Summary of the Process
The process of buying or selling a home is filled with a mixture of emotions and to most buyers and sellers it is a mystery they are involved in a few times in their lives. A confusing set of terms and concepts are thrown at them by people (real estate agents, lenders, lawyers) who use them every day and are quite comfortable with them. Let's try to put these terms and concepts into the framework of a home transaction to help dispel the mystery you are facing.
Before the process begins the principals, the buyer and seller, have plans and decisions to make. For the seller these include the price to ask, the preparation of the home for sale (what are its good points, how can it be made more attractive), how to market the home (listing it for sale through a licensed broker or selling it for sale by owner), and how to fit this sale in with moving to a new home. For the buyer these include family needs, preferred location, price and financing, possible use of a licensed real estate agent as a buyer agent, and coordination with moving from a current home or apartment.
Once the plans and decisions have been made the process of looking on the part of the buyer and marketing on the part of the seller goes forward. The goal of this process is to have an offer to purchase made by the buyer on the seller's property. The offer contains the terms and conditions on which the buyer is willing to purchase the property. These include price, timing of closing and occupancy, contingencies (conditions which must be met before the buyer is legally obligated to buy the house), disclosures and covenants (special promises that are a part of the transaction). The seller must evaluate these terms and conditions and, if they are acceptable, the seller accepts the offer; if they are not the seller may "counter" the offer, that is make an offer of the terms on which the seller will sell the property. If more than one buyer is interested in the property, there may be a multiple counter offer, in essence asking the interested buyers to revise their offers to fit the seller's terms.
The offer is critical. It determines if there will be a sale between the specific buyer and seller and on what terms and conditions the sale will be made. The parties cannot be too careful in working out its details. The offer is generally made on a standard form, the WB-11 (or WB-14 if it is a condominium unit) which is the State-approved contract for which real estate licensees must use. It is also used where no licensee is involved because it covers the various aspects of the transaction well. If a real estate licensee is involved, usually that licensee will draft the offer. In that event the buyer and seller should consider whether they want their attorneys to review the offer before it is binding. If no licensee is involved, the buyer or the buyer's attorney may draft the offer. Again, special care is needed to be sure it is completed, understandable, and legally enforceable. There are also forms for counter-offers, multiple counter-offers, and amendments to the accepted offer and the same help is available to draft these documents. The goal is to come up with a document which clearly spells out all of the important terms of the agreement between the buyer and seller.
Once the offer is accepted and a contract is in place, the contingencies must be met and the covenants fulfilled. The most common contingencies are financing and inspection. The buyer has to try to get the financing outlined in the contract (or any other financing that the buyer finds acceptable). This means visiting the lenders to see if the amount of the required financing at the interest rate in the offer is available. The lender looks at two things: will the income and debts of the buyer allow the buyer to afford the level of mortgage loan being sought (and on this basis a lender will issue a "prequalification" letter) and does the property have sufficient value to protect the lender from loss in the event the buyer defaults and the mortgage is foreclosed. If both the buyer and the property measure up, the lender will issue a loan commitment letter which is given to the seller to meet the financing contingency. If the buyer cannot obtain financing that meets the contingency, the offer may be rescinded.
The inspection contingency is met by buyer hiring a home inspector who goes through the property to see if there are ÔøΩdefects.ÔøΩ Not every problem in a home is a defect as defined in the offer; only major problems count and if there are any, it may be necessary to renegotiate the contract, arrange to have the defects cured (the offer has optional wording which either allows or denies the seller the right to cure a defect), or the offer may be rescinded.
There may be other contingencies depending on the interests of the parties and the nature of the transaction. Contingencies are protections; if they are not met, the offer is subject to rescission by the party they are designed to protect. It is critical that an offer clearly spell out what protections it contains, how these contingencies can be met and what happens if they are not met.
Covenants on the other hand are promises related to the transaction. It may be that the house will be repainted or the porch railing repaired or that the seller will leave the canoe for buyer. While it is important that these promises be clearly stated, generally they are not as important as the contingencies and if there is a failure of performance they can be handled by money damages or an escrow. An escrow is the holding of a sum of money (often one and one-half times the cost of the performance) to assure that something is done or to pay for it being done. Frequently the title insurance company will agree to hold escrows, but it is important that it is clearly defined what the escrow covers and what evidence is required to allow the payment of the escrow to one party or the other. Escrows usually are set up at the closing of the transaction.
Once the contingencies have been met, and usually they are for the buyer's protection so the buyer has the primary responsibility for meeting them, the transaction can proceed to closing. On the buyer's part this requires assuring that the full purchase price is available (from the mortgage loan and down payment) and arranging for property insurance. Both parties have to make arrangements for moving, making address changes, new telephone connections, and utilities (the seller should arrange for special utility readings, including water, on or shortly before closing and the service should be shifted to the buyer). The seller has to order title evidence, generally a title insurance commitment, and arrange for a closing (most often at the office of the title insurer or lender). If the seller has an existing title insurance policy this should be made available to the new title insurer to get a discounted premium.
Various documents are circulated among the buyer, seller, lender, and the real estate licensees and attorneys, if any are involved, before closing. Basically these are designed to assure that the transaction is ready to close, that is all of the preliminary matters have been completed. A settlement statement (or HUD-1) is sent out to show the financial aspect of the closing and let the buyer know that funds to bring to closing (these must be in ÔøΩmoney-goodÔøΩ funds, a bank check, money market check or the like).
The title insurance commitment shows the status of the title to the property, who owns it and what liens (mortgages, judgments) and encumbrances (easements and restrictions) have been filed against it. A number of these can be cleared at closing or accepted as appropriate; buyer's lawyer should review the commitment.
In Wisconsin the parties (or their representatives in some situations) attend the closing. If there may be final details to be negotiated it is important that they be available to do so. The seller signs the deed, the transfer return (a report on the fact of the transfer of title and calculation of a transfer fee paid on the transaction), the settlement statement, and usually some affidavits regarding real estate title and the closing process. The buyer generally is busier at closing having the settlement statement, transfer return and affidavits to sign as well as the loan documents which include the note (evidencing the amount borrowed), the mortgage (which gives the lender an interest in the property to guarantee payment of the note), and a frustrating pile of other documents whose purpose and need is often obscure, but without which the loan proceeds will not be disbursed. The buyer must deliver the down payment and evidence that the property insurance is in place; the seller delivers the deed (that is the moment that the sale officially takes place) and keys and garage door openers, etc. If the seller is staying on the property, special arrangements are made for that.
That's the process. After closing the buyer owns the property and, unless special arrangements have been made, has the right to move in. The seller gets a check for the net proceeds as shown on the settlement statement and the sale is done. After the deed is recorded (this puts the buyer's interest in the property on the public record at the Register of Deeds office at the county courthouse) it will be returned and the title insurance company will issue a policy of title insurance to the new owner. The deed is nice for sentimental purposes; the title policy is key for protection in the event of a challenge to the title.