Real estate sales can be a confusing process for home buyers and sellers. Reading this brief article will help you understand the step-by-step process of a real estate transaction as well as the essential roles of real estate agents, brokers, and escrow professionals. Whether you are buying or selling a home or business, taking on a new mortgage, or looking to invest in real estate, you will be better equipped to succeed if you have good knowledge of the important terms and steps in a property sale.
Real Estate: A Free Guide to Sales and Essential Terms
Real estate sales can be a confusing process for home buyers and sellers. Reading this brief article will help you understand the step-by-step process of a real estate transaction as well as the essential roles of real estate agents, brokers, and escrow professionals. Whether you are buying or selling a home or business, taking on a mortgage, or looking to invest in real estate, you will be better equipped to succeed if you have good knowledge of the important terms and steps in a property sale.
Essential terms in real estate
Real estate is a legal term which refers to land and the fixtures upon it, including buildings. In the United States, residential and commercial real estate are the two main categories of real property. Ownership interest in real estate can be bought, sold, mortgaged, and exchanged. An owner can also lease property to a tenant in exchange for rental payments.
Agents have the most visible role in listing and marketing sale properties as well as representing prospective buyers. If you see a property listed for sale with Jane Smith at Prudential, Century 21, or RE/MAX, for instance, then Jane Smith is probably the agent whereas the head of her office would be a licensed broker who could legally facilitate the transaction.
Multiple Listing Service (MLS) and real estate listings: When a seller agrees to let a broker and agent sell his or her property, it is then listed for sale. In recent years, brokers, agents, and potential buyers have turned to centralized online listing services. These are known collectively as the MLS. There are several different MLS listing sites, some of which are open only to members and others open to the general public. An MLS service generally combines the listings of brokers who are members of that service, such as the National Association of Realtors in the United States or the Canadian Real Estate Association north of the border.
Commissions are a percentage of the property’s sale price, due at closing, which normally are paid by the seller to the listing broker. If the buyer is represented by an agent also, then the commission is split with that agent’s broker as a finder’s fee for delivering a willing buyer. The brokers, in turn, will pay their agents a portion of their commission. Generally, these amounts are set by the time the property is listed.
Mortgage loan: A mortgage loan is a loan to finance the purchase of real estate. The mortgage itself is the borrower’s pledge of a property as security (collateral) to secure this loan. The bank or other lender therefore receives assurance that if the borrower defaults on the payment obligation, then the lender can seize the property and sell it to pay off the loan. This process is known as foreclosure.
Deeds are legal documents (instruments) which grant a right, in this case title to property. There are several important types of deeds, and it is important to know the basic differences. As a seller, you should know what you are promising under the law, while as a buyer you should know what interest and warranties you are receiving.
General warranty deed: This is a type of deed where the seller (grantor) guarantees that he or she has good, clean title to the property and has the right to transfer a full ownership interest to the buyer. In this type of deed, the seller is warranting that there are no competing claims on the title and no hidden liens or encumbrances such as easements. If this type of deed ever fails in the future, then the seller (grantor) is promising to compensate the buyer (grantee) for the value of any loss as a result.
Special warranty deed: This is similar to a general warranty deed, but it may be slightly more limited. For example, the warranties may be limited to any defects or issues that arose after the seller’s interest in the property began. There are other variations on special warranty deeds, depending on the particular state and transaction.
Quitclaim Deed: This is the simplest type of deed, with no special warranties. The seller promises only to deliver the buyer with the same interest that he or she (the seller) has in the property. The seller’s title may be very good or very poor; it is the buyer’s responsibility to conduct due diligence and bear the risk of any future issues with the title. After this type of transfer, the buyer has no recourse against the seller for any type of competing claim, lien, encumbrance, or other title defect.
Deed of trust: This is a mortgage deed, as used in some states, not a deed used to transfer title to property.
Bargain and sale deed: This type of deed, often used by executors of estates or by public officials after a property is seized for tax default, implies that the grantor has good title to transfer to the buyer, but includes no separate warranties of title.
Grant deed: In some states, grant deeds are routinely used to transfer property. They must contain a legal description of the property, be signed by all people transferring the property, and be notarized. No special warranties are included. In these same states, title insurance is often used as a means of ensuring against any future risks.
Title, Chain of title, and Title insurance: When an owner of property has the full legal right to control and dispose of that property, he or she is said to have title. This is often evidenced by a legal document such as a title deed or certificate of title. Chain of title refers to the history of title for a particular property, including all its past sales, transfers, liens (e.g. mortgages) and other encumbrances (e.g. easements granted). To ensure good title and protect against defects, one can search the property’s title history and make certain that there are no such problems. Title insurance is often purchased at the time of property’s sale to protect against the possibility of any title claims and defects.
Additional terms are covered in the following step-by-step overview of a property transaction.
The sale of real estate, step-by-step
A seller decides to sell a property. This could be any type of property (residential, commercial, industrial, agricultural, etc.), but for purposes of this overview we will cover a simple residential property sale. The seller talks with an agent and signs an agreement allowing that agent to list the property for sale on his or her behalf.
The property is then listed on the MLS (Multiple Listings Service), which other agents and prospective buyers can search online. Agents may further promote properties using sandwich-board street signs, newspaper ads, open houses, and other methods of selling.
A potential buyer, who is represented by an agent, looks at the property and decides to make an offer to buy it. The amount offered may be less than the listing price and/or the buyer may include other conditions for negotiation (e.g. “seller will fix the broken window in the living room before the close of sale.”) Normally, the buyer also puts down a good faith deposit (earnest money) to indicate his or her seriousness. This deposit is kept by the broker or escrow professional until closing, though if the buyer defaults after contract conditions are met, this deposit may be forfeited to the seller.
The buyer’s agent then transmits a legally-binding offer to the seller’s agent, who informs the seller. If the seller accepts, then they have a deal, and a contract is formed to sell the property at the price offered by buyer. Alternatively, the seller may reject the offer or make a counteroffer, in which case their negotiations may go back and forth a few times before everyone is satisfied.
Once they have an agreement, the clock begins ticking. The closing date, which is specified in the contract, is the date when the sale becomes final and ownership interest in the property transfers from seller to buyer. The period of time before closing is popularly known as escrow.
During escrow, each side must work to meet the conditions of the contract so that the sale can be finalized. The seller must ensure that the property has a clean title, that any promised warranties are fulfilled, and that any defects in the property’s title or condition are fixed before the sale closes.
The seller must provide the buyer with any disclosures that are required by law (e.g., lead paint). The buyer also has a right, during escrow if not before making the offer, to order inspections of the property (e.g. structural and pest inspections). If there are any unsafe or unforeseen problems, then either the seller can get them fixed or the buyer can negotiate them into a discount.
The buyer’s major obligation before closing is to come up with the money to buy the property. Often, this means arranging for financing in the form of a mortgage loan (loan secured by the property). As the contract usually includes financing as a condition, the buyer normally informs the seller (via their agents) once the financing has been secured so that this condition is removed. If the buyer cannot obtain needed financing, then the sale can fall through, although if it is a matter of timing, then the buyer may be able to negotiate an extension to the closing date.
There are a great many details during escrow, which normally are overseen by a closing professional. In states where title companies are used commonly for title insurance, then a title or escrow agent can oversee closing details, including clearing title, disbursing funds, recording the deed and security documents, paying off existing liens or mortgages and prorating property taxes to ensure a complete closing. In other states, the closing professional may be an attorney or paralegal, the mortgage lender, a broker, or another third party.
In the final days before closing, the buyer or buyer’s agent normally has the right to inspect the property. This is known as a walk-through. Any remaining defects are reported to the seller, who still may fix them or agree to an adjustment of the final purchase price.
At closing, the seller delivers access and title to the property in exchange for the buyer’s payment of the purchase price. The parties need not be present at the time and place of closing as long as the proper closing documents have been completed and signed.
The closing professional should then make sure that all money is disbursed, including commissions, and that the transfer of interest is properly recorded.