Real estate brokers may be employed by sellers to find a buyer for a property, or by a buyer to locate a property for purchase. When a seller employs a broker, they sign a listing agreement which obligates the broker to work to locate a buyer, and the seller to pay the broker a commission upon sale. Brokers are usually held to rigorous standards in order to be licensed. A broker is a legal agent of the person who hired him or her, and thus has duties and obligations to work in their client's interest. The broker is not a party to any agreements about purchase. These agreements are strictly between the seller and buyer.
Contracts and Transfers
Real estate purchase agreements are governed by contract law. These agreements must, therefore:
- Be in writing.
- Be marketable (free of encumbrances, liens, or other title defects).
Real estate buyers generally employ an attorney or title insurance company to research the title. This process, called a title search, involves examination of the public records.
The title searcher will go through the county's public records and assemble a chain of title by finding all recorded deeds for the property in question. He or she will also look for encumbrances on the property. Encumbrances include but are not limited to:
- Unpaid taxes.
- Legal judgments.
- Municipal improvement liens.
- Government claims.
A title insurance company insures the buyers against losses caused if the title is discovered to be invalid. The seller is required to execute and deliver a deed which includes a legal description of the land. Many states require that this deed be officially recorded to establish ownership and notice of its transfer.
Mortgages and Foreclosure
There are a number of methods to finance real estate transaction. The most common is a mortgage. This is a loan which transfers an interest in the land as collateral against repayment. The borrower typically pays the mortgage in installments including both interest and principal payments. If the borrower fails to pay, the mortgage's owner can foreclose on the property. In a foreclosure, the lender can declare that the entire debt is due immediately. If this is not repaid, the lender can sell the property to pay the remainder of the debt.
Foreclosure procedure depends on state law, the terms of the mortgage, and the existence of any other liens on the property. Many states allow borrowers to make late payments in order to avoid foreclosure, and many lenders also try to work with borrowers. If a foreclosure is threatened, a borrower should consult with an experienced real estate attorney to protect his or her interests and resolve the situation.
A deed is a legal document which records the transfer of real estate between owners. No real estate transaction is complete unless the buyer receives a finished deed. Legal requirements for deeds include:
- Must be in writing.
- The names of the buyer and seller.
- A legal description of the property.
- The signature of the person transferring ownership.
- Must follow state laws.
State law differs on language and format for deeds. There are different types of deeds, but the two most common are quitclaim and warranty deeds.
A quitclaim deed allows the seller to resign any rights he or she has to the property. However, it does not guarantee the extent of these rights. Quitclaim deeds are often employed during divorces, when one spouse transfers property rights to the other.
A warranty deed includes an explicit promise to the buyer that the seller has clear title to the real estate. The warranty deed offers the buyer much greater protection, as it guarantees that no liens or encumbrances are extant against the property and undisclosed in the deed. It also obligates the seller to protect the buyer against any defects in the deed. A special warranty deed only contains this guarantee for claims which arose while the seller was the legal owner of the property.
It is a good idea to officially record the deed and make it public record. County governments record property deeds at an office, which is often (but not always) called one of the following:
- The recorder's office.
- The land registry office.
- The register of deeds.
Even if the broker or closer handles the recording of the deed, it is a good idea to make sure that this crucial step takes place. Recording the deed makes the transfer public record, and allows future title searchers to find the history of a property's ownership.
Given the crucial nature of the deed, it is an excellent idea to have the deed reviewed by a competent real estate attorney.
A home inspection can relieve some of the stress of purchasing a house. Independent home inspectors can give a buyer a full assessment of the property he or she is considering purchasing. The inspector's report provides a full and unbiased evaluation of the house's condition and indicates whether the house needs any work or may need work in the future. Reviewing a home inspection report with a real estate attorney can provide a buyer with an advantage when negotiating the purchase.
Obviously, a buyer should inspect a house before making a decision. However, a professional inspection should be done to uncover less obvious defects. In many states, inspectors require a license. FHA and VA loans require a third and usually less thorough inspection at the time of appraisal. This appraisal is focused on the property's value, and not condition.
Home inspectors look at a number of things, including:
- Structural issues. These include the foundation, ceilings, walls, floors, and roof.
- Mechanical systems. These include the electrical system, plumbing and waste disposal, heating and air conditioning, water source and quality.
- Construction issues. These include ventilation, insulation, windows, and doors.
When inspectors discover problems, they may recommend a more thorough investigation. Buyers should also consider requesting inspection for health-related issues such as radon, lead, or asbestos. Many buyers prefer to attend the inspection, although this is not necessary. Many inspectors will answer questions about their findings and offer an objective opinion at the inspection. If it is impossible to get an inspection before purchase, the buyer can include an inspection clause in the offer. This allows the buyer to back out of the purchase if an inspection reveals serious problems. It can also require the seller to adjust the sale price or repair problems before purchase.
The cost of an inspection is generally less than $500. It is well worth the price to disclose problems with the property's value and safety. A real estate attorney can help to guide you through the inspection process.
What to Expect at Closing
The closing meeting is where the ownership of a property is officially transferred. Generally, the closing is attended by the buyer, seller, their brokers, and the closing agent. If the buyer is borrowing money to complete the purchase, a representative of the lender may also attend. At the closing, open issues are settled, the closing statement is verified, and all necessary documents are signed. A real estate attorney can help to advise you through this process.
While good closing agents try to help buyers through the complicated aspects of the closing, an attorney's assistance can be invaluable in determining that closing costs are allocated fairly. Closing costs can vary from between two to five percent of a property's purchase price.
The closing costs cover a large number of one-time fees. They also include the first month's payment for homeowner's insurance, property taxes, mortgage interest, and real estate tax escrow. Some of the fees covered in closing costs include but are not limited to:
1. Attorney fees
2. Escrow fees
3. Loan origination fees
4. Appraisal fees
5. Recording fees
6. Survey fees
7. Document preparation fees
At a closing, the seller and buyer will provide items required by the contract, such as proof of homeowner's insurance, warranties, and other documents. Once both parties have approved the closing statement and all documents, the seller and buyer sign the statement, the buyer signs the mortgage, and the seller signs the deed and transfers ownership. Generally, the buyer pays all closing costs. The closing agent provides the buyer with a settlement statement detailing the closing costs, and then records the deed and (when applicable) the mortgage.
The buyer usually receives the following documents:
1. Settlement statement
2. Mortgage and mortgage note
3. Copy of the deed
4. Truth-in-Lending statement
5. Sales contract
6. Keys to the property
7. Any required affidavits
Real estate law covers a great number of topics, and includes a number of specialized terms and jargon. An experienced attorney can help explain these concepts to you.
Appraisal: An appraisal is an estimate of a property's value. Appraisal are conducted by an uninvolved third party, and usually compares the sale price of a property to the values of similar properties in the same area. Many mortgage lenders require an appraisal before offering a loan.
Assessment: A charge levied by the local government for infrastructure that benefits adjacent properties. This includes road work, sidewalks, or sewer/gas lines. Adjacent property owners pay proportional shares of the improvement's cost.
Broker: A real estate broker works for one of the parties in a real estate purchase. They are licensed persons or organizations.
Closing: The final part of a real estate transaction, where both parties review the terms of sale and the actual sales documents. The seller transfers ownership at the closing, while the buyer generally pays closing costs and, when applicable, finalizes the mortgage.
Condominium: From the Latin for "co-ownership", a condominium is a building split into individual apartments owned by the residents. The condominium association's common areas are shared by the owners. The association pays taxes and deals with property maintenance and improvement. Condominium owners generally pay association fees as well as mortgage payments.
Contract for Deed: A contract for deed leaves legal ownership of a property with the seller until the buyer makes full payment of the purchase amount. The buyer is given use of the property.
Deed: A document that transfers ownership of real estate. As discussed above, a warranty deed includes a guarantee by the seller that his or her title to the land and improvements is uncontested. A quitclaim deed only transfers rights to the property that the seller has, and contains no guarantee that the seller has a clear titile.
Foreclosure: This is a process by which a mortgage lender takes legal ownership of a property when a buyer fails to make mortgage payments. In most states, foreclosure proceedings involve court appearances and are regulated to prevent abuse.
Joint Tenancy: A form of ownership in which spouses own equal shares in a property.
Mortgage Loan: Any loan where the collateral is the property being purchased with the loan money. Like foreclosure, mortgage regulations differ from state to state. Mortgage loans may have fixed or adjustable interest rates.
RESPA: The Real Estate Settlement Procedures Act. RESPA protects buyers by requiring mortgage lenders to disclose all policies and relationships to a mortgage borrower. It also requires lenders to provide fair estimates of all service charges and transaction costs.
Survey: A mapping of boundaries, easements, and improvements on a property. Lenders often require surveys before a transaction, especially for commercial or new residential developments, in order to resolve any irregularities.
Title Insurance and Title Opinion: Title insurance protects buyers against damages resulting from any undiscovered defects in a property's title. A title opinion is a legal document drafted by an attorney which lays out the condition of a title. Both options can help to reassure a buyer before purchase of a property.
What is real estate?
Real estate (also called "real property") is a term for land and improvements to that land, such as buildings and infrastructure. Commercial real estate can include factories and equipment as well as other improvements. Resources such as minerals or petroleum below the ground are part of real estate. These resources or the rights to extract them can be sold individually.
What is a deed?
A deed is a document that transfers and records ownership of a piece of real estate. The deed contains the names of the seller and buyer, a legal description of the property, and the signature of the former owner. See the Glossary for a discussion of different kinds of deed.
What is a disclosure statement?
In some states, the seller must provide a form called a disclosure statement to the buyer. The disclosure statement details problems with the property or title. Requirements differ between jurisdictions.
What are property restrictions?
All land is subject to federal, state, and local regulations. In addition, private restrictions can be placed on a property as a condition of sale. As an example, federal regulations govern environmental impact. State laws typically discuss access to property and procedures for changing property boundaries. Local laws cover zoning rules, and everything from historical preservation to noise levels. Private restrictions are often employed by developers who want their developments to maintain a cohesive look or feel. Developments may employ restrictive covenants to enforce everything from garage size and house design to color schemes and lawn decorations.
How do mortgages work?
A mortgage is a loan provided by a bank or other lender, where the collateral is real estate to be purchased using that loan. State laws often vary in their interpretation of mortgage procedure. In addition, mortgages can carry a fixed or adjustable rate of interest. Some government programs provide mortgage assistance to veterans or other qualified individuals. In addition, real estate owners can take on additional mortgages to meet financial needs. Any mortgage is open to foreclosure if the real estate owner fails to make payments.
What happens in a foreclosure?
The exact procedure varies widely, depending on state law and the terms of the contract. Generally, real estate owners are given opportunities to avoid foreclosure by setting up a payment plan, and are allowed to stay in their home during the foreclosure process. Lenders often avoid the complications of foreclosure by offering options to assist their borrowers. However, any risk of foreclosure should be discussed with a real estate attorney in order to protect the homeowner's interest.
What is joint tenancy?
Joint tenancy is when individuals own equal shares in a property. Often, spouses hold property as joint tenants. All joint tenants must agree to a sale, to protect spouses from having their property sold without their knowledge. If a joint tenant dies, the other joint tenant inherits their share in the property. A similar form of tenancy is called tenancy in the entirety, which gives each spouse an undivided half of the property. There is also tenancy in common, which allows unmarried partners or commercial partners to own unequal shares in a property. All of these types of ownership can become complicated, and the advice of a competent real estate attorney can be helpful to a real estate buyer.