1. Buying and Selling Real Property CHAPTER THIRTY-ONE

2. Copyright © Houghton Mifflin Company. All rights reserved.31 | 2 The Buying and Selling Process Contract of Sale: –Under the statute of frauds a contract for the sale or purchase of real estate must be in writing. Listing contract: the seller enters into a contract giving the agent/broker the right to sell the property for an agreed commission. –The seller normally pays the real estate agent commission. The process of selling real property is often done with a written purchase offer. –The seller can accept the offer, reject the offer, or make a counteroffer. If the seller and buyer agree, the accepting party usually will sign an acceptance, often contained in the real estate form contract. –The parties are able to modify the form contract as needed.

3. Copyright © Houghton Mifflin Company. All rights reserved.31 | 3 A purchase offer and acceptance create a binding, enforceable contract. –This contract cannot be changed once signed without the consent of both parties. –Usually the contract will contain: The description of the real property to be sold (as well as any personal property included in the sale) The names of the parties The purchase price and method of payment The date at which title to the property will pass (often referred to as the closing date) The Buying and Selling Process (continued)

4. Copyright © Houghton Mifflin Company. All rights reserved.31 | 4 Contingencies in a contract to sell real estate: –A contingency is some future event which may or may not occur that can have the effect of releasing parties from performance of the purchase or sale contract. –Both sides can use contingencies to protect their interest. For example, a buyer cannot normally purchase a house without obtaining financing. If the buyer is unable to obtain a mortgage loan, a contract contingency will release the buyer from having to purchase the real estate. A different contingency might make purchasing a new house contingent upon the sale of a current residence. Another important contingency for the buyer is to make the purchase subject to approval upon inspection by a qualified person. The Buying and Selling Process (continued)

5. Copyright © Houghton Mifflin Company. All rights reserved.31 | 5 Financing Financing for most real estate purchases is through a mortgage loan. –The bank or other lender will provide a loan. –The loan is secured by the real estate until the loan is repaid. –The borrower is the mortgagee; the lender is the mortgagor. A mortgage can be a purchase money mortgage, used on the initial purchase of the real estate. In some circumstances the buyer may assume a mortgage loan for which the seller is responsible prior to sale.

6. Copyright © Houghton Mifflin Company. All rights reserved.31 | 6 Financing (continued) The borrower of a mortgage loan should be careful to assess all the terms of the loan including: –The amount of money being borrowed –The interest rate –The monthly payment –The term of the loan (how many years) –The right to prepay the loan and –The right of future buyer of the property to assume the loan Foreclosure is the right of the lender to take the real property and sell it should the mortgagor default. (Default means not making the mortgage payments.)

7. Copyright © Houghton Mifflin Company. All rights reserved.31 | 7 Financing (continued) Land contract: is an agreement where the buyer agrees to purchase land and pay for it over time. –When the final payment is made the seller transfers the title to the buyer. –A land contract allows the buyer to take possession when the contract is entered into. –The seller retains title until the purchase price is paid in full. –If the buyer defaults on the payments called for under the land contract the seller can take possession of the property and evict the buyer.

8. Copyright © Houghton Mifflin Company. All rights reserved.31 | 8 Title Examination and Disclosure Title to real estate is an extremely important matter. –A seller can transfer by deed only the interest he or she actually owns. If there are other claims against the property, the seller may not be able to transfer title clear of all encumbrances. To ensure the seller has complete title, the buyer’s attorney performs a search of the public records. The product of this search is often called an abstract of title. The abstract of title is a summary of all transactions affecting the real property over a period of years. It shows all claims against the property that may be outstanding, such as mortgages, unpaid taxes, liens, and anything else that can affect title to the property.

9. Copyright © Houghton Mifflin Company. All rights reserved.31 | 9 Title Examination and Disclosure (continued) A seller may protect his/her interest from any claims made against title by purchasing title insurance. Mortgage lenders often require, and a buyer should insist, that an instrument survey of the premises being purchased be provided by the seller. –This will provide a clear and accurate description of the land being purchased. –It will also allow any boundary line issues to be addressed prior to purchase.

10. Copyright © Houghton Mifflin Company. All rights reserved.31 | 10 The Closing Prior to the closing, the buyer should take the following steps: –Ensure that the property will be covered by insurance at the time the transfer is complete –Arrange with utility companies for service transfers –Make a final inspection of the property to ensure there have been no material changes to the property

11. Copyright © Houghton Mifflin Company. All rights reserved.31 | 11 The Closing (continued) Closing is the formal transfer of title to the buyer. If the buyer is borrowing money, the closing is often held at the office of the lender’s attorney. Otherwise, it is most likely held at the government office responsible for recording land transactions. The buyer is given a signed deed by the seller and, if borrowing money, signs all the loan and mortgage documents. Once the transfer is put into the public record of real estate transactions, the sale is considered complete.

12. Copyright © Houghton Mifflin Company. All rights reserved.31 | 12 The Closing (continued) At the closing adjustments are made for things such as property taxes. –Taxes are prorated and the seller pays to the day of sale, the buyer normally pays starting the day after the sale. The prorated portion of taxes prepaid by the seller are added to the sale price. A water bill that is billed quarterly will be adjusted so that the buyer pays only the bill from the point he or she purchased the property. After all adjustments, the buyer will pay any net amount due after adjustments and expenses, and the lender then pays the seller the mortgage proceeds.

13. Copyright © Houghton Mifflin Company. All rights reserved.31 | 13 The Closing (continued) The Real Estate Settlement Procedures Act applies to all closings on the sale of residential property. –At closing the buyer and seller must each receive a detailed accounting of the price, the costs involved, the adjustments made for tax payments, etc. –The act also provides the lender must respond in 20 days of a borrower’s written request for information or correction of errors.

14. Copyright © Houghton Mifflin Company. All rights reserved.31 | 14 Disclosure Formerly the rule in the sale of property was caveat emptor (“let the buyer beware”). –The person selling real estate had no duty to tell the buyer of any defects of which the seller was aware. –Most states have changed that rule. Sellers must now disclose to the buyer any known defects which might materially affect the value of the property, that a buyer could not reasonably discover. Many states now require the seller provide buyers with a comprehensive form that discloses the condition of the property.

15. Copyright © Houghton Mifflin Company. All rights reserved.31 | 15 Transfer of Title Title to real property passes when the seller delivers a deed to the buyer. –The seller is called the grantor –The buyer is called the grantee To protect the buyer there is a requirement that the deed be recorded in the proper public record office. –Provides notice to the public of the transfer of title to the property –A mortgage on the property is usually recorded in the public record at the same time the deed is recorded

16. Copyright © Houghton Mifflin Company. All rights reserved.31 | 16 Types of Deeds Quitclaim deed: passes whatever interest the seller has to the buyer. The seller may own all the property or none of it. –The seller is released from responsibility for any claims made by others against the property –No guarantee as to title is made Bargain and sale deed: passes to the buyer whatever interest the seller holds and guarantees only that he or she did nothing to disturb or harm title. –No other guarantees as to title are made.

17. Copyright © Houghton Mifflin Company. All rights reserved.31 | 17 Types of Deeds (continued) Warranty deed: transfers not only the seller’s title but also: Guarantees that the title is good and seller has the right to sell the property Guarantees that the property is free from any claims or interests of others Guarantees that he or she will do whatever is necessary to quiet title if a claim is made