REAL ESTATE OWNERSHIP AND TRANSACTIONS IN THE UNITED STATES
General Aspects of Purchase and Sale of Real Property
INTRODUCTION: REAL ESTATE TRANSACTIONS: IS A LAWYER REALLY NEEDED?
Ownership of land and improved property ("real
property" or "real estate") within the United States has long
been a goal and accomplishment of both citizens and noncitizens
who arrive in this country. Both in terms of investment and in
terms of acquiring a home, real estate transactions often form
the single largest purchase of the average person and can be an
excellent method to build up wealth. Recent tax laws have made
the ownership of a home even more beneficial, not only allowing
full deduction of interest on the home loan, but delaying or avoiding
entirely capital gains upon the sale of a residence. When these
tax benefits are combined with the steadily appreciating real
estate market in California over the past five years, ownership
of property has been seen to be the most intelligent major investment
of the average American.
In the United States any legal entity (individual,
partnership, corporation, or limited liability company, whether
citizen of the United States or not) can own any real property
and the laws of the state in which the property is located normally
control the legalities of how to purchase, lease, sell, and use
real property. Most understandings regarding real property are
required to be in writing or are unenforceable, thus the written
documents concerning property are of the highest import.
Increasingly over the past hundred years, the
government has imposed additional obligations and controls over
use of property, both in terms of allowed use ("zoning restrictions")
and in imposing liabilities for various types of misuse (violations
of building codes; violations of environmental laws such as improper
disposal of waste materials on the property; etc.) Further, especially
in the sale of homes, the government has imposed remarkably complex
requirements of disclosure of problems and potential problems
that the buyer may encounter, from defects in construction, to
disclosure to the buyer of the property's location in flood or
earthquake zones. The government has become a not so silent partner
to every real estate transaction and the parties that ignore that
fact take great risks.
It is an oddity that many people who would seek
legal counsel for drafting a small will or suing someone who dents
a fender on their car do not seek legal counsel when buying an
asset which they may own for decades, which may cost a million
dollars and which imposes thirty years of obligations on the buyer.
Most people execute purchase documents or leases without bothering
to carefully read the tens of pages of detailed legalese and only
obtain legal advice when something goes wrong...and by then it
is often too late. It is an obvious but often ignored fact that
someone, sometime took the time and money to draft the complex
form document that the real estate broker asks the buyer or seller
to execute; clearly whoever drafted that complex document presented
to the buyer or seller was drafting that long form for a reason,
not at random. For a party to execute such a form without a full
and complete understanding of its terms is equivalent to signing
a blank check.
As with much of law, the best time to obtain
legal advice is before a dispute or problem arises and it is a
simple fact that a major portion of the contractual litigation
in the United States involves real estate and alleged breach of
leases or purchase agreements.
While real estate brokers and agents usually
have form agreements, and while most landlords avail themselves
of the preprinted form leases created decades ago by unknown persons,
the fact of the matter is that these forms are usually antiquated,
often inappropriate, and invariably a shock to the persons bound
when they finally read them, usually long after signing them and
after a heated argument with the other party. Properly drafted
documents involving real estate are a necessity and more than
any area of the law, written documents are usually required
to form a binding obligation regarding real estate.
Another often ignored fact is that almost all
professionals involved in real estate transactions have their
own interests which do not necessarily conform to those of the
buyer, seller, lessor or lessee. Real estate brokers and agents
are usually only paid if a transaction culminates and are paid
more if the transaction is higher in price. Clearly, such parties
do not have an objective stance to take when examining the benefits
and detriments of a particular transaction. Likewise, the lenders,
the title companies, the builders, and the mortgage brokers are
all interested parties who seek to have a transaction culminate
simply because that is how they are paid.
If one seeks truly objective analysis of the
cost benefit and detriments of a real estate transaction,
and if one wishes an objective review of the contractual
documents, one is compelled to seek expert legal advice from an
attorney whose task is not to encourage the culmination of the
transaction regardless of the consequences. It is the fact that
attorneys so often advise of the negative aspects of transactions
that have given them the reputation for being "deal killers."
However, to consider both the good and the bad of
the transaction is precisely why lawyers should be retained in
real estate matters. One client put it well: often, the most money
that can be made from a transaction is made by walking away from
the transaction. Usually, the only professional who will so advise
is the lawyer reviewing it.
TYPES OF REAL ESTATE TRANSACTIONS:
While the variations on the type of real estate
transactions are as broad as the ingenuity of human kind, most
transactions involve the purchase, sale, lease, construction,
or subdivision of a piece of reality. The topics of commercial
leases, rental of residences, construction and of subdivision
of real property are each complex enough to justify a lengthy
article in themselves and are the topics of other articles on
this website. This article will, instead, concentrate on the general
topic of purchase and sale of real property.
The Basic Purchase/Sale Transaction of
Realty in California
The average purchase and sale of realty in California
is comprised of the following parties and entities:
1. The Buyer;
2. The Seller,
3. Real estate broker or agent representing either
the Buyer or Seller or, at times, both; sometimes two or more
brokers are involved in the transaction.
4. A lending institution which finances the transaction;
5. A title company which examines the "chain
of title" of the property to ensure that the Seller has title
to sell to the Buyer and, in effect, acts as an insurance company
insuring the validity of the title to Buyer;
6. The County Recorder who records the title
documents showing ownership has vested in the Buyer (usually with
a Grant Deed to the Buyer and Deed of Trust or Mortgage in favor
of the Lender);
7. Often a mortgage broker who arranges financing
between the Lender and Buyer;
8. Various experts who examine the condition
of the property and create a report before close of the transactions
(such as termite and dry rot inspectors; engineers, soil engineers,
9. The escrow agent who holds the money and the
title documents of all the parties and distributes them pursuant
to written instructions;
10. If a condominium or home owners association
is involved, that organization must be joined by the buyer.
STEPS IN THE TYPICAL TRANSACTION
While transactions may vary widely, the usual
1. A real estate broker shows a listed property
to a prospective buyer. The buyer decides he/she wishes to make
a bid and does so, usually rendering a few thousand dollar deposit
along with the bid and signing a form that the broker usually
supplies labeled, "Offer."
2. The broker presents the offer to the seller
or the seller's broker and they can accept it (signing on the
form), reject it, or counter offer with an offer
of their own. The counter may involve a different price or different
financing or requirements such as requiring buyer to pay for correction
of defects discovered by the inspectors, etc. or perhaps accepting
the Property "as is."
3. Each offer or counteroffer gives the other
party the right to accept. If they accept before
one withdraws an offer or counteroffer, both parties are bound.
All offers and counteroffers must be in writing to be legally
4. Once there is an acceptance, then within a
time period listed in the documents the buyer normally is required
to obtain financing, usually from a bank or savings and loan,
while various inspectors such as termite and dry rot inspectors,
soil engineers, etc, visit the property and render a written report
as to its condition. The offer normally requires that the property
"pass" all such inspections or the buyer may withdraw the offer
and receive the deposit back. Quite often if the property fails
to pass a particular inspection, the buyer and seller will negotiate
as to who pays for the repairs...often they split them.
5. If financing is not possible, the deal falls
through. If financing within the guidelines of the offer is achieved,
then the buyer is bound and must proceed with the deal.
6. All deposits, inspection reports, title documents,
down payment, bank documents and sums go to an escrow
officer who holds the monies and documents pursuant to
written instructions and only releases the various documents and
sums to the parties when the conditions are met. The parties normally
split the costs of the escrow officer. Buyer must also purchase
enough insurance on the property to protect the lender if the
property is destroyed or damaged and proof of insurance is also
deposited into escrow.
7. One of the documents deposited into escrow
is title insurance. This is a document prepared
by a title insurance company that warrants that the title is in
the name of the seller and that seller is empowered to transfer
title to the buyer.
8. The brokers are normally paid from the sums
deposited into escrow and the typical transaction has the Seller
paid in full by a combination of the bank (who takes back a "deed
of trust" or "mortgage") and the
down payment of the buyer. Down payments are normally
between twenty and thirty percent.
Thus, a typical transaction for a three hundred
thousand dollar structure will have the following computations:
Down payment will be about sixty thousand dollars.
The bank must lend $240,000. Closing costs (costs of escrow, title
insurance and the like) will be about six or seven thousand dollars
and the broker will be paid by the Seller between $15,000 to $20,000
for their fees. Buyers normally pay for the title insurance, half
of escrow costs, and the inspections. Realistically, a buyer in
the above scenario should plan on spending cash of close to seventy
thousand dollars to close the deal while the Seller will only
receive about $280,000 once the broker and the escrow people are
ROLE OF THE REAL ESTATE BROKER
In the United States the overwhelming majority
of transactions involve real estate brokers
who are licensed professionals who receive, usually, a percentage
of the sales price of the property being sold (the "commission.")
A broker has a fiduciary duty (duty of loyalty) to the person
represented and can only represent both the buyer and seller if
they both consent. Usually two brokers are involved and they split
the commission which is normally between five and six percent
of the selling price of most property. The commission is paid
from escrow upon the close of the transaction. The commission
is NOT set by law and may be negotiated with the broker.
Brokers take on the bulk of the work of the real
estate transaction, seeking property to show to a prospective
buyer or showing the listed property of sellers. Brokers often
have access to computerized listings of all property for sale
thus can quickly ascertain what property may be appropriate for
Brokers normally have written contracts with
their clients and those contracts, like their commissions, can
be negotiated but often are not since most laypersons are intimidated
by the lengthy form contracts presented to them by the broker.
Most such contracts give the broker an "exclusive" right to list
the property for a stated period of time, such as ninety days,
during which only the broker can sell the property.
As experts, brokers can often give valuable advice
as to the negotiations occurring, the proper price to bid, and
the dangers involved in the location of the property, etc. Brokers
normally have complex long legal documents which they suggest
their clients execute to both bid, accept bids, counteroffer and
culminate the sales transaction. These forms, written by the brokers'
associations, are quite complete and fully binding on the parties.
Just reading such documents can take well over an hour and most
buyers or sellers, in a hurry to place or accept a bid or counteroffer,
do not bother to carefully read the terms.
Indeed, most brokers simply use the forms without
careful analysis of their contents, having received the forms
from their associations and usually using them for years without
a second thought.
A broker earns nothing if a sale does not occur.
This necessarily creates a bias in the minds of most brokers in
that they seek to encourage culmination of any sales transaction.
Further, the higher the price, the more they earn. While this
may seem fine for the seller and bad for the buyer, it actually
also distorts their advice even to a seller since they will often
recommend costly improvements to the property to help it sell
which, of course, increases the sales price thus the commission.
Most brokers are honest and hardworking. It is
a competitive and stress filled job requiring long hours on weekends
and nights. Nevertheless, while their role is extremely valuable,
a wise seller or buyer understands that their economic position
within the transaction makes objective advice hard to obtain from
Either by use of a mortgage broker who seeks
possible loans from banks, or via the broker who usually has connections
with various banks, or on their own, the average buyer does not
buy real estate for cash but purchases it by borrowing most of
the sales price from a bank or savings and loan association. The
usual transaction requires a twenty to thirty percent down payment,
with fifteen to thirty year financing for the remainder of the
purchase price. Thus a three hundred thousand dollar home will
normally require a down payment of anywhere from sixty to ninety
thousand dollars plus a loan for the remainder, at interest rates
that vary but will normally be around seven to ten percent over
thirty years. Bank loans come in an enormous variety of terms
including variable interest rates, graduated payment schedules,
federally insured, etc, etc.
Several thousand dollars are also spent to arrange
the loan ("points") and to arrange for title insurance on
the title, perform the termite and dry rot inspection to determine
the condition of the property, and to obtain the insurance that
any lending institution will require before loaning on the property.
It is typical to spend perhaps five thousand dollars to "pay"
for the loan before the first payment is due.
Most loans in California are secured with a document
called a Deed of Trust on the property being
financed. Without going into detail, the Deed of Trust allows
the lender to foreclose and seize the property by an out of court
procedure should payment not be made in a timely manner. Normally,
the procedure for foreclosure is to record a Notice of
Default in the recorder's office which gives
the borrower ninety days to cure the default by paying all sums
due and the costs of the foreclosure recordation. At the end of
ninety days, if no payment has been made, the Notice of
Sale is recorded and the right to cure the default in
payment expires. The lender can then sell the property to pay
down on the loan.
In California, there is no deficiency
judgement; that is, assuming the property is a home which
the buyer can no longer afford, if the lender forecloses on the
property the lender can not also sue the borrower for
the difference between the proceeds of the foreclosure sale and
the amount due under the loan. Nevertheless, the borrower who
suffers such a foreclosure normally has his or her credit history
ruined for many years.
The tax benefits of ownership of realty and the
usual appreciation of property in California are added incentives
for the ownership of property but it must be recalled that real
property in California, over the past hundred years, has averaged
perhaps 8% appreciation a year and if appreciation for a period
exceeds that, it must be expected that there will be years of
depreciation to counterbalance the previous rise. In the last
twenty years real property has decreased in price for periods
of three to five years three or four times and it is critical
for the buyer to recall that a vibrant and expanding economy must
ultimately end, at least for a period. One must not automatically
purchase property relying on future appreciation to justify the
debt incurred since location, the surrounding economy, and just
plain luck can often have drastic effects on value of property.
Nevertheless, careful and planned purchase of
real property has been the typical method of appreciation of wealth
for new citizens and Americans alike and an expanding population
seems to assure that while cycles may cause temporary downturns
in the market, that overall the demand for realty will continue
Articles are to give the reader a general description of certain
areas of the law. Legal advice is necessary to apply these legal
concepts to your particular situation. The Reader should obtain
competent legal advice before relying on the Articles.
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