Agency Disclosure: In California, there is a mandatory Disclosure of Real Estate Agency Relationship. This document is to help consumers understand the type of agency relationship that exists between the Buyer or Seller and their respective agents. California State law requires all real estate licensees who are acting as agents of buyers or sellers of property to advise their potential buyers or sellers of the nature of their agency relationship and the rights and obligations it creates.
A listing agreement is an employment contract for personal service between the Principal Broker, represented by the agent, and a Principal. This agreement establishes a Fiduciary relationship. Because of this relationship, the agent of the seller may not tell the buyer certain facts about the seller. For example, if the seller is insolvent, this may not be revealed unless the seller gives written notice to do so. However the agent must inform the buyer of any material facts that might affect the value of the property. For example, if the property backs up to a school or freeway or has easements. A listing may be given for any length of time. It is effective the date the listing is signed unless otherwise specified. To be legal, exclusive listings must have a definite, final termination date.
Appraisal: This is a written estimate of the value of the property performed by a certified appraiser. It is not much different from a Comparative Market Analysis, or Brokers Professional Opinion which establishes the Fair Market Value of a property. Appraisers can be asked to testify in court. Lenders will require an appraisal to assure the value of the home is no less than what the buyer has agreed to pay. They base the amount they will loan on this appraisal.
Buyers’ Agent: A licensed real estate agent who has a fiduciary duty to the buyer.
Buyers Inspection Advisory: A CAR approved form advising the Buyer to conduct property inspections by professionals. It explains that the physical condition of the property is not guaranteed by either the Seller or the Agent.
Contingencies: Any condition of sale. The most common contingencies are appraisal, loan, home inspections, review of HOA docs and clear title. However a buyer may add any contingency to an offer. Sometimes buyers still have a home to sell. That can be a contingency. Keep in mind that a contingency weakens an offer, since it gives the buyer the right to nullify the contract until the contingency is removed.
Contract: A legal and binding document setting forth the exact terms and conditions of sale. It is legally enforceable and gives both parties rights and obligations. In California, brokers use standard CAR forms. They can be reviewed by an attorney for the buyer but usually attorneys are only hired for commercial or very high end transactions or when there is a dispute. After contracts have been signed by both parties, the property must be disclosed as in Escrow. Any subsequent offers will be considered only as back-up. When all contingencies have been removed, the status is changed to pending.
Counter Offer: A subsequent offer that replaces the original offer with changes in terms. This allows changes to some of the terms of the original deposit receipt and allows the remaining terms and conditions to remain. A contract negotiation often requires several counter offers.
Close of Escrow: The completion of all the provisions of the contract by a third party, the escrow company. The escrow is complete or perfect when all funds are deposited and dispersed. Real estate taxes or prepaid items are prorated and adjusted on a per Diem basis. All underlying loans are paid off. Broker commissions are paid. The buyer must have a binder for Homeowners’ Insurance, unless it is an all cash transaction. All final deposits due Escrow must send via wire.
Deposit Receipt: Also known as the Contract or Residential Purchase Agreement. A deposit of money or items of value must accompany a deposit receipt for it to be valid. It is an offer to purchase a specific property under certain terms and conditions. It becomes a binding contract on both the buyer and seller when acceptance is communicated.
Environmental Hazards: Homeowner Guide to Earthquake Safety must be provided to all buyers of one to four unit dwellings built before 1960. A disclosure form must be filled out by the Seller. The law also requires the Seller to certify that the water heaters are strapped and secured as per Uniform Plumbing Code. Lead Paint Disclosures are required for homes built prior to 1976. Carbon Monoxide and Smoke Detectors are required for residential sales.
Escrow: A neutral third party used to process the paperwork and money involved in a sale or other real estate transaction. The purpose is to meet the terms of the contract and assure that all the agreed to conditions have been performed.
Exclusive Right to Sell: An agreement given by the Seller to the Broker under which an exclusive right is given to list for sale for a specified period of time. The Broker may offer compensation to other Brokers, on a co-broke basis, as authorized by the seller. If a sale or lease is made by the owner or any other broker during the term of the agreement, the Broker holding the Exclusive Right to Sell is entitled to compensation.
Exclusive Agency: An agreement given by the Seller to a Broker under which an exclusive right to sell is given to the exclusion of other brokers. However if the owner obtains a buyer on his/or her own, there is no commission due. If the sale is made by any cooperating broker during the term of the listing, the broker holding the exclusive agency is entitled to a commissions which is then split with the other broker.
Financing Options for Buyers: Conventional loans offer the best rates and longest pay back periods for buyers with good credit. They have terms of 15, 20 or 30 years. Adjustable Rate Mortgages change rates according to a predetermined adjustment period. These loans generally offer very attractive introductory interest rates. There are now ARM’s with 3, 5, 7 or even 10 year first time adjustments. These are very appealing to buyers who know they will not be in one location very long. ARMS offer an opportunity to purchase a house with a low introductory rate, thereby raising the amount the buyer can qualify for and possibly raising the loan amount. Both of these types of loans can be processed directly through a bank at the retail lending rate. Mortgage brokers work in the wholesale market and can place loans with hundreds of banks. They will “shop” the loan out to many different lenders in an attempt to get the best loan for their customer. They get a fee, which is paid by the bank, for their services. The consumer is quoted a rate that includes all charges and is usually on par with the regular retail rate. Sometimes there are additional points to pay. Increasingly popular are the Internet lenders (e-Brokers), who qualify and process all loans on the Web. The advantage is usually a lower rate but the big disadvantage is the lack of personal contact and help with the loan application process.
Flood Insurance Certification: If a property is in a flood plain, established by the Federal government, flood insurance is required by the lender. Flood zone certification is sometimes required to obtain clear title. This will show whether or not the property is in a flood zone and whether it requires flood insurance. Since the flood maps have all been redone, it is entirely possible that a house that has never required flood insurance in the past, may show up in a flood zone and therefore be required by the bank to carry this extra insurance.
Home Inspections: Ordered and paid for by the Buyer, these general inspections are performed by licensed or unlicensed specialists skilled in evaluating a home. Who pays for repairs indicated as a result of inspections? It is usually negotiable. Some listings are “AS IS” meaning that the Seller will not pay for any repairs. If possible, the Buyer should review all Seller disclosures before making a written offer. In most cases the Seller and the Buyer are able to come to terms. The Buyer and Seller may decide to compromise, with both sharing the costs of repairs, or the Seller may pay for repairs. Or the Buyer may decide that the issue is not important enough to risk losing the home. A good way to protect against major repairs during the first year is to purchase a Home Warranty.
Mortgage: An instrument in writing, duly executed and delivered, that creates a lien upon real estate as security for the payment of a specified debt. The Mortgagee, usually a bank or lending institution, is the party who lends the money and takes a mortgage to secure payment. The Mortgagor, usually the Buyer, is the person who borrows money and gives a mortgage on the property as security for the repayment of the loan. Mortgages are not usual in southern California. Instead we have Deeds of Trust.
Multiple Offers: In a sellers’ market, when there are more buyers who want to buy than there are sellers who want to sell, the problem of multiple offers arises. A listing agent is obbligated to present any offers to the Seller at any time unless instructed otherwise by the Seller. It is the Sellers’ decision to entertain several offers at one time or to only negotiate one at a time. Most corporate sellers request “best and final” offer and then chose one offer.
Private Mortgage Insurance (PMI): Insurance required by lenders to insure any amount of the mortgage that represents more than 80% of the appraised value. This insurance is a second lien on the property and has an additional monthly premium which is generally at a higher rate than the 1st mortgage. It must be paid off in full before the bank will release the lien. Many borrowers have found it difficult to get the PMI removed.
Real Estate Transfer Disclosure Statement: The law requires sellers of residential property (one to four units) to provide this form to prospective buyers. It identifies items of value attached to the property and states whether these are operational. It is also where problems of any kind that might adversely affect the value of the property are to be disclosed. This statement must be prepared by the seller and delivered by the agent to the prospective buyer.
Seller’s Agent: The listing agent always represents The Seller.
Survey: A drawing showing the boundaries of the property and the placement of the houses and any structures. In many states banks require a survey of the property. This protects and informs them and the Buyer of any easements or encroachments that would affect home's value. In southern California, surveys are not routinely performed. The Buyer must pay for either an update or an entire new survey. They can be expensive. A lot line survey is advisable if there is a question about a boundary,
Title Insurance: A policy of insurance which indemnifies the holder for any loss sustained by reason of defects in the title. Title insurance insures that the Seller transferred the property free of any liens or encumbrances. In order to verify clear title, a Title Search is ordered. In Orange County, the cost of the title insurance policy is a cost to the Buyer. The lender may require their interest to be insured as well. Any additional title insurance for the lender is also a cost to the Buyer.
Title Search: An examination of the public records to determine the ownership and encumbrances affecting real property. The Chain of Title will show the history of all conveyances and incumbrances affecting the title as far back as records are available. The Title Search is ordered by the Title company and identifies who needs to sign the Grant Deed to convey the property. The search will show any recorded easements or encroachments.
Trust Deeds: Trust Deeds are used in California as the customary financing instrument. This Deed of Trust is a security device that makes the real property collateral for the promissory note. A Trust Deed needs a Note for security. This Note is a negotiable instrument but the Trust Deed is not.
Trustee: A neutral third party who receives the Trust Deed. One who holds property in trust for another to secure the performance of an obligation. In the event of a default, the Trustee can sell the property and transfer the money obtained at the sale to the Beneficiary (the Lender) as payment of the debt. Trust Deed Sale.
Trustor: One who deeds his property to a Trustee as security until the obligation under the terms of the deed of trust have been met. The person borrowing the money, usually the Buyer. An owner of property becomes the Trustor when refinancing a home.