THE BASICS OF RESIDENTIAL REAL ESTATE DEALS
By: Stuart Ian Levin
(c) Copyright 2016 by Stuart Ian Levin. All Rights Reserved.
The successful purchase and sale of a home is a process which involves several legal formalities. Contracts, deeds, and other legal instruments are involved in the conveyance of a house and land. Since this is the single biggest investment that many people make in a lifetime, care needs to be taken to insure that each side receives the benefits that they have agreed to and that good title passes to the Buyer.
A real estate deal may start when the Seller engages a real estate agent to list the property. The terms and conditions of how the agent will work, the commission to be received, the listing price, and the time period in which the agent’s representation and commission are due are specified in the listing agreement. In Texas, agents may also represent Buyers either exclusively, or with a waiver of dual representation. The listing agreement or representation agreement is a formal legal contract and will bind the parties to its terms.
When a Buyer and Seller have come to terms about the sale, either with the assistance of an agent or by a private sale, an Earnest Money Contract will be prepared. The Earnest Money Contract is an extremely important part of the deal, because the terms and conditions of the sale will be governed by this Earnest Money Contract. Remember, agreements governing interests in land need to be in writing to be enforceable in Texas. Thus, the type of deed the Buyer will receive, the timing of the closing, required inspections, disclosures and warranties as to property condition, title insurance requirements, financing requirements, and other terms which go to the very heart of the deal itself need to be carefully addressed in the Earnest Money Contract. It is most important that both the Buyer and the Seller fully understand the deal they are creating. As the forms themselves warn, it is a very good idea to have these forms checked by an attorney BEFORE signing them, whether or not a real estate agent is involved in the transaction.
After the Earnest Money Contract is executed by all of the parties, a number of steps need to undertaken. The Buyer’s tasks include making application for any needed financing and completion of inspections. The Seller’s tasks include completion of disclosures, engagement of a title company to prepare for closing, and completion of necessary repairs.
Under the typical Earnest Money Contract, escapes are provided for both Buyer and Seller in the event problems are encountered with the condition of the property, the state of the title, or inability to obtain anticipated financing. Thus, for example, if the Earnest Money Contract so provides, the Seller may be obligated to make repairs up to say $500.00. If it is determined that $600.00 in repairs need to be made, the Contract may provide that the Seller may expend the additional money or terminate the contract. Likewise, it may be provided that Buyer has the option to complete the repairs and assume the extra $100.00 in expenses or terminate the Contract. By contrast, if the Contract provides that Buyer is to take the house “AS IS,” Seller is making no representations concerning the condition of the property and Buyer will assume the costs of any needed repairs irrespective of what they may be or how much the repairs may cost. If the Earnest Money Contract contains an option for the Buyer to terminate the Earnest money Contract, then the Buyer may cancel and forfeit a small fee to do so.
The Earnest Money Contract derives its name from the fact that the Buyer posts a deposit (the “earnest money”) to secure the sale. If the Buyer defaults on his or her obligation to purchase, the Earnest Money is forfeited and the Seller typically retains other additional legal remedies as well. The Buyer’s remedies, in the event the Seller defaults under the Contract, are usually spelled out in the Contract or are otherwise determined under law.
Again, it is important to understand that both the Buyer’s and Seller’s rights flow from the Earnest Money Contract they have agreed to. The Earnest Money Contract should clearly state ALL the terms of the deal. There should be no oral understandings or promises left between the parties that do not reflect in the Earnest Money Contract, if a party wishes to enforce these understandings. One of the rights usually reserved to the Buyer is the right to have the property inspected. The Buyer typically has a fixed amount of time to hire inspectors, complete the inspections, and report problems back to the Seller under the repairs clause of the Earnest Money Contract. Although the law requires that a Property Condition statement be used in connection with residential real estate matters, Sellers are only obligated to truthfully disclose known defects in the property. The statement does not require the Seller to complete an inspection or uncover hidden defects in the property. Thus, it is a very good idea for the Buyer to protect the investment which is about to be made by hiring his or her own professionals to check out the condition of the property. Likewise, the Buyer usually reserves the right to hire a surveyor. A property survey should clearly indicate how much land is being bought, the location of easements, and the boundaries.
A major assurance which most Buyers require is the issuance of a certificate of title insurance. Title insurance insures good title to the property. A Buyer does not want to buy a property which may be owned by someone else, which has outstanding liens against it, or has outstanding taxes and fees which need to be paid. If the Buyer receives a General Warranty Deed, the Seller is warranting good title to the property, however, if there is a problem that surfaces later, the Seller may be impossible to locate or not have sufficient funds to clear the title. The title company stands behind the Seller’s promises as contained in the deed with regard to title matters. When a certificate of title insurance is issued, the title company sends a Title Commitment to the Buyer (and Lender, if applicable) explaining what it will and will not insure. A Title Commitment is NOT a title search or title opinion. Rather the Title Commitment defines the type, amount, and extent of the coverage which the title company will insure. It is especially important that the exceptions and exclusions from coverage be reviewed by the Buyer and the Buyer’s attorney. If there are objectionable items, the Seller must be made aware of them so that an attempt may be made to correct them and render the property available for sale. Again, the time period in which the Buyer may object to exceptions in the title is limited by the Earnest Money contract, so it is important that these documents be carefully reviewed in a prompt manner.
While all of this is going on, the Lender is considering whether and how much to lend the Buyer and under what terms. In addition to verifying the survey and examining the Title Commitment, the Lender usually requires an independent appraisal of the property to determine its value on the open market. The Lender’s decision as to how much the Buyer may borrow is usually based on both a percentage of the appraised value and the Lender’s judgment as to what the Buyer can afford to pay. If the Lender will lend funds to the Buyer to complete the purchase, it issues a Loan Commitment letter outlining its terms to the Buyer. The terms and conditions of the Loan Commitment should also be carefully reviewed, because this, and only this, is what the Lender is promising.
When all of these preliminaries are satisfied, Buyer and Seller are ready to “close”. The Closing is the event when all papers which will transfer title from the Seller to the Buyer takes place and the transaction is funded. Typically, the Seller presents the Buyer with a signed and notarized deed, which transfers title. If the home is mortgaged, then the Buyer executes a Deed of Trust to the Lender and a Mortgage Note. What the Seller sells and what the Lender is to receive is strictly determined by these legal documents and each should be carefully reviewed against the contracts and commitments previously issued. Finally the charges and amounts to be received are set out on a document called a Settlement Statement. Once all the papers are executed and the monies are exchanged the real estate sale is complete.
After the sale, three items need to occur. First, the Lender must fund the loan. Second, the Deed and the Deed of Trust need to be recorded in the County Clerk’s office where the property is located. Lastly, the title company needs to issue the Title Insurance Policy to the Buyer.
Again, it is important to understand that both the Buyer’s and Seller’s rights flow from the Earnest Money Contract they have agreed to earlier. Review of the Closing papers, title commitment, survey, and inspection are the Buyer’s responsibility. To better insure the Buyer’s rights, it is best to consult an attorney prior to closing any real estate transaction. The Title Company is not authorized to practice law to the public and does not represent either the Buyer or Seller- its job is to insure good title. Both Buyer and Seller are responsible for protecting their own interests and should be assisted by competent professionals at each step of the transaction.
The foregoing article is intended for general educational purposes only and is not intended to provide specific advice or legal counseling with respect to any problem.