A typical real estate purchase transaction varies somewhat with the various state laws and regional customs and is quite complicated, requiring high levels of understanding about the process. Knowing what is involved can help both buyers and sellers by taking a lot of stress and guesswork out of the process. The following steps are usually involved in such a transaction:
1. Prearranging Financing
The buyer will usually prearrange financing. A loan preapproval makes the process go quickly and smoothly, while at the same time letting the buyer know the limit of his financing, and hence, the maximum price of the property he can purchase. Most real estate agents prefer to have your preapproval in hand prior to showing you property. Don’t take this as a negative; understand that if you’re financing your new purchase, today’s mortgage market is much more restrictive than mortgage markets were in the past.
2. Finding a Property
A buyer typically will meet with a buyer's real estate agent to represent his interests, but sometimes will contact the selling agent directly from the listing. Working with a buyer's real estate agent can help you determine locations, past property values, and price ranges that would fit within your buying power.
Researching a property prior to scheduling a viewing will save you time and money in the long run by narrowing down properties in which you will have the highest level of interest, and weeding out properties that will not meet your needs. Real estate agents have resources available to them that the average buyer does not have. They can help you by preparing a complete market analysis of only those homes within your search area that meet your search criteria and provide professional guidance on which properties would be the best fit and why.
3. Making an Offer
Once a property is found, the real estate agent will prepare an agreement to purchase the home, based on your criteria and buying power, ask you to sign it, and then submit it, along with earnest money, to the seller's agent for review. A good real estate agent will guide you on making an aggressive offer based upon the property itself, the location of the property, recent sales of similar properties in the area, and other relevant criteria, while ensuring that the offer is not so aggressive as to insult the sellers of the property, thus prompting an abrupt "no" as an answer.
The seller's agent will then prepare an estimate of settlement costs for their seller and submit the offer along with an estimate of the charges and proceeds that the seller will receive. This estimate will often be the determining factor on whether or not the seller accepts the offer on the property as is, or whether they would like to counter.
4. Counter and Acceptance
Expect to receive a counter offer on the property. With an aggressively placed offer, the seller will often counter with their best price as well as the best deal on the property in question; sometimes, however, more than one pass is required in order to reach agreement. Once you have reached agreement, you can begin the next phase of the purchase, which is acceptance of the counter offer.
Once the counter offer has been accepted, the contract will be taken to the pre-selected title company to open up escrow on the property. This begins the process of transfer of ownership from the seller to the buyer. At this time, the contract is also presented to the lender for the buyer to begin the final work-up of the loan and make the necessary closing preparations.
5. Inspections and Appraisals
Once the sales contract has been accepted by the seller, the buyer typically has ten days to have the property inspected and appraisals performed. This is commonly known as the option period. Findings during the inspection and appraisal can result in requests to have defects corrected or adjustments made to the selling price.
If the seller is unwilling or unable to make adjustments based on this information, the buyer is not obligated to complete the purchase during the option period and can walk away from the purchase at that time. If a proper inspection is not performed, the buyer becomes obligated to the transaction, based on the accepted offer, regardless of the condition of the property. At the end of the option period, if all aspects are agreed upon and accepted, the transaction will move forward.
As part of the appraisal, the property is often surveyed to ensure its description in the title is accurate. If the appraised value of the property is not equal to or higher than the purchase price, the loan will not be approved, often resulting in further negotiations over the selling price, or requiring the buyer to make a larger down payment.
At the end of the option period, once repairs have been agreed to and other items addressed from the inspection and appraisal reports, the transaction moves into a pending status.
6. Pending and Closing
During this period, the buyer arranges for homeowners insurance as required by the lender, which is often paid monthly as a portion of escrow payments to the mortgage lender. If the buyer has not had the property inspected, the insurance company may require inspection of the property to ensure compliance with electrical and fire codes. This sometimes requires updating electrical wiring, plumbing, adding smoke detectors, etc. Distance to the closest fire hydrant, and qualifications of the local fire department are often factors in determining whether the property can be insured and at what rates. The mortgage lender may or may not require flood insurance and/or earthquake insurance.
The title company searches the records of the office of the recorder of deeds, usually found in the county courthouse, to find any documents that may address the property being sold. The previous mortgage holder will have a lien, unless the mortgage has been paid off, which would also be recorded in the recorder's office records. The title company checks to see that the title is clear of any outstanding liens and brings the title up to date. In some states, title abstracts summarize the complete ownership history of the property. Finally, most lenders require title insurance, which insures against an undetected claim such as a long lost relative who claims to have inherited an interest in the property.
During this time, the lender processes all final documents for the transaction and prepares them for the title company. The title company will act as an independent third party to the transaction and will prepare all of the deed and finalized loan documentation for the buyers and sellers of the property. Once all documents have been received by the title company, the buyer and seller are clear to close on the property and can schedule a closing appointment.
Closing appointments typically take between one and three hours, depending on the details of the transaction. Once the closing is completed, the lender will wire the funds to the title company to complete the purchase, and the title company will disburse the amounts accordingly to the seller and to the new owner of the property and/or the lender. At this point, the title is transferred from seller to buyer, the buyer will receive the keys, and the transaction is considered closed.
Finally, the title is recorded in the recorder's office by the title company.