Written by Soo Yeon Lee, Esq.
Buying and selling a house is one of the largest transactions in anyone’s life. In most instances, you will work with a real estate agent who will list your property, and an attorney who will guide you through the legal process. This article guides you through the selling process, from having a prospective buyer to a successful closing.
In most instances, once you decide to sell your house, the first thing you would have done is to retain a real estate agent who lists your property for sale. You would have already determined the listing price, taken photos of your home, and started showing. Then, when you receive an offer your real estate agent will call and let you know that you have an offer to review.
Once you receive an offer, there are five stages to go through:
1. Acceptance of Offer
When a potential buyer makes an offer, they will send you a contract with the amount of purchase price they are willing to pay for the property. Whether or not it is a cash or financed transaction will determine the speed and certainty of a sale. If there are some unusual terms, your real estate agent will point them out for your consideration. However, you do not have to understand all the terms of the contract at this time (that will be done in the next step). For now, if you like the basic business terms (purchase price, earnest money, closing date, financing/cash transaction, existence of other contingency), you will accept the offer. This is the moment that you will send the contract to an attorney for the next step forward.
The date you sign this contract and accept the offer is the date of acceptance. This is an important date because you only have five (5) business days for “Attorney Review” and “Professional Inspection” from this date.
2. Attorney Review
For the next five (5) business days, attorneys for both the buyer and seller will fill in any gaps in the contract and suggest different terms such as tax proration rate and other terms depending on the specific circumstances of the deal. This is called attorney review period. If there is any missing term, the attorneys for both parties will fill in and tie any loose ends left. This is accomplished by each attorney sending to each other an “attorney review” letter. The attorney review letter contains modifications to the contract that the attorneys would like to propose. Also during this time, your attorney will go over the contract with you and discuss the specifics. The contract is not yet firm and is subject to cancellation or being declared void should the parties not be able to reach an agreement on attorney review items.
This is an area the attorneys at Mauck & Baker can certainly help you with.
3. Inspection Contingency
During the same five (5) business days, the buyer will hire a professional home inspector and perform a thorough home inspection. Typically, the buyer will come back to the seller and request that the seller repair certain items based on the result of the professional inspection. The seller has the choice to either i) reject the buyer’s repair requests, ii) agree to repair, or iii) offer closing credit in lieu of repairs. This is usually a matter of negotiation between the parties.
Attorney review and inspection contingency usually run concurrently. Sometimes, attorney review and inspection period gets extended by mutual agreement of the buyer and the seller in order to resolve all outstanding issues. Once you resolve all the inspection and other attorney review items, then your contract becomes firm, subject only to the buyer’s financing contingency.
4. Financing Contingency
The contract remains contingent until the buyer secures a loan for the purchase. This is the last hurdle before a closing. If the buyer cannot secure a loan during this period of time, the buyer can still cancel the transaction and receive his full earnest money. For this reason, many sellers would like to see buyer’s pre-approval letter from lenders before they accept the offer in order to minimize the risk of the buyer not being able to obtain financing.
5. Closing
Once the buyer successfully obtains a loan, closing will be confirmed. Typically, the closing will occur at a title company. The title company provides closing services such as receiving the funds from the buyer’s lender, wiring payoff funds to the seller’s mortgage lender, and handling recording deeds and other important closing documents. On the closing day, the seller will receive the sales proceeds, sign a deed that transfers the legal ownership of the property to the buyer, and the buyer pays the full purchase price in combination of earnest money, loan, and/or his own funds.
The COVID-19 pandemic pushed the industry to go remote and many closings now occur remotely. The seller’s side can easily go completely remote with a little bit of advance planning (such as pre-signing the deed as the original deed is required for recording with the county recorder’s office).
Key Provisions
Below are some of the key provisions from the Multi-Board Residential Real Estate Contract 7.0. As a seller, you will want to review the following items closely.
4. Purchase Price/Earnest Money: You will see the total offer the buyer is making as well as the earnest money the buyer is depositing. The earnest money is usually held by the seller’s real estate agent until the closing.
5. Closing: You will see the proposed closing date here. This date is subject to change depending on the negotiation of the parties or in the event the buyer needs an extension of the financing contingency.
7. Financing
7(a) Loan Contingency: This clause has details about the buyer’s loan (such as the type of loan, the interest rate the buyer is willing to take, etc.) and the general timeline of this contingency. Multi-board contract 7.0 sets the default timeline as forty-five (45) days after the date of acceptance or five (5) business days before the closing. This clause also requires the buyer to act promptly to apply for a loan. In reality, this contingency gets extended by mutual agreement of the parties in the event the buyer’s loan is still in the works.
7(b) Cash Transaction: If the buyer does not need any loan, it is a cash transaction and the buyer will check off this clause.
9. Proration
9(a) Tax: Tax bills come a year later, which means that the final tax bill is not available at the time of closing. Therefore, real estate taxes are prorated at the time of closing. The most common tax proration rate is 105% of the last full tax bill but it could be lower or higher depending on the specifics of the property.
10. Attorney Review: It is five (5) business days after the date of acceptance. Therefore, it is important to send the signed contract to an attorney for review right away.
12. Professional Inspections: Inspection contingency is also five (5) business days. Most attorneys would like to keep the Attorney Review and the Inspection Contingency run concurrently so as to keep all contingent items open for the same time period.
15. Condominium association: If the real estate is a condominium unit, the seller has to provide various condominium documents such as the bylaws, meeting minutes, budgets, and paid assessment letter. Seller’s attorney generally orders from the association or the management company directly so the seller does not have to worry about putting them together.
18. Title: In exchange for the purchase money, the seller has to transfer a good title to the buyer. The seller obtains and pays for the title insurance policy for the buyer as part of the seller’s assurance. This is generally taken care of by the seller’s attorney and most real estate attorneys also act as title agents.
19. Plat of Survey: A plat of survey is a document that shows the exact boundary lines of the property. This is another item that the seller has to provide at his expense. Like the title insurance, the seller’s attorney handles ordering a survey. If you are selling a condominium unit, you do not need to provide a survey.
30. Sale of Buyer’s Real Estate: If your buyer has to sell their home first before they can buy, they will have checked off this clause.
36. “As Is” Condition: Sometimes the seller is selling the property as-is. The buyer should have checked off this clause if they are in fact buying the property in as-is condition. Buying as-is does not mean that the buyer is waiving the professional inspection. It just means that they will not request the seller to make repairs pursuant to the Professional Inspection clause.