04/24/07: Working With Real Estate Professionals
By Benny L. Kass
Q: My husband and I are in the market for our very first house. We believe that this is a good time to buy, especially when mortgage interest rates are still quite comfortable. We know that once we find a house we like, we have to enter into a real estate contract with the seller.
Who prepares this contract? What real estate professionals will we (should we) work with, and when do we get them involved in the transaction?
A: That’s an excellent question. Often, those of us in the real estate arena tend to forget that many people – especially first time home-buyers – have no real understanding of the real estate process.
There are a number of players involved in residential real estate, each of whom have different interests and take on different functions. Let’s look at this Cast of Characters:
- Seller: interested in obtaining the highest market price for the house. While some sellers may opt to try to sell their house without using a real estate agent, in most cases the seller will sign a listing agreement with a real estate brokerage company, giving the real estate broker the exclusive right to market and sell the house.
- Real Estate Broker: a broker is licensed by the State (or the District of Columbia) and is authorized to conduct the business of selling real estate – both commercial and residential. Typically, a broker will have agents working for him/her, and these agents are often the people who sit on open houses and show the seller’s property to prospective buyers.
- Real Estate Agents: agents must also be licensed to practice real estate. In most jurisdictions throughout the United States, in order to become a broker, the agent must have been licensed for a set number of years.
- Buyer: You and your wife – strangers in the complex world of real estate. All too often, buyers end up paying for everything, from the lender’s hidden extras as well as some illegal charges.
- Lenders: the people who lend buyers the money to purchase their house. Lenders are concerned primarily with market rates (the technical term is “yield”). Most lenders are legitimate; however, there are predatory lenders who literally prey on unsophisticated buyers, making mortgage loans which are designed – from the very outset – to fail, thereby causing the house to be sold at a foreclosure sale. Lenders will require a buyer to sign a promissory note, and a deed of trust. The latter – which is recorded on land records in the jurisdiction where your property is located – is the security for the lender and is also referred to as a “mortgage”. When you buy your house, and get a loan, you will receive a deed to the property. You will then deed the house in trust to a trustee selected by the lender. Should you default on your loan obligations, the trustee has the legal right to sell your property at a foreclosure sale. Hopefully, you will never hear from the trustee until you have paid off your loan and will have the trust deed released from the land records.
- real estate attorney: as a buyer, you have the right to retain an attorney of your choice to represent you during the entire transaction – from contract negotiation through settlement. The involvement of attorneys varies from state to state. In some jurisdictions, the lawyer only gets involved if problems arise; in other states (such as in the Washington metropolitan area) attorneys often get retained at an early stage, usually before a contract is entered into. The lawyer will also advise the buyers as to the best way to take title. If you are single, you buy as “sole owner”. If you are married, your best approach is to take title as “tenants by the entirety”. This is the strongest form of protection; if one spouse dies, the property automatically (by operation of law and without having to go through the Probate court) vests in the surviving spouse. Additionally, if there is a court monetary judgment against only one party, the house cannot be sold to satisfy that judgment. It is to be noted, however, that several years ago, the Supreme Court allowed the IRS to break a tenants by the entirety when there was a tax lien against just one of the parties. (US v Craft, 2002).
If you are buying with a friend or domestic partner, there are two ways to take title: joint tenants or tenants in common. You should discuss your personal situation with your attorney to determine which is the best route to take.
- title company/settlement attorney: when you are finally ready to buy your house, you will have to use a title company or a settlement attorney. At settlement – also called “closing” – a large number of papers must signed by the buyer and the seller. The seller signs a deed, which conveys the property to the buyers, and also the settlement statement (affectionately called a HUD-1). The buyer signs the loan documents, a Truth in Lending statement, a bunch of affidavits and disclosure forms, as well as the HUD-1. The sales proceeds are collected by the settlement company which makes the appropriate disbursements. If the seller has a current mortgage, that will be paid off. The government charges – such as recordation and transfer taxes – will be paid, as well as any real estate commissions. The balance of the sales proceeds will then be turned over to the seller.
This sounds complex, and for the novice it is confusing and often intimidating. But the various real estate professionals listed above can be helpful. You have to keep in mind, however, that with the exception of an attorney specifically retained by the buyer, most of the other players have one basic objective in mind: make the sale and get the commission.
You have asked when you should consider hiring a professional to assist you. Here are my suggestions.
You should first contact a mortgage lender, and determine the approximate amount of money that you can comfortably borrow. You don’t want to find your “dream house” only to learn after the fact that you just cannot qualify for a loan on that house. Many lenders will give you what is known as a “comfort letter” – i.e. a statement that you are qualified to purchase a house up to a certain amount. I caution you not to show that letter to anyone (other than perhaps your attorney) until after you have signed a sales contract.
Why? Let us assume that the comfort letter says you can qualify up to a $500,000 purchase. Why provide that advance notice to a seller? If the seller knows that you can qualify up to that amount, your chances of negotiating a lower price are significantly reduced.
Next, you should look around and locate the house you like. If you want to hire a “buyer’s broker”, that is your choice. But make sure that the agreement you sign with that broker does not in any way obligate you to pay that broker; should you sign a contract, the buyer’s broker will be paid by the seller, through a split of the commission with the listing broker. Additionally, while it may be legal, I strongly recommend that your buyer’s broker/agent not be with the same real estate company that has the listing from the seller. In my opinion, the possibility of a conflict is just too great, so why take that chance?
You have now located the house you want to buy. Your broker/agent (or the seller’s broker if you are not represented) will prepare a sales contract for you to sign. That’s when you should retain an attorney to review the contract. The attorney will assist you in understanding all of the contract terms, as well as including protections for you. For example, is the contract contingent on your obtaining a satisfactory home inspection from an inspector of your choice? Is the contract contingent on the house appraising at the contract price? In todays market, the appraisal ordered by your lender may be lower than the contract price, and you may have to come up with more money in order to go to closing.
The process takes time, patience and knowledge. A good professional can smooth the path toward a successful purchase.