Ways Buyers Protect Themselves When Using Real Estate Contracts

Posted by Ric Thom on July 5th, 2012

There are four basic ways that buyers can protect themselves when using a real estate contract to purchase property.

  1.  Use a Title Company.  A title company can tell the buyer if the property they are purchasing is in a legal county approved subdivision.  If it is not, then the buyer does not want to purchase that property because chances are they will never get a clear title.  The title company will let the buyer know if the seller actually has the right to sell that property.  They will also let the buyer know if there are any liens or lawsuits that affect the property that the seller did not disclose.  The title company will provide the buyer with a HUD (Housing and Urban Development) closing statement which defines who pays for what and prorates property taxes.  It will be very helpful for tax purposes when the buyer goes to sell the property.  They will also issue title insurance which helps resolve any misrepresentations and defects in the title that were undiscovered at the time the buyer purchased the property.  The title insurance policy that the seller received when they purchased the property does not cover the new buyer.  The new buyer needs to get their own new policy.
  2. Record the Contract.  It is STATE LAW that you must record any document that transfers property with the county clerk.  When you enter into a real estate contract the seller has just transferred equitable title to the buyer.  You record the contract to “put the world on notice” that you have purchased this particular property (legal description) from this particular seller.  It lets the County know who the new buyer is so they can assess the property and send tax notices to the new buyer.  It will prevent the seller from selling the same property again to an unwitting buyer.  It provides the title company with a clear chain of title so they can issue title insurance.
  3. Use an Escrow Company.  This is not an option.  New Mexico case law (Montgomery vs. Cook) requires deeds to be placed with an escrow agent.  The New Mexico Appellate Court said that if the seller does not deliver a deed into escrow, the buyer does not have to make any payments and can even ask to rescind the contract and ask for all their money back.  By placing the deed in escrow you also have a third party that will prevent the seller from improperly foreclosing on or terminating the contract.  The escrow company will also provide an accurate accounting of all the buyer’s payments so the buyer can receive the deed from the escrow company upon the completion of the contract.  The buyer then records that deed with the County Clerk which puts the world on notice that they paid off the real estate contract.

Use a Realtor licensed by the New Mexico Real Estate Commission who is familiar with seller financing.  The Realtor will provide standard forms produced by the Realtor’s Association of New Mexico.  The buyer doesn’t want the purchase agreement or the contract handwritten on the back of a napkin.  The Realtor can also supply an approved seller’s disclosure form that requires the seller to disclose in writing everything from available utilities to any defects in the property.  The RANM real estate contract is a highly evolved document designed to protect both the buyer and seller that has been jointly crafted by attorneys, escrow companies, title companies and the Realtor’s Association of New Mexico using over a half a century of NM case law.

By following these four simple steps, two of which are required by law, a buyer will be well protected from any unscrupulous seller when using a real estate contract to purchase property.