Understanding Real Estate Legal Documents
For most people, the most complex transaction they will ever be involved in is buying or selling a home. The most tedious but important part of property transactions would be the understanding of real estate agreements, legal forms and documents that are required for selling and purchasing any property in the United States. Buyers and sellers must remember that laws change from state to state so make sure that all legal documents they attain be drafted to comply with the laws of your state. Our best advice would be to hire a real-estate attorney. Although using the services of an attorney can easily add several thousand dollars to the cost of a real estate transaction, it's often money well spent.
One of the most important documents in real estate transactions would be the “Contract for Purchase and Sale”. This document has various other names such as “contract of purchase”, “contract for purchase”, “and agreement of sale”, “sales agreement”, “purchase contract”, “sales contract”, and many others. It doesn’t really matter what it’s called as long as the document meets the requirements. This document is usually completed by the buyer but can be executed by either party.
The “Contract for Purchase and Sale” is generally defined as a contract for purchase and sale of real estate between the buyer and seller in which the seller agrees to sell and the buyer agrees to buy, under certain specific terms and conditions. The process first begins with an “offer” from a potential buyer. This offer will contain all the stipulations required by the buyer in order to purchase the property. The seller may accept or decline the entire offer as presented. The seller will then respond with modifications and adjustments to the “offer. This document is usually referred to as the “Counter Offer.”
Real Estate Disclosure
In recent years it has become necessary for the seller to provide the buyer with a list of known defects, conditions or any other information concerning the property. This is known as “Real Estate Disclosure Statement”. This document is neither a warranty nor a substitute for any inspections but is simply a declaration of what the seller knows regarding the property and its defects. (click here to read more on Real Estate Disclosures).
The next step would be to prepare an Escrow Agreement. This is a legal arrangement in which an asset such as cash, real property, or any other tangible assets that can be deposited into safe keeping under the trust of a neutral third party(escrow agent) which is then kept there until certain conditions have been met. The escrow agent will then deliver the asset to the party prescribed by the contract. During real estate transactions an Escrow Agreement is usually used to hold the buyers deposit so that the buyer will know that he/she is entitled to a return depending upon a contingency specified in the contract.
The documents stated above must be executed by the buyer and seller and the escrow agreement should be executed by the escrow agent. Each of these document should be carefully reviewed with great attention so that there will be no misunderstanding at the closing.
Post Contract, Pre Closing
Financing- The majority of real estate property today is purchased with the finance of a loan. Lenders estimates a value for which the borrower needs to purchase the property based upon an Appraisal Report. An appraisal is an estimate of real estate property made by a certified appraiser not involved in the real estate transaction. The appraisal is usually part of a loan application and is needed in order to get approval from the lender on a mortgage loan. Lenders need an appraisal for two basic reasons:
- Have a set idea of how much the borrower realistically needs.
- See if the property value is enough collateral for the loan amount.
(click here to read more on Property Appraisals)
The buyer must then obtain a commitment from the lender and work to meet all lender requirements. Most lenders usually require that the borrower put up the property as collateral. For this reason closing on the mortgage loan and closing of the purchase property must occur simultaneously.
Deed- The seller prepares the deed by signing it and has it witnessed and notarized so that the property can be transferred to the purchaser. The deed is then tendered to the buyer and filed with the government recording office in the local county so that the property is recorded in the buyer’s name.
Title Insurance- The buyer should then order a Title Insurance Commitment. This document indicates any existing liens, mortgages, judgments, or any other title defects the property may have in order to be cleared prior to closing. Before you purchased your home, it may have gone through several ownership changes, and the land on which it stands probably went through many more. For example, someone along the way may have forged a signature in transferring the title. Or there may be unpaid real estate taxes or other liens. Title Insurance covers the insured party for any claims and legal fees that arise out of such problems.
Around this time the buyer would be well advised to start the process of obtaining homeowners insurance, flood insurance or any other insurance policies that they will need to have in place before the closing. Here is some more legal document needed prior to the closing of a real estate property.
- Survey of the property which includes termite and building inspection
- Estoppels Affidavits from the mortgage holder allows the buyer to assume the obligations of the seller under their own mortgage.
- Real Property Tax- Check with the tax collector to make sure all taxes and assessments have been paid on the property.
One of the final documents used in real estate transactions is a Closing Statement. A document prepared by a closing agent describing the real estate transaction, including the escrow deposits for taxes, commissions, loan fees, points, hazard insurance, and mortgage insurance. This document is also known as HUD-1 statement or settlement sheet. This legal document sets out the exact amount of money needed to close the real estate transaction and transfer the title from the seller to the buyer.
If there is a mortgage loan being used to buy a portion of the purchase price there will be a Closing Statement for both the loan closing and the closing on the purchase of property and a Promissory Note which is a written document in which a borrower agrees promises to pay back money to a lender according to specific terms.
Certified Checks. Most closing agents require Bank Certified Checks for any payments due at closing. These checks are proof that the money is available when the check is presented.
The buyer and the seller finalize all the terms in the contract and then the property is all yours!!! The seller gives you the title in exchange for the contract purchase price. He also delivers a deed, title evidence and insurance, the property’s plat of survey, leases (if applicable) and proof of any required repairs based on the home inspection. We recommend that you attend the closing with an experienced real estate attorney.