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Who's Who in Your Real Estate Transaction? How It Works, From Start to Finish

By Paul W. Samarin, Attorney at Law

As a Real Estate Attorney, I am often asked the following questions: What does escrow do? Who is supposed to look-out for my interest? Doesn't FHA or VA check-out the house to make sure it's OK? Is my Realtor® working for me or the Seller? What is title insurance? The basic question underlying all of these questions is: "How does the whole process work?"

These are important questions which should be answered before you enter into a contract to buy or sell real estate. Usually, however, I find myself answering these questions long after escrow has closed and a problem has arisen. Too often I am faced with the unpleasant job of telling my clients what they should have done because they have come to me after the sale, rather than before the sale.

This article is the first in a series of articles developed from my seminars entitled "Understanding Your Real Estate Transaction" and from more than twenty years' experience representing Buyers, Sellers and Realtors in various lawsuits and real estae transactions.

The purpose of the series is to give you the information you need about the decisions you are going to have to make before you have to make them. The goal is to have you make decisions in your best interest, rather than to do simply what you are told to do because you don't know what else to do.

Find The Right Realtor

How does it all work, from beginning to end? You're actually buying much more than a house. You're buying a house, a loan, several insurance policies, a neighborhood, a school district, etc. Your Realtor can give you valuable information on all of these things and more. You have to be prepared to ask the right questions before you can get the answers that help you make the right decisions.

The best starting point is to find a Realtor in the area in which you plan to buy with whom you can build a trusting relationship. If you can get a referral from a friend, that's best. In any case, you need to meet with the person and trust your feelings. You may want to meet with more than one Realtor until you can find someone you're comfortable with. You are looking for the same qualities you would look for in an attorney: 1) knowledge of the subject matter; 2) understanding of your needs, and 3) cares about you.

After you've found a Realtor, the next thing you need is a loan. That's right, go loan shopping before you find the house. It's a hot market again, and if you are preapproved for a loan, the Seller is going to be much more interested in your offer when you find your house.

Your Realtor will recommend a Loan Rep (representative) or two. This may be a mortage broker or mortgage lender. Ask your Realtor to explain the difference. The Loan Rep will get your credit report and other financial information, and this will help you and your Realtor know exactly which houses you can afford. Tell the Loan Rep everything.

Help Your Realtor Find The Right Home

Once you are comfortable that you have a Realtor working for your best interest, you must help him find you the right house. How can you help your Realtor?

First, give him the most accurate information you can about your income, credit history, your likes and dislikes, the things you must have in a home versus the things you'd really like to have but could live without, etc. Second, keep in touch with your Realtor and be available to go look at the property he finds as soon as he finds it. Third, look for houses on your own and tell him what you've found.

When you're looking on your own, either through the newspapers, the internet, or in the neighborhoods, understand that your Realtor can represent you in the purchase of any home that's for sale. Virtually every home listed for sale is listed in the Multiple Listing Service (MLS), and they all work together and share the commissions.

Always inform other Realtors that you're already represented by your Agent. The other Realtor may choose to deal directly with your Agent rather than to give you the information for you to give to your Agent. Even a "For Sale By Owner" seller is likely to be willing to pay your Realtor a fee, if you tell him you're working with a Realtor that you like and trust and you insist on being represented. If your Realtor is spending his time and working for you, it's only fair for you to give him the opportunity to make the sale. It's the only way he gets compensated for his efforts.

Making The Right Offer

Once you find the house, you submit a written Offer. The Offer will be written on a standard form purchase contract that Realtors call a "Deposit Receipt." They call it that because when the Realtor signs your copy he is giving you a receipt for the Deposit check you wrote to show the Seller you mean business. During your first meeting with your Realtor, get a copy of the Deposit Receipt he plans to use when you find your house. This way, you can review it at home and familiarize yourself with it before you find your house. You can ask all your questions, have it reviewed by your attorney, etc., before you take the big step.

Now your Agent completes the Offer for your signature and then presents the Offer to the Seller and his Agent. There will be an entire article on Agency discussing what the Seller's Agent's duties are versus the Buyer's Agent and who represents whom.

The Seller may accept or reject your Offer or write a Counter-Offer. The Counter-Offers may go back and forth, and at some point you will come to an agreement. If you have not made the Offers conditional on you having your attorney's review, you are now bound to purchase under whatever terms are contained in the written Offer and Counter-Offers. Taken all together, these will be referred to as the Purchase Agreement.

When you've reached agreement, be certain that you have a copy of all the offers and counter-offers with all parties' signatures and initials in the appropriate places; and, that you understand what all the terms of the deal are and those terms are clear from the Purchase Agreement. Don't assume that someone else will be checking this for you.

Agent Opens Escrow and Orders Escrow Instructions

The Agents will now contact an escrow company to have another more formal process started. The escrow company's job is to arrange for the transfer of record title from the Seller to the Buyer under the terms agreed upon between them in the Purchase Agreement. Usually, the Seller owes money to his lender who has a lien against the house. For the Seller to transfer title to you, he has to pay-off his loan. You need to borrow the money to buy the house and your lender wants to use the house as collateral, so a new lien will be recorded by your lender the moment after you get title from the Seller. Escrow handles all those details.

Further, there are property taxes, and sometimes homeowner's association dues, accruing every day against the property. Escrow computes a proration of these kind of fees by debiting and crediting the proper amounts between the Buyer and Seller based upon the Purchase Agreement.

Technically, the Escrow Officer is an Agent for both the Buyer and the Seller. However, in practice you should consider the Escrow Officer to be more of an administrator than an Agent. They have duties which are clearly defined in the Escrow Act, but poorly enforced by the courts. Escrow does not determine (and does not have any duty to determine) whether the Purchase Agreement is fair or benefits either the Buyer or the Seller. They simply carry-out the written instructions of the Buyer and Seller. These instructions are typed by the Escrow Officer based upon information given to them by the Agents, which comes from the Purchase Agreement.

So, once the Buyer and Seller have finalized the terms with the Offers and Counter-Offers, and you now have a completed Purchase Agreement, the Agents will call the Escrow Officer and give her the information; and, she will type the information and send it to the Agents. The Agents take the paperwork to the Buyer and Seller for signatures, and return it all to the Escrow Officer. These will be called Escrow Instructions.

Inspections, Approvals and Insurance

So, now you're "In Escrow." Now several things begin to happen at once. You have already been preapproved for a loan amount, but now the house has to be appraised so that the lender knows it is sufficient as collateral for the amount of money you are borrowing. They are not going to check it for structural stability. They are going to demand that you have a licensed termite company clear it for termite damage and/or infestation.

You should also have it inspected by a professional home inspection company (always go with the inspector and inspect along with him.) All of this should be planned immediately to be completed within the first week or so. Your Purchase Agreement will set forth a specific number of days within which you must complete and approve each of these inspections and any others you may determine are advisable (e.g., roof, soil condition, etc.)

You should also be shopping for Homeowner's Insurance at this early stage. You can also buy insurance against major appliance failure. It will not cover any pre-existing defects. You may also purchase life insurance which pays-off the loan in the event of death of either of the borrowers. Earthquake insurance, Flood insurance: you should be looking into these things during your first 30 days of opening escorw.

Any contingencies described in the Purchase Agreement must be addressed during escrow. Some contingencies, if not addressed, will expire automatically depending upon how the contract is filled-out. For more info on this, you should read about "Passive Removal of Contingencies" in the article entitled "The Real Estate Purchase Contract."

Escrow will order a Prelim (preliminary title report) from a title insurance company. This will describe the current status of the Seller's title. You are supposed to review this document and determine whether there are any easements, liens, conditions, covenants or restrictions to which you object. If you do not object in writing within time limits set in the Purchase Agreement, your objections to items contained in the Prelim will be waived. You will buy Title Insurance, but it will not cover any of the matters disclosed by the Prelim.

If you have any questions on matters contained in the Prelim, you should address them directly to a lawyer or the Title Officer (not a Title "Rep".) The Escrow Officer can give you the phone number for the Title Officer.

Close Escrow and Move Into Your Home

The Seller may need to find a new home. He may ask you to delay the closing of your escrow until he can find his new home and close both escrows simultaneously. This will have been negotiated between you during the Offer/Counter-Offer stage.

The escrow process may last 30 to 90 days or so. The exact closing date cannot be known at the beginning. Don't make an appointment with the moving vans at the beginning. Near the closing date, you'll be notified that your loan has been approved and Loan Docs (documents) are ready for your signature. Now is the time to get a firm closing date from your Realtor so that you may arrange for movers, utilities, etc. The Escrow Officer will compute how much money you will need to bring in based upon the agreed down payment together with all of the expenses of obtaining the loan and the escrow process iteslf. Now is the time for a Valium; OK, calm down, you're investing in your future.

You most likely will Close Escrow within two or three days of delivering the signed Loan Docs and your cashier's check (drawn on a local bank) to the escrow company. Escrow is closed when title has been recorded in your name: and, you're a homeowner!

Usually, you get the keys to your new home about 3 to 5 days after Close of Escrow, giving the Seller a chance to move-out. This time period will have been negotiated during the Offer/Counter-Offer stage. OK, you've done it. Now that you're a homeowner, there are a million more things you need to know. Don't worry about those today.

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