Step One: Negotiation

This is where offer and acceptance of a purchase price are negotiated between a buyer and a seller, the purchase contract is then signed, and the escrow period begins.

 

Step Two: Due Diligence

Here, an escrow account is opened to hold the good faith deposit until closing. The due diligence period is a timeframe allowed for the buyer (and the lender) to conduct a reasonable inspection of the subject property to ensure that it is in marketable condition. This is done by ordering a home inspection, a property appraisal, title search, and a land survey. If financing is involved in the purchase transaction, the lender will begin the loan qualification process concurrently during this period and will issue a “clear to close” when all of the supporting materials for the buyer’s (mortgagor) loan file have been collected and verified.  Meanwhile, the title company will work with the lender to prepare all of the necessary transfer docs: warranty deed, mortgage, promissory note, and escrow instructions (payoff instructions for the seller’s existing mortgage, if applicable) and other closing costs.

 

Step Three: The Closing

Making it to the closing table is an exciting time for most home buyers. The contract is fully executed,  loan funds are disbursed (usually by wire transfer from the lender),  the buyer pays the remainder of the purchase price and other closing costs  as necessary, illustrated on the Hud-1  settlement statement, and the seller tenders clean title   (and the keys) to the new homeowner. Congratulations!

4 Common Legal Problems That May Arise Prior to Closing

• Statute of Frauds

  • The SOF traces back to the original English Statute of Frauds of 1677. It requires certain types of contracts, such as contracts for the sale of land, to meet 3 requirements:
    • Terms of the Contract (Parties, Price, and Property Description).
    • The Contract Must be In Writing (whether it be a formal contract or an informal note handwritten on a napkin).
    • Signature (the contract must be signed by the party accepting the offer – the “offeree”).

• Marketable Title

  • Almost every contract for the sale of real property, unless the contract specifically expresses otherwise, includes either an express or implied promise that the seller will deliver a merchantable (marketable) title. That is to say that the title will be valid and free of any clouds (encumbrances).
    • Two Types of Unmarketable Title:
      • (a) Less than Fee Simple Ownership (ex: seller has a life estate);
      • (b) Encumbrances on the Title (ex: lot is subject to a “right of way” easement).

• Equitable Conversion

  • During the executory period (the time between the contract signing and the closing) the buyer is seen as the equitable owner of the property once the contract is signed.  As such, the buyer bears the risk of loss should the property be damaged or destroyed.
  • In order to minimize such risk, the buyer may request a provision in the contract that specified the owner bears the risk of loss should the property be damaged or destroyed prior to closing. (This makes the most sense as the seller typically has property insurance coverage already in place.
  • Another alternative is for the buyer to purchase an insurance policy on the subject property during the executory/escrow period. Generally speaking, the liability runs with the land. In other words, whomever is living in the home usually takes liability of loss or damage.

• Seller’s Duty to Disclose

  • Most jurisdictions require the seller of residential real estate to disclose all known defects that:
    • (a) materially affect the property value; and/or
    • (b) are unknown to the buyer and are NOT readily observable by a reasonable buyer.

 

Describing Real Property

 

There are 3 Principal Types of Property Descriptions Used in the Continental United States.

1. Subdivision Map:  Lot & Block Parcel #’s are recorded in public records.
2. Metes & Bounds:  Descriptions are based on topographic features.
3. Government Survey:  Public Land Survey System or PLSS (Section, Township, and Range)