Real Estate Transactions: 3 Stages of a Transaction

In this post, we will outline the basic steps of a real estate transaction in California. For the terms used in this post, see our previous post, “Real Estate Transactions: Basic Terms.” The steps in a real estate transaction can vary, but these are the steps of a typical transaction.

OFFER AND COUNTER OFFER

Once a prospective buyer sees a property they like, they will make a bid on the property. The broker has the buyer sign the offer, which usually includes a deposit. Then if the seller doesn’t immediately reject or accept the offer, the seller may make a counter offer.

You can think of this stage of the transaction as a bit like betting in poker, in the sense that you are now engaged in determining the stakes of the deal. Meanwhile, the seller may have multiple bids on the property, and those offers may raise the stakes. The parties can go back and forth modifying the price, requirements, or terms of the agreement until both buyer and seller are satisfied.

These offers and counter offers are official, signed documents that legally bind both parties once the offer is accepted. Once one party countersigns the offer, it becomes a contract. So you can withdraw your offer, but if the other party accepts your offer before you withdraw, you are now both bound to those terms.

OFFER = PURCHASE AGREEMENT

Given the above, it is crucial to understand that an offer essentially is a purchase agreement. This means that you need to be sure that all terms and contingencies are spelled out in your original offer. Once the offer becomes a contract, you cannot back out without being in breach of contract. An offer should not be something you don’t really want to commit to. It is also often a good idea to have your real estate attorney look over your offer before you make it—it is easy to end up committing yourself to a lot more than you think, which is often the cause of costly disputes later down the road.

REMOVING CONTINGENCIES

A purchase agreement likely includes contingencies for things like financing and inspections. During this period, the seller expects the buyer to fulfill certain obligations and the buyer expects the seller to do the same. So for example, real estate transactions are big ticket purchases that can run into the millions of dollars, which means most transactions require financing. The offer typically includes a time period within which the buyer must obtain financing. The seller is only bound to the contract if the buyer secures the financing within that period. (See “Common Contingencies” for more.)

ESCROW

All the documents and monies required for the completion of the sale are gathered in escrow, and the escrow officer only releases the documents and monies to the requisite parties once all conditions are fulfilled. The buyer and seller usually split the cost of the escrow officer. By routing everything through this “middleman,” the buyer and seller ensure that each party holds up their end of the agreement.

The documents deposited into escrow include inspection reports, title insurance, and the buyer’s proof of insurance on the property (usually required by the lender). At the close of escrow, the escrow agent ensures that all the vital documents of the sale are properly filed and registered, including registering the mortgage and deed with the courts. Brokers are also usually paid from the escrow. Once all provisions of the contract have been fulfilled, the seller receives the agreed upon funds, with the lender supplying whatever balance that was financed by the buyer, and the transaction is complete.