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The Basic Steps of a Real Estate Transaction

Like almost everything in life, selling or buying real estate is a process with fundamental steps that need to be closely followed to avoid misunderstandings, mistakes and confusion that can lead to costly litigation.

The Contract

Legally, agreements to buy or sell real estate must be in writing to be enforceable. Here’s where the Real Estate Purchase and Sale Agreement comes in. Simply put, this agreement is a written document reflecting the essential provisions of the transaction as well as any other optional terms either party desires to make part of the contract.

Essential terms include price, financing terms, security deposits, title representations and insurance, closing dates and disclosures regarding the integrity of the home and/or property including termite damage, structural issues and other countless defects that a property may contain.

Many of the real estate disputes occur as a result improperly memorializing these terms. To minimize your risk and to include necessary-omitted or remove unreasonable terms, it is prudent to consult a real estate attorney. Hiring an attorney to provide this preventive maintenance pales in cost when compared to the fees to undo legal entanglements that often result from entering into transaction without proper legal guidance.

The Inspection

Many defects are not visible during a physical inspection of a home. If the seller does not disclose these “latent” defects and you lack the construction knowledge to identify them yourself during your inspection, you may end up with a property, that given the proper knowledge, you never would have purchased. By hiring a certified inspector and making the Purchase and Sale Agreement contingent on the inspection, you then could alter or cancel the contract, provided, the proper language is included in the contract. One other thing. When you hire the inspector, carefully review the contract (if they don’t have one, run). Check to see if there is a limitation of damages clause which simply means that if they miss a property defect in their inspection, your remedy is limited to the fee that you paid for the inspection.

The Appraisal

If there is financing involved in the transaction, a lender will invariably require an appraisal to protect their interest. An appraisal will also protect a buyer’s interest by comparing other similar properties that have recently sold in the area. It is important that the buyer include contract language making the purchase contingent on the appraisal being equal to or more than the agreed contract price.

The Title Insurance Policy

Never purchase property without the protection afforded by title insurance which is the policy that protect your interest by insuring that you are getting marketable title. There can be many “invisible” interest that attach to property that the most thorough physical inspection will never reveal. Common defects that a search can reveal are debts, claims (i.e. pending civil actions involving the property), and various liens that have or may in the future attach to the property. It also will verify that the person you are purchasing the property from has full legal rights to transfer marketable title to you. For example, it is not uncommon for future beneficiaries of estates to put, for instance, their deceased parents property on the market, execute a contract and have the title company stop the transaction because the beneficiaries do not have title to sell the property until their parents wills have been proved in a probate proceeding. Without the benefit of a title search and the resulting policy, your remedy is to then track down the beneficiaries and start a legal proceeding against them to clear the title.....again, the benefits of preventative maintenance. Additionally, any defects that are discovered in the title search can allow the purchaser to demand that they be removed or the contract will be cancelled with their deposit returned.

The Closing

The closing entity which can be a title company or attorney acts as a disinterested third party in the real estate closing. During this process, they hold your deposit in escrow and prepare a settlement statement which enumerates the costs to buyer and seller to consummate the transaction. These various costs are initially negotiated in the Purchase and Sale Agreement. The final result reflects what the buyer and seller need to pay for their portion of the closing costs and the final amount the seller will receive after these considerations.

The Attorney

The role of the attorney should be clear to you by now. It is to act as the ship’s pilot by navigating the transaction through potentially perilous waters and into the safe harbor of the closing. Personally, I prefer being the ship’s pilot in a transaction to the role of the ship’s salvage expert after it has crashed into the rocks.