Whether you are buying commercial or residential property, each real estate transaction is made up of five basic steps:
1] due diligence – conducting research about the property you intend to buy
2] contract – setting the rights and obligations of the parties to the transaction
3] financing – obtaining the necessary funds
4] clearing title – ensuring that the
property is not encumbered by liens or other restrictions
5] closing – delivery of the funds in exchange for the
Due Diligence -
As purchaser, you have identified a parcel of property for investment or for your residence. Real estate brokers may provide you with certain facts and figures regarding that property. Engineering or environmental inspections should be conducted and the economics of the property (income and carrying costs) researched thoroughly. The structure, fixtures and equipment/appliances should be inspected to determine if they are sound and in working condition and the anticipated costs of maintenance and repairs. Loan payments, real property taxes, insurance premiums and utilities should be budgeted. The property should be inspected for environmental hazards. Leases and service contracts should be reviewed. Certificates of occupancy and compliance with building and zoning codes should be verified. Tax consequences must be considered. In short, the due diligence period is the time to verify the information you have been provided and to determine whether you are making a sound investment. Know what you are buying.
The contract is the blueprint for the transaction. It is the legal document that sets forth the rights and obligations of the parties with regard to the sale and defines those rights and obligations upon the occurrence of various contingencies. It is the most important step in the process because the contract establishes the parameters for the ensuing steps in the purchase transaction, e.g., in what instances can either party cancel the contract, what must the seller do to clear title, what is required at closing. A clear and precise contract prevents misunderstandings, and disputes.
The bulk of the purchase price for real property is often paid with a mortgage loan. An application is submitted to the lender of choice and the property is appraised. Among other things, the lender considers the value of the property, the income and expenses, the loan-to-value ratio and the credit qualifications of the borrower in making the determination whether to issue the mortgage commitment. Mortgage brokers can be helpful in securing the proper type of financing, e.g., term, interest rate, amortization rate, prepayment privileges, and recourse liability. In commercial transactions, financing can be creative and take various forms utilizing techniques such as purchase money financing, assignments and consolidations and wrap-arounds.
In the standard real estate transaction, the seller must deliver marketable title. A title insurance company investigates the existence of title encumbrances and provides a report as to the status of mortgage and judgment liens, covenants and restrictions, compliance with municipal codes and the status of real property tax, water and sewer and other assessment payments.
Closing may have been scheduled “on or about” a certain date, providing either party a reasonable adjournment, or with “time being of the essence”, meaning no postponement is possible. In either event, this is the time for the purchaser to pay the balance of the purchase price in exchange for the seller’s transfer of title by delivery of a deed, all in accordance with the terms of the contract that was negotiated and signed in step (2). Payment is made by bank or certified check or by wire transfer. Closing is normally held at the office of the seller’s attorney or at the office of the lender or its attorney. An estimate of closing costs should be obtained prior to the closing date in order not to be short of funds.
A competent and experienced attorney can assist you in making the purchase transaction a trouble-free and satisfying experience.