As businesses and real estate developers grow and seek out new opportunities, they often venture into neighboring states from their home office. As clients find out when they branch out into new states, the laws, customs, taxes, title insurance, financing documents and costs tend to vary from state-to-state. Those differences can make or break the financial viability of a potential deal.
Here are five things to consider when venturing into new territory for a real estate transaction:
1. Transfer taxes. The amount of transfer taxes and how they are customarily paid varies greatly from state-to-state. In Pennsylvania the 2 percent transfer tax is customarily split. In New York the seller generally pays transfer tax of less than 0.5 percent. Beware of using your “form” without checking into transfer taxes.
2. Bulk sales. Many states have “bulk sales” laws, which can result in a buyer being responsible for a seller’s debts. When these laws apply, to avoid liability on the part of the buyer, some states require an escrow amount to be held at closing, other states will issue clearance before closing, while others issue post-closing clearance.
3. Title insurance. The cost of title insurance varies from state to state, as does what is able to be insured, types of endorsements and who can issue insurance. Unlike Pennsylvania, New York, New Jersey and Maryland surveys are customarily obtained by buyers and certified to the bank and title company. In many states, like Maryland and New Jersey, zoning endorsements are available and it is customary for a buyer/borrower to request and obtain a zoning compliance letter from the municipality, which needs to be requested weeks before closing. In Pennsylvania, title insurance companies charge an “all-inclusive” rate, but many neighboring states charge title review fees, escrow fees, settlement fees and document preparation fees.
4. Mortgages and mortgage taxes. Certain states like New York charge a mortgage tax, and Maryland charges a stamp tax on deeds of trust. In New York, buyers and their lenders will regularly coordinate with the seller’s bank to obtain an assignment of the seller’s existing loan to reduce this liability. Since this can be a time-consuming process, it is a good idea to include cooperate language in the agreement of sale and start the process early.
5. Escrow closings and settlement charges. Agreements of sale generally address how certain charges are split between the parties, and often the parties agree to split fees based on “local custom”. Parties should explore what this means when venturing into a new state and who is preparing certain documents and what these charges are. For example, some states require pre-closing inspections and require any local building code deficiencies to be remedied.