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Anatomy Of A Real Estate Transaction
Once you’ve set your criteria and toured a few properties, you’ll know when the time is right.
The next step will be actually writing and presenting an offer. Usually offers need to be written and presented quickly to secure a property, especially if it's a great property or deal. The worst thing that can happen is you miss out on the perfect home because you are hesitating to sign the contract.
Review the anatomy of a real estate transaction before you ever need to write an offer, so you know what to expect and can have questions answered before the big moment. Fresh Look is happy to send you copies, just give our office a call at 206-966-4404.
A real estate transaction consists of contracts, responses & negotiation, mutual acceptance, an inspection, more responses & negotiation, an appraisal, more responses & negotiation, and if all goes well, a closing.
Read more for a description of each component:
Purchase & Sale Agreement (PSA)
The purchase and sale agreement is the formal offer contract. This document shows the terms of the offer including price, earnest money amount, and closing date. In Washington State, the PSA is a 5 page document, the first page outlines the details of the offer and requires a signature, the following 4 pages define the lines on the first page and each page requires an initial.
The PSA is usually contingent. This means there will be a few ‘outs’ or items that require due diligence by the buyer and the lender before fully committing to purchasing the house. The most common contingencies are:
Financing contingency: Outlines the type of loan, down payment, and states the purchase is contingent on lender approval including the appraisal.
Title Review: Allows the buyer time to review Title, examine any liens, encumbrances, or easements on the property. For example, perhaps the driveway is shared with the neighbor. This would be outlined on the Title, which may or may not be reason to withdraw the offer. Or perhaps, the current owner owes back property taxes. These issues need to be cleared up prior to committing to the purchase so there are no surprises at the closing table!
Disclosure Review: The seller is required to disclose everything they know about the property. The buyer then has the right to review these disclosures and withdraw their offer in light of new information with which they may not be comfortable.
Inspection Contingency: This document outlines the timeline to complete a property inspection. Typically, you will get a formal inspection after completing the Title and Disclosure Reviews. Once everything checks out on the paperwork side, you can feel comfortable paying the ~$500 for a formal, professional inspection conducted by a certified inspector.
Once the Purchase and Sale Agreement and all contingencies are signed by the buyer, the selling agent will present the offer along with the Pre-Approval letter to the listing agent. The listing agent will then do their diligence on the buyer, typically by confirming with the lender that financing is secure.
The listing agent has within 48 hours to present the offer to the seller (typically).
Mutual Acceptance & Earnest Money
If the seller agrees to the initial terms, the listing will prepare for signature & return to the selling agent. Now both parties have agreed, this is a fully executed contract and is referred to as Mutual Acceptance.
The mutually accepted contract will be sent to Escrow, referred to “opening escrow”, which means the Escrow Officer will create a new transaction file for the pending closing.
The buyer now has 48 hours to deposit their Earnest Money. These funds can be received by escrow in form of a wire transfer, check, cashier's check or money order. This is a very important step, if the buyer fails to deposit earnest money, the contract is void.
Response & Negotiation
Once all the due diligence is completed, the buyer and their selling broker will formulate a response to fulfill contingency requirements. This is another form that the broker will fill out and send to the buyer for signature, which will then need to be signed by the seller.
There are 3 options to respond:
Approve and move forward with original offer
Withdraw and cancel the entire offer
Counter offer. The counter could include a price reduction, request for repairs or improvements, a seller credit to pay for some issue found in the property OR any combination of the above.
This is the part of the transaction where the majority of negotiating takes place. Efficient communication with your broker is vital at this junction; Discussions are going back and forth between the seller to listing broker, listing broker to selling broker, and selling-broker to buyer. All parties are working to come to terms to put the deal together. A slowdown in communication can be frustrating and may cause the other party to back out, simply because they are annoyed.
Assuming parties come to agreeable terms, a final version of the contracts will be signed around and sent to escrow.
Loan Approval & Appraisal
Next, the lender sends out the appraiser, who determines the property value and whether or not they will approve the amount offered and the seller accepted. Additionally, they may have work orders that the seller will need to fulfill.
An appraisal is “an expert estimate of the value of something” In this case, the expert is the representative sent by the lender and they are estimating the value of the property. For more on the appraisal process, read Appraisal, what is it & why does it matter?
Final Walk Through
The last step before closing is the final walk through. The appraiser may need to come back to ensure the lenders work orders were completed; The buyer and/or selling broker may also want to walk thru to make sure the items agreed upon on the response contract were actually fulfilled.
Failure on the seller’s part to complete what they agreed to makes the contract voidable. Typically, at this point, everyone is committed to fulfilling their contract obligations, but it is always best to double check. Again, we want to avoid any and all surprises at closing and immediately following closing.
Closing is when the buyer and seller physically sign all necessary paperwork to transfer title to the property. Generally, Escrow will schedule an appointment for each party to come into the office to sign; Accommodations can be made with mobile notary if necessary.
At closing, all documents need to be notarized, so Photo ID is required. Buyer funds will also be required and escrow will inform you of the exact amount. These funds can either be wired in or in the form of a cashier’s check.
Once all documents have been signed by both the seller and the buyer, funds have been received from buyer and lender, then the Escrow Officer will proceed with closing procedures. All parties will receive a confirmation that the transaction has been “Released to Record” and issue recording numbers. This is the confirmation that the county has received everything they need to transfer title from the old owner to the new owner, in this case...YOU!
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