Questions and Answers about Real Estate, Part 1
By Phil Halverson
Reprinted from an article published by the Bar Association
- How Do I Make An Offer?
- Can A Buyer "Change His Mind" After A Contract Is Signed?
- What Is An Acceptance?
- What If The Seller Doesn't Like The Offer?
- What If I Change My Mind?
- How Do I Obtain Financing?
- What Is A Trust Deed?
- What Is An Assumption?
- Do I Need Secondary Financing?
- When Should I Start Looking For A Loan?
- What Happens If I Can't Get A Loan?
- What's A Trustor? Trustee? Beneficiary?
- What Happens If I Can't Make Loan Payments?
- What Is A Title Report?
- What Is A Cloud On A Title?
- What Are Easements?
- What Is Title Insurance?
- How Should I Hold Title To Real Estate?
- Should I Use A Broker To Sell My Property?
- How Do I Find Out The Condition Of The Property?
- What Is A Condominium?
- What If I'm Planning To Build A New Home Or Major Renovations To Existing Properties?
- How Much Commission Does The Seller Have To Pay?
- What Is A Multiple Listing?
- Can I Sell My Property Without An Agent?
- What Documents Are Needed For The Purchase Of Real Estate?
- Conclusion
BACKGROUND
This article discusses common legal questions that arise in the purchase and sale of real estate. Buyers and sellers of real estate sign contracts and make important personal, financial and legal decisions. It is intended to help buyers and sellers of property make informed decisions when making or accepting offers, seeking financing or transferring title to real estate. Real estate is probably the single largest acquisition a person will ever make. It is important to consider these obligations when deciding to purchase property.
1. How Do I Make An Offer?
The offer sets forth the conditions and price the buyer is willing to pay. It must be in writing and clearly set forth the important elements necessary to complete the sale. Some of those elements are price, financing, inspections, down payments, repairs, etc. The offer will also set the date and time by which the seller may accept the offer and the "Closing Date". This is the day by which everything must be done to transfer ownership of the property.
2. Can A Buyer "Change His Mind" After A Contract Is Signed?
The offer sets forth terms and conditions that must be met to complete the sale. Conditions commonly found include "subject to obtaining suitable financing." The formation of a binding contract depends upon the party's ability to meet the stated conditions. A reasonable attempt must be made to satisfy the conditions. If the conditions cannot be met, for example, if it is not possible to secure the necessary financing or to sell an existing home, the contract will end. This is important especially where at the time of making or accepting an offer there are things that have not been finalized.
3. What Is An Acceptance?
When an offer to purchase is delivered, the seller should read it carefully and decide that all the terms and conditions are acceptable. On most standard offer to purchase forms, the acceptance is on the same form as the offer. When the offer has been signed by the buyer and accepted by the seller, a binding agreement for the purchase and sale of the property exists.
4. What If The Seller Doesn't Like The Offer?
THE COUNTER OFFER. If a seller is unable or unwilling to accept all the terms of the offer, the seller can make a counter offer. The counter offer is usually made on a separate document. The seller's counter offer is a new offer to sell the property on different terms. The buyer can accept those terms or make another counter offer to purchase. It is important for both the buyer and seller to realize that an offer ends when it has been rejected or a counter offer is made.
5. What If I Change My Mind?
An offer or counter offer can generally be withdrawn at any time before the other party accepts. An offer or counter offer expires when the time limit it specifies for acceptance has passed, or it has been rejected, or a counter offer is made.
6. How Do I Obtain Financing?
Few people are able to pay the full price of their home in cash. Generally, after paying the down payment, the balance of the purchase price is financed by a loan. If they qualify, buyers may arrange for a new loan or assume an existing loan on the property.
7. What Is A Trust Deed?
A Trust Deed is a document used to secure the repayment of a loan of money usually from a lending institution such as a bank or credit union. To make sure that the lending institution will get back the money it lends, it records the Trust Deed on the title to the property. This does not mean that the lender owns the house. A Trust Deed, when recorded, serves as notice to everyone that the lenders has financial interest in the property. The Trust Deed acts as collateral to insure that the lender will be repaid.
8. What Is An Assumption?
It is sometimes possible for buyers to assume an existing loan, depending on the seller's loan agreement with the lender. When a loan is assumed, the buyer agrees to take over the seller's obligation to repay the lender. Often a buyer assumes an existing loan because its terms are better than those the buyer could negotiate for a new loan.
9. Do I Need Secondary Financing?
A second or third loan is similar to a first loan. The amount of money available to the borrower for a second loan depends on the amount of equity in the property. The equity is the difference between the value of the property and the amount still owing on the first loan. Lenders charge a higher rate of interest on second and third loans. Second loans are often obtained to finance major renovations to the property or to raise money for family emergencies. Upon sale, the second lender is paid after the first providing there is sufficent money available after the sale.
10. When Should I Start Looking For A Loan?
It is a good idea to start looking for financing before making an offer. Lending institutions will sit down with borrowers and determine the maximum amount of money that can be borrowed and discuss payment schedules. This assists buyers in determining their price range. It is a good idea for buyers to shop around for a loan that best suits their needs. Interest rates and other provisions in loans can vary from lender to lender. A lender may provide the prospective buyers with a "prequalification letter" which can help the buyer in making an offer to purchase.
11. What Happens If I Can't Get A Loan?
Because most buyers borrow money to pay for property, most offers to purchase contain a "subject to financing" clause. This clause makes the offer to purchase dependent on getting suitable financing by a certain date. A "subject to financing" clause obliges the buyer to make reasonable efforts to seek financing for the amount and on the terms set forth in the offer. If the buyer cannot obtain suitable financing and the condition has not been satisfied, the buyer may be excused from the contract.
12. What's a Trustor? Trustee? Beneficiary?
The Trust Deed is the document which secures the lender's loan. The person borrowing the money is the Trustor (borrower), and the lending institution is the beneficiary (lender). The Trustee is generally an independent firm that supervises the conditions of the Trust Deed. The term is the length of time a loan runs before it is due. An amortization period is the total length of time it would take to pay back all the money borrowed including interest. The interest rate and the amortization period together determine the monthly payments that will be made on the amount borrowed.
13. What Happens If I Can't Make Loan Payments?
The lender is interested in getting its' loan paid. This is why a Trust Deed is recorded on the title to the property. The recorded lien on the property gives the lender certain rights if the borrower defaults. If a borrower defaults on the loan, the lender has a right to foreclose. A foreclosure is an action taken by a lender to collect all the money owed including the involuntary sale of the real estate.
14. What Is A Title Report?
Information about the property such as loans, easements, leases, etc., are recorded on the title to the property. Copies of these documents are usually kept at the County Recorder's Office. It is therefore very important that the title be searched when buying or selling real estate. A search of the title reveals the name of the current owner of the property, the legal description of the property, whether or not the owner has mineral rights, and certain claims, liabilities or trust deeds attached to the property.
15. What Is A Cloud On A Title?
Liens are notices or warnings that someone has a claim against the property. Claims or interests that are commonly found on a title are options to purchase, mechanics liens, and lis pendens. These represent money or ownership interests in the property that should be removed before the property is transferred to a new owner.
16. What Are Easements?
An easement is a right that someone other than the owner of the property has to use the property in a particular way. An easement may continue to affect the property even when it is transferred to a new owner. Easements vary and may include the right of a neighbor whose land has no street access to use a strip of your property to reach the street, and to the right of the city to run a sewer line across your land.
17. What Is Title Insurance?
Most buyers want to obtain clear title to the property. Free of liens, unpaid taxes, judgements, etc. To get clear title it is necessary to have all unacceptable claims, liabilities and charges against the seller's title removed before title is transferred to the new owner. A title insurance company will for a fee or premium investigate the title and assist the removal of liens, etc. The title insurance company issues an insurance policy to the buyer guaranteeing clear title.
18. How Should I Hold Title To Real Estate?
Joint Tenancy. Joint tenancy means that the property is owned by more than one person. Joint tenants have a right of survivorship, that is, the survivors become the sole owners of the property when one of the joint tenants dies. For example, if two friends were joint tenants of a house, and one died, the surviving friend would automatically become the sole owner of the property. The property would not become part of the estate of the deceased.
Tenancy In Common. Tenancy in common means that there is more than one owner, and that each owns a individual share of the property. The shares can be equal or unequal. Each owner is free to sell his or her share of the property. There is no right of survivorship, so owners can will their share of the property to a person of their choice. If two people decided to buy a house, but could not contribute equal amounts to the purchase price of the house, they could purchase as tenants in common. One could own 70% of the property and the other 30%. If the property were sold, the proceeds would be divided accordingly between the two owners.
There are several other ways of holding title including, in California, community property.
19. Should I Use A Broker To Sell My Property?
If you consider using a broker to sell your property. You will be asked to sign a listing agreement. A listing agreement is a legally binding contract between a seller and a real estate broker. It gives the broker the authority to sell the property on certain conditions. The listing agreement generally expires after ninety day unless renewed by both parties. Because the listing agreement is the contract between the seller and the broker it is important to understand it. Review it carefully with the agent before signing.
20. How Do I Find Out The Condition Of The Property?
It is important to ask questions about the property before signing any type of agreement, offer or contract to purchase. Buyers have the opportunity to inspect the property before agreeing to buy it. Most purchase agreements provide buyer conditional approval of a home inspection report. In California, sellers have a duty to disclose known defects of the buyer. It is called a Transfer Disclosure Statement.
21. What Is A Condominium?
The condominium is a type of private ownership. The purchaser of a condominium becomes the owner of a specific unit in a multiple unit dwelling, and has the exclusive right to use that one unit. The rest of the property, such as the walks, garden, and swimming pool, is "shared" with the owners of the other units. The buyer has to contribute to the cost of maintenance and repair of these common areas, and carry out other terms of the "Homeowners' Association Agreement."
22. What If I'm Planning To Build A New Home Or Major Renovations To Existing Properties?
When looking to purchase land on which to build a home, have the land inspected to ensure that it is suitable for the type of construction planned. Whether considering new construction or major renovations, it is important to find out if there are any laws that may limit the buyer's ability to do the work.
23. How Much Commission Does The Seller Have To Pay?
The commission to be paid, usually by the seller is, by law, negotiable. The commission is paid to the broker. Once a listing agreement is signed, the seller must pay the commission based upon the sale price received. If a seller sells the property privately while the listing is in effect, he may be legally obliged to pay the commission to the broker.
24. What Is A Multiple Listing?
This is the most common type of Listing Agreement. A multiple listing means the seller engages the services of a single broker, but authorizes that broker to use the services of other agencies to sell the property. The advantage of a MLS agreement is that the property can be made more widely known to prospective purchasers.
The other type of agreement, the exclusive listing agreement gives only one agency the authority to sell the property. The services of other agents can be used to sell the property, but one agent controls who sees the property.
25. Can I Sell My Property Without An Agent?
It is possible to sell property without using brokers. To private sales, the seller and prospective buyers deal between themselves. Either the buyer or seller, or their attorney, may draft the documents. The contract between the seller and the buyer represents an important legal commitment on the part of both parties. The terms and conditions in the contract bind both parties and can be difficult to change once both parties have signed.
26. What Documents Are Needed For The Purchase Of Real Estate?
The acquisition of real estate is generally commenced when the buyer makes an offer. The offer, or purchase is an important document. It is the basic contract and defines the rights and obligations of both the seller and buyer. The offer must be in writing. Both the seller and the buyer must sign the offer with the knowledge that it is a contract and they are bound by its terms.
The offer can be printed on a standard form. Even an offer printed on a standard form may be changed. Clauses can be removed and conditions may be added. Read the offer carefully and be sure that it contains all the agreed terms. Once the contract is signed by both the buyer and the seller, it cannot be changed without the mutual agreement of both parties.
27. Conclusion
Buying and selling real estate is a complex process. There are a number of personal, financial and legal considerations. The contract for purchase and sale and the loan agreement are often two of the most important contracts entered into during a lifetime. Careful consideration before making any decisions or signing any documents relating to the purchase or sale is necessary to ensure that the legal interests of both the buyer and seller are adequately protected.
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