Redesign of the Real Estate Transaction Process
Real Estate Transaction Process and Proposal for RedesignIt is true that, when involved in a real estate transaction all parties involved want it to go successfully from contract to closing; the catch is how much effort are they willing to contribute? There are obstacles that could prevent a real estate transaction from closing and that are why it is important to have an effective process in order to know how to overcome those obstacles. Real Estate Agents are independent contractors and do not get paid if they do not have real estate transactions that close. To be a Realtor, a member of the National Association of Realtors, there is a code of ethics that must be followed and Realtors have a duty of servicing their customers, both buyers and sellers. There are problems in the current real estate transaction process because some of the steps get skipped or there are low-quality standards of effort. Sometimes, there are transactions that cannot close because of factors Realtors cannot control, but there are few of those. Realtors have a duty to their sellers and buyers. It is extremely important for the Realtor to qualify their buyers and sellers of any real estate transaction, this prevents surprises and the possibility of the real estate transaction not closing. The time between contract and closing can be busy or slow depending on the contract dynamic.
Another key to a successful closing, is that the buyer’s Realtor is “driving,” in charge and aware what has been done and what needs to be done to make the transaction close! The proposal to redesign the current real estate transaction process adds steps to the process and is more detailed than the current process. It is true, the Buyer’s Realtor will have time involved in the transaction and wants it to close; therefore, being in charge to make sure all “checkpoints” are completed help prevent surprises at closing. It is very important that from the seller or buyer’s view that the Realtor made the job seem easy, even though it took a great effort to make the deal happen. A real estate transaction is one of the biggest, emotional, anxious, or fearful times of a buyer or seller and it is important to sustain the Realtor “name” and maintain the Realtor code of ethics.
The Current Real Estate Transaction ProcessGenerally, the current Real Estate transaction process begins with a potential buyer contacting a Real Estate Agent, also known as a Realtor. Then, the Realtor schedules an appointment to meet the buyer to grasp his/her desires. The Realtor performs a search and identifies properties in within the Buyer’s criteria. Then, the Buyer selects properties from the search and the Realtor will begin schedule showing times for the properties. The Buyer identifies a property he/she wants to purchase; therefore, the Realtor and Buyer have a discussion and negotiate what the Buyer’s terms are to present an offer. The Agent writes and delivers the contract and the offer is either accepted or rejected. If the offer is accepted, the Buyer puts an Earnest Money Deposit. If the Buyer is in need of a loan to purchase the property, he needs to contact a financial institution or a bank.
The due diligence period begins and this is when the buyer finds out about financing, reports, and other inspections on property. The Buyer finds out if he/she is approved for the loan. If he/she is not approved then the transaction is dead because of the contingency on “buyer getting financing.” If the Buyer is approved for the loan then the Title Company begins the Title Search on the property to warrant that they are not problems in chain of title. After the time delay of the appraisals and inspections are complete, and Buyer accepts the results, then the Title Company can being to prepare the closing documents. When the closing documents are ready, the Buyer and Seller sign them and this is where title and funds are transferred.
The first problem with the current process is if the Realtor did not properly qualify the Buyer by first determining what the Buyer could purchase based on their income, credit scoring, pre-qualified for a loan, or if they have any money to pay for inspections and other closing costs. If the Buyers are not pre-qualified for a loan, then how can they be sure they can purchase properties that the Realtor identifies? If the Buyer does not have any funds to pay for the title insurance, survey, home inspection, termite inspection, down payment, or any other fees and expenses that may generate as the Buyer’s closing costs, how can they purchase a property? These are all concerns and questions that are dealt with in the Realtor’s initial and first meeting with the potential Buyer. The Realtor is not to assume it is a perfect world and believe that the potential Buyers are aware of all of the aspects involved in a Real Estate Transaction.
Second, when the Realtor is writing up a contract for the potential Buyer to make an offer, it can get very complicated. The problems begin with is the Buyer aware what real property is part of the purchase and what real property is not part of the purchase. In addition, if the potential Buyer has to get financing, the contract will state that the Real Estate Transaction is “contingent” on Buyer getting “specified” financing. If the Buyer cannot get the financing then the transaction is dead because that was one of the contingencies; this is an example of a part of the “terms” in a contract. The Realtor has a duty to make sure all terms are as the Buyer specifies.
For example, if the potential Buyer submitted a $250K offer for a single family residential house and wanted to the kitchen appliances included in the sale, when the Real Estate Transaction closed and they move in, only two appliances are there, the built-in convection oven and the dishwasher. They were under the impression that they were also getting the refrigerator and microwave. There are other terms that the buyer and Realtor need to discuss other than the price of the offer. In Florida, there is a big controversy if Realtors should be able to write contracts versus attorneys writing the contracts to protect the Buyers and Sellers by being able to interpret the contract and advise them. Each year, thousands of real estate transaction experience high emotionalism, frustration, anxiety, threats of lawsuits, actual lawsuits, and substantial legal fees because of problems with contracts, agreements of sale.
Finally, complications can occur from the results of a home inspection, termite inspection, survey, appraisals, or any other type of contingency of the contract. In the beginning, the contract needs to state what the Buyer and Seller agree to pay for and how much, if there are repairs to be made.
Alternative MethodsAn alternative method to using a Realtor in a real estate transaction is a Buyer discovering a “For Sale by Owner” property. The Buyer and Seller usually negotiate themselves in lieu of saving money but this can be a disaster if the Buyer or Seller is not experienced in a real estate transaction. In addition, a Seller selling their property “For Sale by Owner” may have a lawyer that is handling the contract and real estate transaction. The majority of sellers will choose to use a Realtor because they are paying for a service and do not have to worry with a “For Sale by Owner” transaction and be on top and in charge of everything. It is to the seller’s benefit to use a Realtor because of the Multiple Listing Service System that Realtors input all properties listed by a Real Estate Broker, therefore more potential Buyers because there is more people who know that it is for sale. Sometimes, Sellers already have a buyer when they are ready to sell and may execute the transaction themselves or request a lawyer or realtor to write up the contract and the Seller and Buyer are responsible for all activities to make the actual transfer of ownership, with the help of a Title Company.
Interestingly, Sellers that sell their homes as “For Sale By Owner” have to market the property, qualify their own Buyers, and be very time flexible, and be knowledgeable in all subjects to get through to a successful closing. Sellers that are experience in real estate transactions can market “For Sale by Owner” and be successful but for the majority the best way is to choose a Real Estate Broker to market, advertise and sell the property. In some cases, attorneys do get involved because some transactions are way over the ability of the Realtor. When a situation does come up where an attorney is needed, the Realtor will notify the seller or buyer. In most cases, the need for an attorney is up discussed up front.
The New Real Estate Transaction Process
In redesigning the real estate transaction process, it too begins with a potential Buyer contacting a Real Estate Then, the Realtor schedules an appointment to meet and properly qualify the Buyer to see his/her desires and abilities. The Realtor performs a search and identifies properties in which the Buyer desires and is pre-qualified to purchase. At this time, Buyer will have provided a pre-approval qualification letter from their lender to present when with the Buyer’s purchase offers. Then, the Buyer selects the properties he/she is interested in from the list identified properties provided by the agent. The Realtor begins schedule showing times for those properties. The Buyer identifies a property he/she wants to purchase; therefore, the Realtor begins to do research on the property to make sure it suits the Buyer’s needs. For example, the question of current zoning, is there city sewer, city water? Some of this is done after the parcel is under contract and the results are not as the Buyer assumed. When the research is complete and the Buyer approves, then the Realtor performs a Comparative Market Analysis to see the sold comps that are similar in that area, to come up with a fair market offer. After negotiating all contingencies that need to be met and what the Buyer’s estimated closing costs will be the Realtor writes up the offer. Then, the offer is to be delivered and presented. The offer will be either rejected or accepted. If it is rejected and the sellers did not counter offer, then the real estate transaction is dead! If the offer is accepted, the Buyer gives an Earnest Money Deposit to the Title Company or Attorney who will be performing the closing. The Title Company or attorney begins the Title Search on the property to warrant that they are no problems in chain of title. IN addition, the Buyer stays in close contact with his lender, if he/she is purchasing property with a loan.
The contract states that there is a due diligence period begins at the effective date and is a specific amount of days to meet all contingencies. Customarily, but terms can be negotiated, the Buyer’s closing costs are Title Insurance, Home Inspection, Termite Inspection, Bank-related charges (if there is a loan), pro-rated share of taxes, homeowner’s insurance (if applies to property), survey, and deed recording fee. If the Buyer doesn’t meet all contingencies before the due diligence date is up or before closing date, there will have to be an extension of the contract, so, the contract will not be dead. If for some reason, the bank does not approve a report from an inspection or the property does not appraise, transaction is dead because of the contingency on “Buyer getting financing”, home appraising, or another stipulation required by a lender. If all contingencies are met and the lender approves all reports from inspections, surveys, and appraisals. Homeowner’s insurance should be in place if the Buyer is purchasing a home.
After the time delay of the appraisals, inspections, and survey(s) are complete, and Buyer accepts the results, then the Title Company can being to prepare the closing documents. The Title Company has to be in contact the lender, inspectors, surveyors, appraiser, or any the expense that will be disbursed at closing. Buyer has a final walk-through before closing to approve of the condition of the home, there may have had to be repairs from the results of the termite or home inspection. Upon approval from the Buyer, then they move to closing. When the Buyer and Seller sign the closing documents transfer of title and funds are transferred.
The key is to have no surprises near closing or at closing. For example, if the Realtor was not informing their Buyer about Homeowner’s Insurance and the day before closing it is realized, to make this transaction happen, hopefully an extension can be done. A lender will not lend money to a Buyer purchasing a home without homeowner’s insurance and to make things more intense, there is a hurricane coming and is in the “box” when all insurance companies seize to write any policies. That is a problem! With the new redesigned real estate transaction process, it will reduce the surprises at closing and transactions that fall through by requiring the Realtor to be on top of everything, it is so important! Deadlines, inspections, lenders, escrow officers, and clients are the “Big 4 Transaction Trip-Ups”.
A Buyer who is well-informed, well-prepared and represented by a skillful Real Estate Agent has a much better chance of achieving their goal of property ownership. It is important to understand that purchasing a property is a step-by-step process that should begin with you selecting a Realtor who will expertly guide you through the entire process. This new process will encourage and hopefully require Realtors to be more detail-oriented and utilize all tools available to prevent a closing from being dead. Realtors want deals to go through and the new process reflects that.
Challenges and Opportunities
If the new redesigned real estate transaction process is accepted there will be challenges and opportunities. First, some Realtors that have survived by using their own process that may not include taking charge and “doing it yourself to get the job done attitude,” will still continue to do their own thing until it is the required thing to do and not just the “ethical” thing to do. Amazingly, most Realtors do not use the tools that they pay annually to use. The education and training in the Real Estate Business is phenomenal! It enhances skills and ability to discover factors early in the transaction that could be potential problems later or at closing. The National Association of Realtors have guides, toolkits, articles, and much more that helps enhance Realtor skills and abilities to get to a successful closing. Annually, members of NAR pay dues and that is a service offered by the Association to assist and motivate Realtors to provide their customers with the highest level of service. In addition, Realtors have a local Association in which they live, they hold education courses in all areas of the Real Estate Business and help Realtors where they feel they may be lacking or know where they can improve.
Surely, more training or increasing the continuing education requirements so that there is more to do than a multiple choice questioned assessment every two years, at renewal time. Truthfully, the Realtors that are motivated do take advantage of what is offered to them and that is why only 5% of the Realtors earn over 75% of the commissions, in the United States. It is an opportunity to step-up and have a competitive advantage over competitors. It will be a challenge for the Realtors that lag behind and an opportunity for the Realtors that are self-motivated and willing to stay on top of their industry.