Behind the Scenes of a Real Estate Transaction

Congratulations! The offer you made on your dream home was accepted! Now what?

Hurray! You’ve come to terms with a buyer on your listing. What happens next?

I think we all have a general idea of what it means to buy or sell, but a signed contract is just the beginning.

When you have a contract that everyone agrees on, you have yourself a transaction. The word transaction describes the period of time between mutual acceptance (i.e. buyer and seller agree in writing on price, closing terms, etc.) and the moment the buyers officially become the new owners of the property. 

So much happens behind the scenes when you are buying and/or selling! I’ll break it down into basics:

Earnest Money, Honey

The first item of importance is earnest money. This is a (usually) refundable deposit that the buyer pays, which is held by the escrow company for the duration of the transaction. Earnest money is the buyer’s way of telling the seller, “I recognize that you are basically taking your home off the market while I try to buy your place. I am going to make my best effort to purchase your property and I will set aside this money which will become yours if I don’t honor our signed contract and/or I back out of the contract for no reason.”

If the buyer backs out of the sale, the money will either be returned to the buyer or given to the seller, as described by the contract. (Contingencies, such as inspection or financing contingencies, exist to protect the buyer’s earnest money.)

If the buyer completes the sale, the deposit goes towards his or her down payment and/or closing costs. The earnest money is usually due within just a couple of days, so it’s smart for buyers to turn in their earnest money ASAP. The earnest money amount is negotiable and varies, though it’s usually between $1,000-$10,000 and is typically around 1% of the sales price.

What to Expect When You’re Inspecting

Most sales contracts include a home inspection contingency. This means that the buyer is allowed to hire a home inspector to check the home and all the major components. The buyer can then request repairs or modifications or even a price change based on what the inspector discovers.

The buyer will need to get right on hiring an inspector. Any requests the buyer wants to submit to the seller for review are due pretty quick, generally in 5-10 days (depending on the contract). Depending on the property, the buyer may also want to hire someone to test the well/water quality and/or the sewer/septic lines. The buyer’s agent will attend all of these inspections and we encourage the buyer to attend as well. (It’s a great way to get acquainted with the new place, and the inspection report will make a lot more sense with some context.)

Once the inspection is complete, a report goes out to the buyer. The buyer and their agent will review the findings and piece together an inspection response that will be submitted to the seller for review.

Once submitted, a new negotiation period between the buyer and seller commences. This time period is not as open-ended as the initial negotiations over the price and contract terms — there is a pretty strict time limit to all the back and forth in the inspection period.

Every buyer and seller are different, but these negotiations are really meant to focus on major issues that are expensive and/or urgent rather than small matters of home maintenance. A buyer can ask a seller for whatever they want, but unreasonable requests (whether unreasonable due to quality or quantity) tend to alienate the seller and can make it difficult to come to a reasonable compromise.

Baby, Buy Buy Buy! Financing a Home Purchase

Once through the inspection period, the buyer’s lender will order an appraisal. An appraisal is a report on the home’s value prepared for the benefit of the lending institution. This report is meant to protect the bank from lending more than a property is worth and ensures that the buyer is purchasing a property free of basic health/safety hazards.

An appraiser will visit the property to take photos and make measurements. During the short inspection, the appraiser will check the size and condition of the property so they can determine the approximate market value; at the same time they will make sure the home is generally safe and has all of the necessary components that make a home habitable (an intact roof, heat source, potable water, etc.)

The resulting appraisal report will estimate a market value and will call out any issues that must be addressed as a condition for the buyers’ loan. Items that are usually called out include missing carbon monoxide and/or smoke detectors, peeling exterior paint, inadequate railing on decks or balconies, rooms without a heat source, and missing seismic water heater straps. The items called out are directly related to the buyer’s loan program requirements; different loans have different requirements.

At this time, the lender will generally require more information from the buyer so that the loan can be fully underwritten. If any financial information was estimated or given verbally at the time of preapproval, the lender will now need hard copies of everything: pay stubs, tax forms, business statements, etc.

Title & Escrow: The Best Friends You Didn’t

Know You Needed

The title company’s role in all of this is to verify legal ownership of the property and ensure that any legal matters attached to the property are addressed so that the ownership of the property can be transferred to the buyer. To reach this end, the title company produces a title report.

The title report is an exhaustive list of liens, easements, agreements, etc. that affect the property. This commonly includes road maintenance agreements, CCRs, and/or utility easements, but may include some surprises – the title report is essential to be sure the seller has the right to sell the property and to be sure the buyer isn’t inheriting any weird restrictions or encumbrances in the process of buying that will ultimately hinder their enjoyment of the property.

The escrow officer is responsible for preparing all of the documents that need to be signed by the buyer and the seller to transfer ownership of the property. Essentially, the escrow officer is the coordinator between buyer, seller, lender, and the county office. They handle paying off the seller’s remaining mortgage, obtaining signatures on all lender closing documents, completing and submitting essential tax filing information, submitting the transaction to the county so the buyer can be recorded as the new owner, and cutting a check to the seller for the proceeds of the sale.

It’s worth noting that title and escrow services may occur at the same office, but not always!

Coordinating a Sale: An Orchestra or a Circus?

A successful transaction relies on the successful coordination of buyers and sellers in addition to lenders, escrow officer, title company, inspectors, and appraisers at a minimum, and sometimes additional parties. Even when everyone is communicating well and respectful in their dealings, it takes an incredible amount of legwork to coordinate a successful closing. Closing day is truly a feat of achievement.

When Things Go South

I wish I could say that it’s always smooth sailing, but some real estate transactions are…complicated. Here are a few real issues that we’ve run into that required some real problem solving:

• A seller’s ex-husband was supposed to clear a loan he had taken out against the home when the couple was still married, but he didn’t and it wasn’t discovered until signing day.

• A buyer purchased a house full of furniture for their new place on a credit card a few days before closing; this skewed their debt to income ratio and they no longer qualified for the mortgage they were trying to secure to purchase the home.

• The appraiser called out a two-car garage as hazardous and as a result, a condition of the loan was that the entire structure be removed. It cost the sellers $10k to remove the garage and the buyer had to pay out of pocket to have a new garage built in its place after closing.

Who You Work With Matters

So much can go wrong, but when a transaction works, it feels like pure magic (even when it is magic born of blood, sweat, and tears). Buying and selling is not for the faint of heart, but with the right team and a good attitude, it can be a positive, transformative experience. My advice is to choose your team wisely.