The expression “you have to learn how to walk before you can run” holds true in many aspects of life. The expression means you have to do step “A” before you can do step “B.”
And if you think about it, many things in life have to be done in the correct sequential order or the end result will not reach the desired conclusion.
Over the last few weeks I have been asked questions about the purchase process by friends who are in the middle of a transaction. It is a good idea to review the steps involved so you know what to expect during a residential real estate purchase. The purchase process breaks down into the following steps: purchase contract is executed by a buyer and seller, escrow is opened with deposit funds, inspections are scheduled and completed, financing is attained, recording takes place and escrow closes with a disbursement of funds.
As I have explained in past articles, escrow is a neutral third party that handles a real estate transaction. If you have a lot of money involved, it is a good idea to have a third party handling the transaction so both the buyer and seller are protected. Once you have identified a property you want to purchase you will let your real estate agent know and he or she will draw up a purchase contract.
A purchase contract is a legally binding contract with terms that explain what price the buyer is paying for the property, the length of escrow in days, which title and escrow companies the seller wants to use, etc.
Once a real estate agent or broker presents the offer to the seller’s real estate agent, the seller will have “X” amount of time to get back to the buyer for the contract to be valid. Often the contract stipulates between one and three days before a specific time.
The seller now has three options once the purchase contact is presented. They can accept the terms of the buyer’s offer, reject the offer or submit a counter offer. If the seller accepts the offer, the buyer and seller open escrow and a deposit of usually 3 percent of the purchase price is placed into escrow.
Once escrow is open, the purchase contract will usually state that inspections need to be completed within a specific allotted time. The time will vary depending on the motivation of the buyer and seller and the current market conditions. In a “hot” market, usually the buyer has between two and three days to complete inspections, while a normal market will allow anywhere from 10 to 14 days for inspections. Inspections of the property range from pests to major systems. There are companies and individuals that only do property inspections. The best way to find a reputable inspector is to speak with your real estate agent.
Usually an offer is not accepted unless the buyer is pre-qualified with financing or can prove they have the funds to close the transaction with cash. Pre-qualified or pre-approved simply means that the buyer has gone to a lender and been pre-approved based on their credit, income, liquidity, etc. However, the buyer still has to go through the financing process, which takes anywhere from 30 to 60 days for residential financing. It is best for a buyer to go directly to a bank for financing as the cost of financing is usually lower; however, using a mortgage broker gives the buyer options just in case the buyer’s first lender does not come through with the financing.
Once inspections are complete, the buyer has financing and all terms on the purchase contract are met, the buyer and seller can finish the purchase transaction. This involves the buyer placing the remaining funds into escrow, the lender wiring money into escrow and the seller executing all necessary documents such as the grant deed. Escrow then has all necessary documents recorded. With a residential property there is what is known as a right of recision where the buyer has three days to not accept the funds from the lender and back out of the financing. Once the recision is up, keys are given to the buyer, funds are disbursed to the seller and escrow closes.
Now this was a simple illustration of a residential purchase to explain the process. However, as many people know, things happen in escrow that are unexpected, so both the buyer and seller should be prepared for unforeseen events that take place. In the end, if a buyer is qualified and a seller agrees on a price, these are the basic steps to completing a residential purchase transaction.
Mike Heayn is a Commercial Loan Consultant, specializing in Multi-Family Lending. He can be emailed at firstname.lastname@example.org.