Are you ready to buy your very first home? Or maybe you’ve found a low-cost property that you want to wisely invest in. Whatever your reason for purchasing real estate, this article will guide you step-by-step through the process to a successful closing.
Once you identify real estate you are interested in, many times with the help of a real estate agent, there are five stages until the ownership officially transfers and you receive the keys to your new property:
- Contract (Offer/Acceptance)
- Attorney Review
- Inspection Contingency
- Financing Contingency
1. Contract (Offer/Acceptance)
The contract formation begins with a buyer sending an offer to the seller. As a buyer, your real estate agent will typically assist in filling out the standard contract form. The most common form you will see the Multi-Board Residential Real Estate Contract 7.0. This will contain the buyer’s name, seller’s name, property address and most importantly, the purchase price. When a buyer completes this form and sends it to the seller, that is officially an “offer.” When a seller receives the offer and signs the contract, that is an “acceptance.” The date the seller accepts the offer is the date of acceptance. This is an important date because you have five (5) business days for “Attorney Review” and “Professional Inspection” from this date.
2. Attorney Review
This is when an attorney typically gets involved. Attorneys for both buyer and seller will fill in any gaps in the contract and suggests different terms such as tax proration rate and other terms depending on the specific circumstances of the deal. This is more important to a buyer than a seller. A seller only needs to make certain disclosures about the property. Therefore, a buyer should use this contract formation process and the attorney review period as an investigation tool and ask for more information about the property. As a buyer, you will have to do some investigative work before you fully commit yourself to the purchase because you are not as familiar with the property as your seller is.
3. Professional Inspection
This is the most important process of all. After closing, the seller will walk away with the purchase money and the buyer will be stuck with any faults the property has. Therefore, it is always on the buyer to be diligent and learn about any problems ahead of time. The investigation process starts with the attorney review above, but the real work begins with the buyer hiring a professional home inspector for a thorough home inspection. After this inspection, the buyer can come back to the seller and request that the seller repair certain items based on the result of the professional inspection. Typically, a buyer can anticipate the response from a seller to be that i) the seller rejects the buyer’s repair requests, ii) the seller agrees to repair, or iii) the seller offers closing credit in lieu of repairs. This is usually a matter of negotiation between the parties. Attorney review and inspection contingency usually run concurrently. Once you resolve all the inspection and other attorney review items, then your contract becomes firm, subject only to the buyer’s financing contingency.
The inspection contingency clause (paragraph 12) of the Multi-Board Residential Real Estate Contract 7.0 provides that only the major components of the Real Estate, limited to central heating and cooling system(s), plumbing and well system, electrical system, roof, walls, windows, doors, ceilings, floors, appliances and foundation are covered. Minor repairs, routine maintenance items and painting, decorating or other items of a cosmetic nature, no matter the cost to remedy same, do not constitute defects, and thus are not a part of the inspection contingency. Sometimes it would be a good idea to obtain an estimate to remedy a certain defect in order to negotiate a reasonable amount of closing credit.
4. Financing Contingency
The contract remains contingent until the buyer secures a loan for the purchase. This is the last hurdle before a closing. If the buyer cannot secure a loan during this period of time, the buyer can still cancel the transaction and receive his full earnest money. In reality, this contingency may be extended by mutual agreement of the parties in the event the buyer’s loan is still in the works.
Closing will occur at a title company. The title company provides closing services such as receiving the funds from the buyer’s lender, wiring payoff funds to the seller’s mortgage lender, and handling recording deeds and other important closing documents. On the closing day, the seller will receive the sales proceeds, sign a deed that transfers the legal ownership of the property to the buyer, and the buyer pays the full purchase price in combination of earnest money, loan, and/or their own funds.
Below are some of the key provisions from the Multi-Board Residential Real Estate Contract 7.0. As a buyer, you will review the following items closely.
4. Purchase Price/Earnest Money: This contains the total purchase price as well as the earnest money the buyer is depositing. The earnest money is usually held by the seller’s real estate agent until the closing.
5. Closing: You will see the proposed closing date here. This date is subject to change depending on the negotiation of the parties or in the event the buyer needs an extension of the financing contingency.
7(a) Loan Contingency: This clause has details about the buyer’s loan (such as the type of loan, the interest rate the buyer is willing to take, etc.) and the general timeline of this contingency. Multi-board contract 7.0 sets the default timeline as forty-five (45) days after the date of acceptance or five (5) business days before the closing. This clause also requires the buyer to act promptly to apply for a loan. This contingency gets extended by mutual agreement of the parties in the event the buyer’s loan is still in the works.
7(b) Cash Transaction: If the buyer does not need any loan, it is a cash transaction and the buyer will check off this clause.
9(a) Tax: Tax bills come a year later, which means that the final tax bill is not available at the time of closing. Therefore, real estate taxes are prorated at the time of closing. The most common tax proration rate is 105% of the last full tax bill but it could be lower or higher depending on the specifics of the property.
10. Attorney Review: It is five (5) business days after the date of acceptance. Therefore, it is important to send the signed contract to an attorney for review right away. Also, it is important to bring to the attorney’s attention immediately any items you’d like to find out more or confirm.
12. Professional inspections: Inspection contingency is also five (5) business days. Most attorneys would like to keep the Attorney Review and the Inspection Contingency run concurrently so as to keep all contingent items open for the same time period.
30. Sale of Buyer’s Real Estate: If you have to sell your home first before you can buy, you will check off this clause. However, you may decide not to have this contingency depending on your circumstances.
36. “As Is” Condition: Sometimes the seller is selling the property as-is. You will check off this clause if you are in fact buying the property in as-is condition. Buying as-is does not mean that you are waiving the professional inspection. Even if you are buying as-is, it is recommended to do a professional inspection to make sure all the repairs or risks are acceptable to you and that there is no other unacceptable condition in the property. It just means that you will not request the seller to make repairs pursuant to the Professional inspection clause.