The Real Estate Purchase Contract
The real estate contract is the cornerstone of the home buying and selling process. It binds the seller to part with their property, sets the terms that govern the sale and purchase of the home or condo, and generally establishes the parameters for the closing process. Your buyer/seller attorney will review the contract to ensure that it meets all local requirements and contains all necessary information before you proceed with contingencies:
The Parties
This section is self-explanatory, but is one that needs to be clear from the beginning: who is buying and who is selling the property?
Property Description
The property description included in the contract must be an accurate and legal depiction of the property as a whole, including the parcel number and any individually assigned PIN numbers for each property on the legal description. This is where your real estate attorney will review the description in full to make sure you are covered.
Acceptance of Offer
In the contract , the seller stipulates the basic conditions of the sale, including price, closing date, deposits, contingencies, things that are included, things that are not, and anything else of substance that pertains to the negotiations of the sale.
Disclosures and Warranties
Your real estate attorney will work with you to ensure that disclosures and warranties are accurate, both to protect you, the buyer, and to ensure that the final sale is not contingent on any incompleteness that may disband the process.
Conditions of Sale
The buyer and seller will negotiate any necessary conditions of the sale. This includes seller disclosure, financing, home inspection or any other clauses that apply to your specific transaction.
Closing
Closing is the final detail of your contract. It includes the location of close, the date, time and specifics that must be outlined before your attorney finalizes the deal. Closing costs are determined and scheduled as well during this time, and the case of resale, any amount that is owed or owed to the seller.
Engaging Your Real Estate Agent
The duties and responsibilities of a real estate agent don’t stop once the ink is dry on the contract. Real estate agents know that contract to close can stretch weeks into months, depending on the length of your contract and what you are buying or selling. It requires a lot of paperwork and navigating door Number 2. Your agent is going to be the one who keeps you on track. It’s important to have an advocate as you hire for guidance on how the process can be smoothed out or what exactly happens at which stage. There are always ways in which closing can be interrupted. Negotiations might have to begin again and again as various outs come into play for buyers or sellers. Meeting those out applies means it could only be a temporary set back. But you need someone who can demystify these processes for you, getting them to make sense.
Most of the duties and responsibilities of a real estate agent in this part of the transaction will be the same whether you’re the buyer or the seller. They’re going to be responsible for making sure that the contract is honored to whatever extent possible. All parties need to be held to their obligations under the contract. For a seller, keeping in touch with your agent is important, as they will have the most up to date information and be able to help you negotiate on things that come up. For example, if a home inspection exposes a major flaw in your house, a buyer may ask for a drop in price to go about making the repairs themselves once they purchase the house. Your agent will probably recommend that you meet them in the middle on terms here, and that you cover half of the repairs. They will take responsibility for drawing up the addendum to your contract, and email a copy of those terms to you for you to sign and return.
Your real estate agent is acting on your behalf under the contract during this period. They can’t share any of your confidential information unless you have a private agreement about sharing information, like a confidentiality agreement. Since your agent is the one who has the ear of those negotiating for the other side of the contract, they’re going to offer you the most accurate intel about how the other party is feeling about the terms of the contract, and where it might be falling apart.
The Role of A Home Inspection
From the buyer’s perspective, a successful contract closing is contingent on the contract terms being satisfied and the satisfaction of any contingencies outlined in the contract. Addressing the contingencies that can arise from the financed status of the deal is the subject of their own post. Here we will cover the most common and often most contentious contract contingency, the home inspection.
The home inspection process typically begins with the buyer obtaining a recommendation for an inspector from a licensed agent. There are certain professionals who are not third-party inspectors but advertise for customers to attend "inspection parties" where the "inspectors" claim to pass on their expertise to the customers. Many times, these parties also include free liquor intended to make the social atmosphere aid in enticing customers to not ask a lot of detailed questions. Shelter would advise anyone purchasing a property to avoid these non-professional groups at all costs and to only hire a licensed inspector who has the credentials to be listed in the inspection registry.
A home inspection generally takes three to five hours. Even antique homes can be inspected in this timeframe if the owner agrees to leave on all of the lights and water. Systems turning on and off is the normal pace of a home inspection. If the owner is not cooperative and insists on following the inspector into each area of the house while the light goes on and off, the process could turn into all-day work. If the owner is uncooperative and or is upset about the inspection, the inspector will terminate the inspection and leave if the situation has risen to the point where he or she fears for their personal safety. This is rare but it does happen in some contexts.
If, and only if, a client has spoken with the inspector and feels there may be something that could damage the home that it has not yet been identified the client can accompany the inspector during the process. Other concerns about the process, such as not asking someone to move their vehicle or not turning water faucets on and off would need to be addressed when the home inspection is scheduled and the inspector retained. It is critical that the Realtor or inspector clearly describe what is not considered normal procedure and the possibility that the room may not be inspected if it was not properly prepared.
It is important to advise the owner and potential purchaser at a showing what to expect in the way of paperwork from the inspection. It is the absolute responsibility of the seller to inform the buyer in writing how the home should be prepared and what that entails specifically. If it is expected that the inspection will take more than three hours if everything is not prepared and clearly described in writing for the homeowner, the agent should be very clear with the property owner that the inspection may not take place as scheduled. The owners’ ignorance of the process can damage a sale.
Home inspectors are highly trained and can identify early signs of damage in many situations that may not be seen on the surface. Some of these early signs can lead to hundreds of thousands of dollars in repair work. Inspectors are skilled at identifying problems with the roof, the electrical system, appliances, plumbing, heating and air conditioning, and cracks in the foundation that lead to serious issues years down the road. If any problems are identified, the inspector will provide a binder to the buyer with all the details concerning the problem and the projected costs and potential repairs associated with that problem. It is very important for people considering a home purchase to realize that good news is never reported by an inspector; only bad news, and lots of it. As such, when the report is provided to the buyer, they should realize that the continuing list of problems that the home inspector has presented was never meant to scare them from purchasing the home. Rather, it was intended to show the buyer what problems exist and what they should consider and budget for to have a safe and properly functioning home. Unfortunately, many buyers find the home inspection process very depressing and become extremely anxious and paranoid about bringing any problem to the attention of the owner and getting the home purchased. This is not an unusual behavior in most purchasers. Buyers should realize that the home inspection is meant to identify all issues with the potential home as well as issues that could arise in the future. If an inspector identifies a crack of the foundation wall in the basement, it does not mean it will cost tens of thousands of dollars to save or repair the wall. It simply means that the problem should be identified so that it can be monitored and, if it becomes larger, the cost to repair the damage can be adjusted in the offer process.
Financing – Obtaining A Mortgage
In today’s competitive real estate market, financing is not a sure thing until the closing documents have been signed at closings. While most know that being mortgage worthy is critical in obtaining financing, many do not understand the specific steps in obtaining a mortgage and how each step is intertwined with the real estate process.
We have all heard the terms "pre-approval" and "loan application" many times in the media, unfortunately, many do not understand their meaning. The pre-approval process is a must in today’s market, as it allows you as the buyer or borrower to "make the deal happen." The pre-approval process, however, is not as simple as it may seem. The pre-approval process involves an in-depth analysis of your financials by a banker or lender.
Once the lender has all of your information, a pre-approval is issued. Once again, the pre-approval is only as good as the accuracy of the information you provided. If you, the buyer/borrower, have significant larger expenses or a change in your financial situation after the pre-approval was obtained, you must communicate that change directly to your mortgage lender. A change in the buyer/borrower’s financial situation can directly impact the loan application.
Specifically, when you are pre-approved, the lender gives you a target amount you can borrow now, not later in the process. Once you have an accepted offer, you must then apply for a loan ("loan application"). The application is very similar to the pre-approval process. At this point in the process both the borrower and the lender devote substantial time and resources to the process. A good faith requirement is needed by the borrower at this stage as well as a trusted mortgage broker or banker.
Now the loan application process is very similar to the pre-approval process in that it requires all of your financials from the pre-approval but also now requires updated financials that existed after your pre-approval was obtained. The lender will then try and obtain a rate for your loan. It is important to remember that you are entering into a binding agreement. If you back out of this deal, seller could possibly sue for damages. The process all starts with the contract and ends at closing.
Understanding Title Searches and Title Insurance
A title search and title insurance are ways to assure that a buyer (or lender) gets a clear title to a property. If we don’t have a loan on a property, we do not write a title insurance policy. That is not typically the case, as most buyers need a lender to purchase a property. In the vast majority of transactions we have a loan, so we have a title insurance company do a title search, and from that search we get commitments for a title insurance policy.
In Michigan, there are two kinds of title insurance; one for lenders, which is called the loan policy, and one for people who are buying a home or some other property, which is called an owner’s policy. The owner’s policy covers things that are not covered by the loan policy, so it is necessary to have both. The title insurance company obtains the information needed for the title search from two places: 1) at the county Register of Deeds’ office and 2) the current title owner’s documents, called the H-8 form.
How is a title search useful?
Well , we all hate it when the county sends us all of those annoying tax and water bills, and what if we pay them and we don’t get reimbursed when we sell our house? A title search review is a great way of figuring out if you have any unpaid water or tax bills! Another example of how a title search is helpful is when the property has once had a "life" that was different from what it is now. For instance, if there was a gas station on the property once upon a time, you’ll want to know if there are any outstanding orders or judgments relating to clean-ups. Or maybe there was a court order granting an easement to someone else over the property, and you want to know about it and have it removed. The same thing is true if there’s a deed restriction on the property that needs to be updated, amended, or terminated. A title search will find all of that for us.
In summary, our title insurance and title search are tools that assure that we get a clean title to the property.
Moving Towards Closing
Acquisition of a home begins with an executed purchase and sale contract. But, closing day is when the transaction will be consummated and will only occur after all conditions precedent have been satisfied. The way to ensure that this occurs is to be certain that the documents and the funds are available for closing. First, it is important that the buyer be prepared to immediately review and understand the settlement statement. This will include, among other things, the identity of the parties involved, the type of title to be given, a description of the property, the purchase price, the names of the lenders and escrow company, and the value of each item of property. The buyer’s lender will likely be the lien holder on the real estate and therefore the settlement statement will show the costs and expenses associated with obtaining the loan. Because all of these costs and expenses will be paid by the buyer, the buyer must understand each item to confirm any and all charges being deducted from the proceeds of such loan.
Likely, there will be other expenses including any documentary and non-documentary stamps, recording and doc fees, settlement and title insurance costs, and inspections and title search costs. The lender’s fees should be reviewed and compared with the estimates provided prior to closing. Once the lending institution has committed to financing the purchase, it makes sense to get the lender to pre approve any special stipulations in the contract. Finally, the buyer will be prepared for the end of this process, which will include payment of all required closing costs and obtaining a clear and clean title to his or her property, if all goes as planned.
The seller will also have his responsibilities. The settlement statement will specifically outline the release and assignment of the buyer’s contract to the seller’s agent, if applicable. The closing of any mortgages and other title encumbrances and the releases of same must be carefully examined to ensure that no encumbrances have been overlooked.
The Real Estate Closing
On closing day, the parties usually meet at the title company’s office or at the attorney’s office where the closing documents will be signed. All of the parties involved should plan to have the funds for the down payment and the closing costs wired directly into the closing attorney’s trust account or the title company’s escrow account at least a day in advance.
At the closing, the Seller executes a warranty deed conveying the home to the Buyer in consideration of the Purchase Price; the escrow agent will record the deed in the public records. The Buyer then pays the balance of the Purchase Price to the Seller either by a wire transfer or by a cashiers check or bank check for the closing funds and a wire transfer to the bank for the remainder of the funds. The escrow agent will send the proceeds of the transaction, the signed Seller’s Affidavit, and the deed to the purchaser’s attorney.
Closing costs will be reviewed to ensure that they are proper and due diligence with a final review will occur. The lender will wire the loan proceeds to the closing attorney and will simultaneously disburse the other closing funds. Keys will not be given to the Buyer until Closing is completed. The Buyer will normally receive possession of the home at the time of closing. However, if closing is taking place after the end of the month and the current owner is not vacating the premises prior to that date, the parties may agree that the Buyer will take possession of the property at the end of such month.
After The Closing
Congratulations! You have you received your closing statements and become the proud new owner of your new home or property. All the hard work of looking, visiting, bid and contract negotiation is done. Or, is it!? If you think that when the ink dries all of the hard work is over, you are mistaken. From this stage you will be moving in (or moving out), updating records and making sure all of your vital documents are in order and safely stored.
With most closings the title company will handle a lot of this process. They will record the deed, disburse funds and mail pay off letters. But, it is always good practice to double check after 30 to 60 days, that the deed has recorded and your mortgage is in good standing .
It is also important to contact your insurance agent to make sure the homeowners policy is taken care of and you receive copies of the declarations page for your records along with your paid invoice for premium. Some lenders will also require that insurance policies be paid in full with an escrow account established for payment on future premiums.
It is a good idea to place all of your closing documents, including your title policy and insurance declarations pages (along with any surveys or repairs plans, etc.) in a safe place, such as a fireproof safe until you sell the property or eventually pass it along to a family member.