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BUYING OR SELLING A HOUSE
WHAT IS THE FIRST THING I NEED TO DO IF I AM BUYING OR SELLING A HOUSE?
You will want to find a real estate agent, or broker, to help you in either buying or selling a house. If you are a potential buyer, you can work with any number of brokers. The seller, who will be responsible for the commission, generally lists with only one broker. However, the "listing" broker and the "selling" broker do not have to be the same. Although the seller lists with one broker, often other brokers can show the house to potential buyers. In this case, the commission is shared (often split) between the two brokers. The "seller's" broker acts in the interests of the seller. The "buyer's" broker acts in the interest of the buyer. If the same agent represents both the seller and the buyer he/she is then acting as a "dual agent". To do this, the agent must have prior approval from both the sellers and the buyers and can not put one client's interests ahead of the other.
WHAT IS A "LISTING AGREEMENT"?
The listing agreement is a contract between the seller and the listing broker. It sets out the conditions of the listing. While the details of the agreement can be negotiated, a listing agreement generally includes the following:
- the length of the listing period
- the desired sales price
- the amount of the commission
- any exceptions to the commission, for example, would there be a reduced fee if the house is sold to a friend with no need for a broker, or no fee at all for selling to a certain person who is listed on the agreement
The seller should pay very careful attention to the listing agreement. Once a broker produces a willing and able buyer, assuming all conditions are met, the seller owes the commission. If for any reason the seller chooses not to sell (perhaps he or she wants to hold out for more money, or a proposed job transfer falls through), the commission must still be paid.
WHAT ARE SOME THINGS A SELLER SHOULD LOOK OUT FOR WHEN DEALING WITH THE SALE OF A HOUSE?
The seller should consider the following:
- Whether or not to use a broker, and if so, the broker's commission.
- What things (fixtures, equipment, built in furniture and the like) will be included in the sale?
- What is the asking price of the house?
- What price are you willing to accept?
- Are there any defects that you must by law, disclose to the buyer?
- Do you have any debts or liens that may affect the sale of your home?
WHAT ARE SOME THINGS A BUYER SHOULD LOOK OUT FOR WHEN DEALING WITH THE PURCHASE OF A HOUSE?
The buyer should consider the following:
- Exactly what property is included in the sale? Lighting fixtures, drapes or blinds, refrigerators, stoves, washing machines and dryers are often problem areas.
- Is the neighborhood quiet, friendly? Are the homes well kept?
- Are there any futuredevelopment plans that will affect the property?
- The inspection report - are there any substantial problems with the house?
- Real estate taxes - what are the current property taxes, and what impact will your purchase have on the taxes?
IF A BUYER MAKES AN OFFER ON A HOUSE, IS HE/SHE BOUND TO IT? IF A SELLER ACCEPTS AN OFFER, CAN HE/SHE CHANGE HIS/HER MIND?
A buyer can withdraw an offer anytime up until the offer is accepted by the seller. After that, the seller may owe the commission to the broker, and may well turn around and sue the buyer for breach of contract to recover the cost of that commission.
If the seller changes his/her mind after accepting an offer, especially if the terms of the listing agreement have been met, s/he usually still owes the broker a commission. This depends largely on the wording of the listing agreement; it might be wise to state that the commission will be paid upon completion of the sale of the property.
WHAT HAPPENS AFTER A BUYER AND SELLER AGREE ON A PRICE?
It is common for the buyer and seller to complete a "binder". This is either an outline of the proposed
sales contract between the buyer and seller or the contract itself. It includes:
- the property address
- the names of the parties involved (the buyer and seller)
- the purchase price, and proposed financing
- what will happen if the buyer can't get a mortgage, or if inspection reveals serious problems with the house
It is most often accompanied by a deposit from the buyer - usually 1% of the purchase price of the house (no less than $500). It is mostly used as a show of good faith between parties. Depending on the wording of the binder, it may or may not give either party the right to sue for breach of contract, or create a forfeiture of deposit.
WHAT IS A "CONTRACT"?
The contract is a legally binding document spelling out the key issues of the sale. It includes some of the same things as the binder, but exactly identifies the following:
- the exact property being sold (boundaries, dwellings etc.)
- the purchase price
- any mortgage contingencies
- the proposed closing date
- the names of the parties
It also spells out what items the seller agrees to leave in the house. Things like doorknobs, ceiling lights, awnings and window shades are considered "fixtures", and are generally included in the sale. Built in furniture, like bookcases that are attached to the walls are generally included as well. Appliances must be named in order to be part of the sale. Both parties must sign the contract in order for it to be legally binding.
WHAT ARE SOME OF THE THINGS THE BUYER SHOULD BE SURE TO PUT IN THE CONTRACT?
The contract should also include a standard clause that enables the buyer to have an inspection made of the property. It should allow the buyer to terminate the deal and receive a full refund of the deposit if he or she:
- is unable, despite good faith efforts, to obtain financing within an agreed upon time at prevailing interest rates
- discovers any serious mechanical problems or environmental hazards with the house
- discovers any other serious problems that could not have been discovered before signing the contract
WHAT ARE SOME OF THE THINGS THE SELLER SHOULD BE SURE TO PUT IN THE CONTRACT?
The seller will want to be sure that the contract specifies that:
- he or she (the seller) is entitled to damages (usually the deposit) if the buyer does not fulfill his or her end of the contract - the amount can vary from as low as 1% to as much as 10%, generally depending upon the location
- all statements made about the property by the seller are accurate
- any of the buyer's contingencies - like inspections or financing - will be taken care of in a reasonable amount of time
IF THE INSPECTION IS NOT SATISFACTORY, CAN THE BUYER BACK OUT OF THE DEAL?
In addition to everything else, the contract should include an "inspection contingency clause"; that is, what happens if the buyer's inspection does reveal problems with the property. Small problems, like leaky faucets, loose light fixtures or doors that don't close properly can probably be fixed easily by the seller. More substantial problems, like a defective furnace, a waterlogged basement, or non-compliance with building codes, that can be structural, need more substantial repairs. Although, depending on the terms of the contract, the buyer can often break the deal without forfeiting his/her deposit, there may be a statement in the contract that says that the seller will either fix the problems, or give the buyer a discount on the price of the house in lieu of repairs. If the house is situated on a hillside, and is about to slide off the side of a cliff, the buyer will most likely want to cancel the contract.
WITH ALL THESE SIGNED AGREEMENTS, IS IT IMPORTANT TO HAVE A LAWYER?
Although many people buy and sell houses each year on their own, it is a good idea to have an attorney represent your interests when you are buying or selling a house. An attorney who has experience in real estate can help you to draw up a contract that can be sure all contingencies have been considered. The real estate agent will be trying to get the deal done, so as to receive his/her commission, so it is good to have someone who specifically represents you, whether you are the buyer or the seller.
A lawyer can also help you do a "title search" to be sure the property is free from any claims against it by creditors of the seller, or of previous owners.
WHAT HAPPENS AT THE "CLOSING"?
The closing is the time at which all remaining documents relating to the sale are signed. The deed to the house is transferred from the seller to the buyer. The mortgage papers are signed by the buyer, and possible transfer taxes are paid to the state. In addition, the buyer will pay the seller for any miscellaneous expenses, such as appliances or furniture that had been previously agreed upon, the remaining oil in the oil tank, or any real estate taxes that the seller had prepaid.
WHAT IS "MORTGAGE INSURANCE", AND IS IT NECESSARY?
Mortgage insurance protects the lender (usually a bank) against the risk of nonpayment by the buyer. The only reason to buy this insurance is if your lender insists upon it; there is no benefit to anyone except the lender.
WHAT IF THERE ARE PROBLEMS FOUND WITH THE HOUSE AFTER THE CLOSING?
This really depends upon the type of problem you find. If you find that the seller has walked off with some fixtures, which should have been included with the house, you might be able to sue to get them back, but this is a problem that might be better found in a walk through inspection just before the closing. Any major problem that the seller should have disclosed before the sale would probably justify a lawsuit, while a problem like termites, which should have been discovered in inspection, will likely leave you no recourse but to solve it yourself. A problem such as noisy neighbors is your problem; it is best to spend time in the neighborhood before making an offer or signing the contract. Don't wait until the closing to see if there will be a problem.
Glossary of Real Estate Terms
Add-On Rate a type of loan repayment schedule that breaks the principal into equal installments. The interest payment is added on to the principal. Total monthly payments are high in the beginning but, over time, the interest payment is reduced as the principal balance is reduced.
Adjustable Rate Mortgage (ARM) interest rates on this type of mortgage are periodically adjusted up or down, depending on a specified financial index.
Agent acts on behalf of another, repre- senting that person's interests and serving as an intermediary.
Amortization a method of equalizing the monthly mortgage payments over the life of the loan, even though the proportion of principal to interest changes over time. In the early part of the loan, principal repayment is very small and interest repayment very 1-tigh; at the end of the loan, that relationship is reversed. Compare to "Add-on Rate."
Annual Percentage Rate (APR) the actual finance charge for a loan, including points and loan fees, in addition to the stated interest rate.
Appraisal an expert opinion of the value or worth of a property.
ARM see "Adjustable Rate Mortgage". Assumption of Mortgage buyer as- sumes liability for an existing mortgage note held by the seller. This is usually subject to approval by the lender, who must be willing to approve the buyer and release the seller.
Assessed Value the value placed on prop- erty bv a municipality for purposes of levying taxes. It may differ widely from appraised or market value.
Balloon Payment a large principal pay- ment due all at once at the end of some loan terms.
Binder small, but serious, amount of money ($100-$ 1,000) accompanying an offer to buy, along with a brief written agreement to go to contract for the sale of property.
Broker a real estate professional who has a higher level of training than an agent. Generally, this is one who is the legal repre- sentative or proprietor of the office.
Cap limit on how much the interest rate can change in an ARM.
Certificate of Title document, signed by a title examiner, stating that a seller has an insurable title to the property.
Closing “closing the deal," the meeting where the deed to property is legally trans- ferred from seller to buyer.
Closing Costs see "Settlement". I - CMA-see "Comparative Market Analysis". Commission fee(usually a percentage of total transaction) paid to an agent or broker for services performed. | Comparative Market Analysis (CMA)
comparable houses on the market or recently sold; used to help determine correct pricing strategy for a seller's property.
Condominium (Condo) type of real estate ownership where the owner has title to a specific unit and shared interest in common areas.
Contingency a condition in a contract that must be met for the contract to be binding.
Contract binding legal agreement between two or more parties that outlines the conditions for the exchange of value (for example: money exchanged for title to property).
Conversion Clause a provision that allows converting an ARM to a fixed-rate loan after a specified interval.
Cooperative (Co-op) type of real estate ownership where all shareholders own the whole property, but each has proprietary occupancy rights for specific units.
Deed legal document that formally conveys ownership of property from seller to buyer.
Down Payment percentage of the purchase price that the buyer must pay in cash and may not borrow from the lender.
Earnest Money in some locations, the same as "Binder." In others, it's a large deposit paid when the sale contract is signed before the closing.
Equity the value of the proper-ty actually owned by the homeowner: purchase price, plus appreciation, plus improvements, less mort- gages and liens.
Escrow a fund or account held by a third-party custodian until conditions of a contract are met.
FannieMae see below.
Federal National Mortgage Association (FNMA, called "Fannie Mae") privately owned corporation created by Congress that buys mortgage notes from local lenders and is responsible for the guidelines a majority of lenders use to qualify borrowers.
Finance Charge the total cost, including all fees, points and interest payments a borrower pays to obtain credit.
Fixed Rate Mortgage interest rates on this type of mortgage remain the same over the life of the loan term. Compare to 'Adjustable Rate Mortgage."
Fixture a recognizable entity (such as a toilet bowl, kitchen cabinet, or light unit) that is permanently attached to property and belongs to the property when it is sold. Graduated Payment Mortgage monthly payments start low and increase at a predetermined rate. Compare to 'ARM."
Hazard Insurance compensates for property damage from specified hazards such as fire and wind. More complete coverage is given by all-risk homeowner’s insurance. | Home Inspection Report prepared by a qualified inspector, it evaluates a property's structure and mechanical systems.
Interest the cost of borrowing money, usually expressed as a percentage over time. 1-1 lien-a security claim on property until a debt is satisfied.
Listing Contract agreement whereby an owner engages a real estate company for a specified period to sell property, for which upon sale the agent receives a commission.
Market Value the price that is established by present economic conditions, location, and general trends.
Market Price the actual price at which a property sold. MLS see "Multiple Listing Service".
Mortgage security claim by a tender against property until the debt is paid.
Multiple Listing Service (MLS) a system that provides to its members detailed information about properties for sale.
Negative Amortization when monthly payments aren't enough to cover interest costs, they are added to the principal balance, and you may end up owing more than when you started. This is most likely to occur with ARMs that have payment caps.
Origination Fee application fee(s) for processing a proposed mortgage loan.
PITI-principal, interest, taxes, and insurance, forming the basis for monthly mort, gage payments.
Point one percent of the loan principal. It's charged in addition to interest and fees.
Prepayment Penalty a fee paid by a bor- rower who pays off the loan before it is due.
Prequalification informal estimate of how much financing a potential borrower might expect to obtain. Done before paying substantial loan application fees.
Principal one of the parties to a contract; or the amount of money borrowed, for which interest is charged.
Prorate divide or assess proportionatly
Purchase Agreement see 'Contraact
Realtor-a member of the National Association of Realtors'.
RESPA Statement (Real Estate Settle- ment Procedures Act), a precise breakdown of closing costs for both sellers and buyers.
Settlement all financial transactions required to make the contract final. See "Settlement Guide for Sellers," on page 124
Title document that indicates ownership of a specific property.
Title Insurance protects against loss from legal defects in the title.
Title Search detailed examination of the entire document history of a property title to make sure there are no legal encumbrances. |
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