Know the REAL DEAL before you sign!
The intent of this page is to provide clients with more knowledge and a clearer understanding of how things really work in a Real Estate transaction these days. What follows is a breakdown of the most important steps in a sale, including definitions, Common Misconceptions and what we call The Real Deal. The Real Deal explains how these concepts work in actual practice so that sellers have realistic expectations and a good understanding of the sales process before they accept an offer. It is important to keep in mind that The Real Deal reflects how most sales go, but of course, each sale can vary depending on the circumstances.
OFFER TO PURCHASE:
Definition – A document that outlines the main terms (price, dates/deadlines, deposit amount, etc.) for the purchase between a buyer and seller. It is considered to be “legally binding” agreement once executed by both parties
Common Misconception – Offer is hand delivered to listing agent by the buyer’s agent with a deposit check.
The Real Deal – Offers are usually submitted via email directly to the listing agent or uploaded online to the listing brokerage by the Buyer’s Agent. Sellers can accept, reject or make a counter-offer. When both parties reach an agreement on the terms and the offer is executed by the seller, it is emailed directly to the buyer’s agent by the listing agent. Once it is executed by the buyer and seller, it becomes a legally binding contract. Practically speaking the offer is more legally binding to the seller than the buyer if there are contingencies such as a home inspection as outlined below.
DEPOSITS:
Definition – The deposit is also known as “earnest money” and it is usually held in escrow by the escrow/title company. Deposits typically range from 1-3% of the purchase price.
Common Misconception – Checks are hand delivered from the buyer’s agent to the listing agent along with the Offer also known as the Residential Purchase Agreement.
The Real Deal – Most earnest deposits are wired to the escrow company directly. Brokerages and Agents are discouraged from handling checks as that is considered trust fund handling and requires special handling under real estate laws. As explained in our Escrow Policy, if a buyer defaults on the contract and there is any dispute over the deposit, a mutually agreeable release must be executed by all parties before any funds can be returned to the buyer or given to the seller. Sellers cannot automatically keep the buyers initial deposit for breach unless the Buyers agree to release it to the sellers or there is a settlement or arbitration awarded.
LOAN PRE-APPROVAL:
Definition – A Pre-Approval is a preliminary approval to obtain a loan. Buyers who plan to obtain a loan should provide this along with their offer.
Common Misconception – Buyers are completely approved for their loan once they have a pre-approval and nothing can go wrong.
The Real Deal – PRE is the key part of ‘pre-approval’ to pay attention to. A buyer cannot apply for a full approval until they find a home. If buyers provide a pre-approval from a reputable loan broker and company, chances are they will be able to actually obtain the loan, as long as they don’t have a life changing event such as job loss, Credit Change, etc.
PROPERTY INSPECTION CONTINGENCY:
Definition – This is the period of time that buyers have to inspect the home and conduct their due diligence about the neighborhood. The deadlines for inspections and type(s) of inspections to be conducted are included in the Offer to Purchase.
Common Misconception – Buyers cannot attempt to renegotiate or back out of the purchase following or as a result of an inspection.
The Real Deal – After their inspection(s) buyers have the right to proceed with the sale, renegotiate purchase terms, or back out of the sale. If parties are unable to come to an agreement, buyers are entitled to the return of their deposit. Buyers sometimes use the inspection contingency as a means to renegotiate their offer terms. If this occurs, we will advise you accordingly depending on the circumstances.
RESIDENTIAL PURCHASE AGREEMENT (RPA):
Definition – An extensive, legally binding contract between the buyer and seller. This agreement defines what each party must do prior to and up to the closing in order to complete the sale. It has clauses to protect both buyer and seller.
Common Misconception – Once the Residential Purchase Agreement is signed, the deal is done and nothing could go wrong.
The Real Deal – Once this is signed you have crossed a huge hurdle and the sale usually occurs. However, there are circumstances in which a party fails to perform their obligations under the Residential Purchase Agreement. If this occurs, we will advise you accordingly depending on the circumstances.
APPRAISAL:
Definition – An appraisal is an evaluation of a home’s value conducted by a licensed appraiser that is hired by the buyer’s loan company. The purpose of an appraisal is to allow the lender to ensure that the home’s value is enough to warrant a loan in the amount that the buyer is seeking.
Common Misconception – Buyers use this to get a lower price or it is another inspection.
The Real Deal – Buyers have no control over the amount of the appraisal and it is not another inspection. Most of the time appraised values reflect the same amount the buyer is paying for the home. Appraisals sometimes come in too low; this is more apt to happen when there is a lack of comparable sales in the area. If the appraisal does happen to come in too low we will advise accordingly depending on circumstances.
LOAN CONTINGENCY DATE:
Definition – A provision in Residential Purchase Agreement which specifies the date and time by which the buyers must have their loan commitment.
Common Misconception – If the buyers do not get their loan by this date the seller can keep the buyers’ deposit.
The Real Deal – If buyers notify the seller prior to the contingency date that they need additional time to obtain their loan or that they were unable to obtain a loan, they can terminate the sale and get their deposit back. However, if the buyers are denied a loan after removing their loan contingency the seller is usually entitled to keep all or a portion of the deposit. Please keep in mind that the no funds can be released until all parties sign off on the escrow forms.
CLOSING DATE:
Definition – The date on which the deed is recorded and transferred to the buyers name, and buyers officially take ownership.
Common Misconception – Seller can remain in the home after this date, or seller can easily change this date after signing a contract.
The Real Deal – This is a firm date in the Residential Purchase Agreement that can only be changed by contractual amendments. Sometimes loan officers can cause delays in the loan processing and then cause escrow closing to be delayed. Sellers are expected to be 100% moved out by the closing date unless they have special License to Remain in Possession agreement with the Buyer.
This document is for informational/ educational purposes for CA transactions only and is not a predictor or guarantee of anything.
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