distinctively different than a condo. With a co-op, the "owner" does not own a specific unit in the building (not even the unit the owner resides in). Rather, the owner owns stock in the corporation that actually owns the building and all the apartments. The shareholder then leases his or her apartment or unit from the corporation. Typically, the unit's size determines the number of shares of stock that must be purchased to reside within the co-op building.
Just as condo owners generally pay monthly fees to an association, co-op shareholders generally pay monthly fees to the co-op. Fees to the co-op, however, are usually assessed based on the number of shares of stock owned, and are used to pay the mortgage, taxes, and general operating expenses of the co-op. Also like a condo association, shareholders in a co-op generally elect a Board of Directors who manage and decide on how the cooperative is to be run, including approving who is qualified to buy shares.
4. Are there advantages in owning real property?
The primary "advantage" to owning property is the enjoyment of that property. That is, you get to enjoy living in or vacationing in the property you own. In addition, if you own property as an investment, you may enjoy investment income from the property you own.
The major financial advantage for most homeowners who own the property they live in, however, comes from the ability to deduct the interest of a home mortgage and a home equity loan on your Federal Income Tax Return. Though taking such deductions is dependant on certain qualifications," most homeowners meet these qualifications (at least with respect to their residence, and usually with respect to a vacation home), and enjoy significant tax relief as a result of their homeownership.
Tax relief for home ownership can be significant, and generally includes deductions for mortgage interest paid, as well taxes on real estate paid to the state or locality.
5. Are there risks in owning real property?
While there are inherit benefits of owning real estate, including enjoyment of the property (i.e., enjoying residing there), property ownership does carry with it significant risks. Some of the more common risks include the potential liability for:
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violation of zoning ordinances;
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environmental hazard clean-up;
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injuries to others that occur on the property;
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injuries to others by the property (such as tree's falling from your property onto a home on an adjacent property);
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breaches of contracts (such as mortgage payments);
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problems related to selling the property (e.g., problems in transferring title, interest or possession); and
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failing to maintain the property or knowingly create a condition on your property that causes injury to someone's property or person (the owner has a legal obligation to maintain the property in a condition that does not cause harm or injury to others).
6. How can I minimize my risks of property ownership?
Before you offer to purchase: Risk management, with regard to property ownership should begin before an offer to purchase the property is made. Certain risks may be eliminated or reduced through a carefully drafted "offers" to purchase. Similarly, buyers should be aware that many standardized real estate forms contain provisions that impose additional risks on the buyer, or otherwise reduce a buyer's ability to secure certain protections after an offer is made. Accordingly, an "offer" should be reviewed by your attorney before it is forwarded to the seller.
In addition, know what you are buying before signing an offer. Ask lots of questions, of the seller and your real estate agent, and make additional inquiries where warranted. Inquiries should include, but are not limited to, such issues as:
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Are there any zoning violations on the property which will have to be corrected?
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Are there any environmental hazards which may be present (someone in the distant past may have dumped environmental hazards on the property so an environmental assessment should be made)?
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Are there any apparent conditions on the property which could potentially harm someone who happens to come on the property?
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Are there any restrictions or covenants in the purchase contract or on file with the county that would be hard to comply with?
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Will I be able to pay the mortgage on time?
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Are there any potential defects in the chain of title?
Where such questions cannot be answered prior to making an offer to purchase property, a carefully drafted offer can preserve your right to get answers, as well as preserve your right to rescind your offer if such answers are found to be unsatisfactory. Once an offer is made and accepted, however, you are bound by that offer. Accordingly, you MUST make sure that the terms of the offer protect your interests as completely as possible.
After an agreement of sale is signed: Once a purchase agreement is made, additional risk management includes complete inspections of the property, getting all questions answered, contingencies satisfied, and appropriately insuring the property (yes - you should assure that the property you have under an agreement of sale is properly insured even before you settle and take the deed to the property).
After the purchase: Ongoing risk management includes, but is not limited to, regular inspections for potentially hazardous conditions, assuring compliance with local codes and ordinances when making any additions, improvements or modifications to the property, and maintaining appropriate levels of insurance on the property.
7. What happens between the time my offer to buy property is accepted and when I actually "close" on the property?
During the time period before closing date, the terms of the purchase contract are to be taken care of. A properly drafted agreement will likely include a financing contingency, an inspection contingency, other relevant contingencies related to outstanding questions and issues, as well as a provision that the buyer can and will confirm a title to the property that is free of defects.
The inspection provision allows the buyer to have the property professionally inspected. The financing provision gives the buyer time to secure mortgage approval. Because this is often a lengthy process, the buyer should begin seeking financing immediately after the contract is signed. Failure of a buyer to act timely to secure financing could give the seller the right to terminate the agreement and accept other offers.
During this time you should receive a title report. It should be reviewed carefully to determine any possible areas of concern. As few homebuyers are familiar with such matters, it is generally best to have an attorney experienced in real estate matters review the title report and advise you of any causes for concern.
During this time period you should also line up homeowners insurance, making sure the property is insured even before you settle on it. Finally, you will want to schedule a final walk-through inspection of the property to be sure everything is as it should be before you take over ownership.
Of vital importance during this time are the deadlines specified in the agreement of sale. You must read the agreement carefully and observe all deadlines, as failure to do so could give the seller the right to withdrawal from the sale, and even sue you for damages.
8. What kinds of insurance should I buy?
The two most common forms of insurance for real property include liability insurance and title insurance.
Liability insurance: Liability insurance provides coverage if someone is injured or harmed on your property or as a result of your ownership of the property. Typically it is sold in a package policy (renter's, homeowner's, business liability, etc.) which bundle a variety of coverage - such as liability, property contents, theft, and defense against lawsuits - to cover the risks that most owners of similar polices face. Some insurance carriers offer personal excess or "umbrella" liability policies to protect you from expose to liability risks beyond the standard limits offered through homeowner or business liability policies. Also, check your policy to see if flood, earthquake, tornadoes, hurricanes and land subsidence are covered. You may need or want additional protection if those adverse weather conditions are prevalent in your area.
Title insurance: Title insurance provides coverage to a homeowner if it is discovered in the future that there was a defect in the title and the homeowner did not get clear title to the property. Title insurance is generally required by the mortgage lender, but should be purchased whether or not the property is financed.
Commercial property insurance: Commercial property insurance is frequently more specifically tailored to needs of the purchaser, and will consider many factors, including the type of property, loan, kind of business, etc.
9. What are the various types of mortgages?
There are many popular financing options for home purchases, including both traditional and non-traditional strategies. The traditional mortgage options typically available to prospective homebuyers are:
Conventional Mortgages: Most mortgages are a conventional mortgage. A conventional mortgage is a loan issued by a bank or other financing institution for which a lien is placed against the title of the property. This lien permits the lender to acquire possession of the property if the borrower defaults on his or her payments. Conventional mortgages are often "purchased" through independent brokers who issue the mortgage to the buyer, and then sell their interests in the mortgage and mortgaged property to a bank or other financing institution.
FHA mortgages: An FHA mortgage is a conventional mortgage that is insured in whole or in part by the Federal Housing Authority (FHA). This insurance helps protect lenders from loss due to a buyer's default. Because the FHA specifies certain standards for the properties purchased under its program, many properties that may qualify for a standard conventional mortgage will not qualify for an FHA mortgage. For properties and persons that do qualify, however, an FHA mortgage may provide a lower interest rate or a more ready approval from a lender.
Fixed Rate Mortgage: a fixed rate mortgage is a mortgage in which the "rate" - the interest charged on the amount owed - remains the same, or "fixed" for the life of the loan. For example, a 30-year, 7% fixed-rate mortgage will have a rate of 7% for the 30-year life of the loan. That means that the payments will be calculated such that the amount paid each month, from the first month to the last, will be the same and will not change due to fluctuations in the mortgage market, the prime rate or other economic conditions. Most conventional or FHA mortgages are fixed rate mortgages.
Because of its certainty that rates and payments will not increase over the life of the loan, the fixed rate mortgage is usually the preferred choice of buyers who plan to be in their home for more than a few years.
Adjustable rate mortgages: Unlike a fixed rate mortgage, an adjustable rate mortgage (often called an "ARM") offers a rate that may adjust to reflect changes in the mortgage market, prime rate, or other economic factors. Generally ARMs offers an initial interest rate and payment that are "fixed" for a brief period of time - typically between one and three years. After that, the rate will adjust consistent with certain economic factors.
The upside of an ARM is that the initial fixed rate is frequently lower that the prevailing fixed rate mortgage at the time the mortgage is issued, resulting in an initially lower mortgage payment. This lower initial payment may permit a buyer to qualify for an ARM at an amount he or she would not qualify for under a fixed rate mortgage agreement.
The downside of an ARM, however, is that there is no certainty, over the longer term, as to what the rate and required payments will be. As rates increase over time, so will payment obligations, which may force homeowners into default because they are unable to meet the increased payment demands. Accordingly, ARMs are generally advisable only for homebuyers who are not planning on being in their home longer than two or three years, or who are prepared for the risks of significantly escalating interest rates and payment demands.
Other mortgages: There are many other mortgage options presently available that are individually tailored to meet specific goals, including purchase money mortgages, jumbo mortgages, balloon mortgages, shared-equity mortgages, biweekly mortgages, reverse mortgages, and buy downs. In addition, in this very competitive mortgage market, financial institutions are continually developing new mortgages and financing strategies to meet the needs of borrowers.
10. What happens if I cannot make a mortgage payment?
If you fail to make your mortgage payments, you will be in default, and your lender can begin foreclosure proceedings. If you are unable to pay the default amount, the property may be sold at Sheriff Sale, with the proceeds used to compensate the lender for its losses. In addition to losing your property, if the lender is unable to recoup its losses through foreclosure proceedings, in many cases it may also sue you to recover any shortfall. This could result in your wages being garnished or your other assets seized to pay the deficiency amount.
If you are unable to make your mortgage payment, and are threatened with foreclosure, it is imperative that you obtain legal counsel immediately. In many cases legal strategies can be utilized to forestall foreclosure proceedings, giving you time to catch up on what is owed, or possible obtain alternative financing. Such strategies are generally time-sensitive, however, so any delays should be avoided.
11. What taxes am I subject to on my home?
Property owners are subject to county and/or local property taxes. Generally, in Pennsylvania, such taxes are assessed as County Taxes and local School Taxes. These taxes are typically collected by locally elected tax collectors, county tax assessors, or private tax collectors engaged for the purposes of collecting taxes due.
In most situations, mortgage companies will actually collect property taxes along with the borrower's monthly mortgage payment. The mortgage company will then escrow the portion of the payment allocated to property taxes, and pay it to the appropriate tax collection office when it is due. The ultimate responsibility for the payment of the tax, however, is on the owner of the property, and failure to do so could result in tax liens against the property and its eventual seizure and sale to pay taxes due.
The usual method for determining the amount of taxes to be paid is based upon the assessed value of the property and improvements found on the property. A homeowner, who believes his or her property has been assessed at a value that is too high, has the right to appeal the assessment determination.
12. What is the difference between a real estate broker and an agent?
Broker: A real estate broker is a person or a company holding a license to represent buyers or sellers in real estate transactions. In Pennsylvania, brokers are the persons ultimately responsible to the buyer or seller for the transaction.
Agent: A real estate agent is someone who works under the umbrella of a broker's license. Also a licensed professional, a real estate agent is usually the direct and principle contact that a buyer or seller has with a broker.
13. I am selling or buying a home. Should I work with a real estate agent? An attorney? Others?
While some buyers or sellers often feel competent to handle the sale or purchase of real estate without the assistance of professionals, the simple fact is that few actually are. Adding to the confusion is that few understand the "role" of professionals in the real estate transactions process. Here are professionals who can help you with the purchase of a home and offer direction on what you should consider:
Real Estate Agent: A real estate agent can advise buyers on the marketplace and what is available in the buyer's price range, help buyers consider aspects of a home which may be important to them (such as nearby schools, shopping, and commuting options), and access databases and information not readily available to the public.
Mortgage Officer/Broker: A mortgage loan officer or broker can help you determine what kind and amount of mortgage payment you can afford and alert you to the estimated property taxes which would be owed annually. A loan officer can also help you pre-qualify for a real estate loan.
Insurance agent: A homeowner's insurance agent can provide information on the amount, type and cost of coverage you'll likely need.
Attorney: An attorney knowledgeable in real estate matters is invaluable in helping you protect yourself and your interest throughout the process of buying or selling real estate. He or she can advise you regarding all legal matters pertaining to your transaction, draft and review your documents before you sign them (remember - standardized agreements are seldom written to protect your interests), work with your real estate agent, mortgage broker, and settlement team to help facilitate a smooth transaction. Your attorney can also attend settlement with you (or be "on call") to assure that any surprises are appropriately handled so that your interests are protected.
IMPORTANT: The best time to engage an attorney is before you sign anything - before you sign an offer; before you sign an acceptance; even before you sign an agreement with a real estate agent. Once signed, you are bound by your document - your attorney can best protect you by helping you draft or review the documents before you sign them.
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