If you are an aspiring real estate agent, there are numerous concepts that you need to know in-depth to provide professional services to your clients. And understanding the real estate transaction is one field that can be complex and daunting. What is a real estate transaction? What does it cover and what are the roles of each party in the process? You might feel overwhelmed pondering over these questions.
There are several aspects – and parties – involved in any real estate buying/selling transaction. For a real estate agent, knowing these moving parts can be advantageous to understand the entire process. In this guide, we will cover everything you need to know about real estate contracts.
Real Estate Transaction: An Overview
A real estate transaction is an all-encompassing process wherein a buyer and a seller enter into an agreement to purchase or sell a property respectively. It is a broad term and involves a wide range of functions such as preparing the property for sale, receiving offers, inspecting & valuing the property, negotiating the sale price, signing the agreement, and closing the deal.
There are several steps that must be completed before closing the deal and transferring the title of the property to the buyer. The process can be complicated due to the intricacies of property rights, federal & state regulations, and legal procedures involved. Additionally, requirements and conventions vary significantly among different states and jurisdictions.
Real estate agents play an integral role in the completion of these tasks, ensuring adherence to property regulations, and protecting the best interests of the party in concern.
Basics of a Real Estate Transaction
Every real estate transaction has the following parties involved:
- Real estate agent
- Real estate broker
- Home inspector
- Mortgage lender
- Real estate attorney
- Title company
Together, they form the structure of a real estate transaction – facilitating key functions such as:
- Pre-contract: It involves making and receiving offers, negotiations, etc. before the contract is signed.
- Due diligence: This step involves a thorough inspection of the property to ensure it adheres to state & federal building regulations.
- Financing: Based on the sale price of the property, financial arrangements are made with the mortgage lender.
- Preparing for closing: The real estate attorney will prepare all documentation required to complete the contract.
- Closing: Real estate brokers ensure the transaction is closed to the party’s best interests and the title is transferred to the buyer.
- Post-closing: The role of a real estate professional also involves following up with the parties to the contract even after closing the deal.
Roles of Different Parties in a Real Estate Contract
Let’s understand how different parties to a real estate transaction work towards closing the deal successfully.
Seller: The seller puts his property on sale and works with a real estate agent to get it listed on Multiple Listing Services, online directories, and real estate websites. Before that, the seller should make recommended upgrades for the property and prepare it for staging. A seller’s rights also include negotiating the sale price and accepting an offer that best interests them.
Buyer: The buyer works with real estate brokers to facilitate the property search process and find a suitable offer. Based on the inspection report that the broker submits, the buyer will negotiate with the seller for a suitable purchase price and upgrades required on the property. If the seller accepts the purchase offer, the buyer will work with a mortgage lender to make necessary financial arrangements. After agreeing to all the conditions of the real estate contract, the title of the property is transferred to the buyer.
Real estate agent: A real estate agent or a broker typically works on behalf of either the buyer or the seller. They are responsible for guiding the buyer or seller through all the steps involved in a real estate transaction.
Home inspection companies: They play a crucial role in buying a home, thoroughly evaluating whether the property is in good condition and conforms with state & federal building regulations.
Real estate attorney: A real estate lawyer will arrange all documentation and prepare the contract according to the purchase/sale conditions determined. They will perform a property search to determine if it has a clear title and if there are no disputes related to it. Once confirmed, the attorney will complete the title process only after ensuring that both parties have fulfilled their duties. Some states make it mandatory to have a real estate attorney or a title company during the closing process.
Mortgage lender: Buyers work with mortgage lenders to get pre-qualified for a loan. The latter will also help with the paperwork required to apply for a mortgage.
Key Steps of a Real Estate Transaction
Step 1: Finding a Professional Real Estate Agent
The first, and most important, step of a real estate transaction is to find an agent or broker who can help navigate through the entire process. Real estate brokers play a vital role in closing a sale. Therefore, both the buyer and the seller should be diligent in their search to find a trusted agent who will work on behalf of them.
Step 2: List the Property for Sale / Find a Property (Seller/Buyer)
For a seller, the real estate agent will list the property via Multiple Listing Services and other online portals. They are also responsible for marketing the property to fund suitable buyers.
On behalf of the buyer, the agent will perform a thorough property search on preferred locations or neighborhoods to find the right option.
Step 3: Make an Offer
A real estate professional will be vital in helping the seller determine at what price they should list the property. At this stage, it is recommended to conduct a property appraisal to know what it is worth. It will help you make a fair offer based on the location, market conditions, neighborhood, and appraisal value of the property.
Step 4: Staging the Property
This is one of the most important steps of a real estate transaction – staging the property and making all necessary repairs or upgrades before the inspection. Depending on the state where the property is listed, the seller may also need to outline specific disclosures and details about the property.
Step 5: Get Pre-Qualified for a Loan
Here, the buyer needs to get pre-qualified for a mortgage to determine how much they can get as a loan and what type of property they can afford.
Step 6: Negotiations
For both the buyer and the seller, this is the most crucial part of a transaction. Both parties can review the price offer and then make a counteroffer with the terms & conditions and the price they want.
This step can be trickier for the seller because they are likely to negotiate with more than one buyer. They will ultimately choose the most lucrative offer and the “purchase price” will be agreed upon. At this stage, it is important to decide whether the agreed-upon price will include closing costs.
Step 7: Open an Escrow Account
In the next stage, the buyer or seller may work with a title company or hire a real estate attorney to handle the legal procedures of the transaction. The title company will open an escrow account on behalf of the buyer to secure their payment against the initial deposit, homeowner’s insurance, and taxes. An escrow officer will hold this money until the closing of the property.
Step 8: Home Inspections
The buyer or the real estate agent should mandatorily get a home inspection done to ensure the property is in good condition, adheres to the state & federal regulations, and what repair works need to be done. Based on the report submitted by the home inspection company, the buyer may negotiate with the seller to get the repairs done before moving in. In certain cases, the buyer may take responsibility for the repair work in lieu of a price adjustment.
Step 9: Conduct a Title Search
A title agent will perform a thorough title search to find if the property is clear of liens such as unpaid utility bills, taxes, or other fees. They will then provide the title commitment, which is essential to get title insurance.
Step 10: Sign Loan Documents
If the buyer is already pre-qualified, it will be easier to apply and get approved for a mortgage. They need to submit all required documents to the lender and once the loan is approved, they will sign the documents and make necessary financial arrangements before the closing.
Step 11: Deposit the Closing Costs
Another aspect of a real estate transaction that the buyer must fulfill is to review the closing disclosure and deposit the closing costs as agreed upon.
Step 12: Complete the Closing Paperwork
In the presence of a real estate attorney and the title agent, both parties to the transaction need to complete the closing formality. The lawyer will arrange all documentation and prepare the contract in the best interest of the buyer or the seller. Once the parties sign the paperwork and due diligence is performed, the title of the property will be transferred to the buyer.
Now that you have the complete real estate transaction process discussed in detail, you should feel confident as a real estate professional to efficiently manage the sale or purchase of a property.