Residential Real Estate Transactions

Understanding the legalities of real estate transactions will make home ownership smoother

By Andra DelMonico, J.D. | Reviewed by Canaan Suitt, J.D. | Last updated on September 4, 2024 Featuring practical insights from contributing attorney Jeffrey S. Marks

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You are ready to make the commitment and become a homeowner. Now what? While the first step of hiring a realtor seems obvious, there is much more home buyers need to know when purchasing residential property. Owning real property requires a large investment, which usually means taking out a large loan called a mortgage. Understanding how residential real estate transactions work will make owning your first single-family home smoother.

What Is a Residential Real Estate Transaction?

A real estate transaction is the process of a property owner giving their ownership rights of a property to someone else in exchange for monetary value. While single-family homes are well known, several other types of residential real estate exist. Examples include townhomes, duplexes, split levels, condominiums, co-operatives, row houses, mobile homes, and apartments.

Jeffrey S. Marks is a top-rated real estate attorney for Busse & Busse law firm in Arlington Heights, IL. He points out the importance of buyers and sellers protecting themselves by hiring a lawyer for their real estate transactions. “This is usually the most expensive transaction in somebody’s life. It’s just silly to not have an attorney who will be responsible for looking everything over and shepherding the file through the closing. These contracts are not easy to read. Having an attorney spend half an hour explaining the contract from beginning to end so that you feel more comfortable and understand what you’re citing is a huge benefit.”

Property Rights Associated with Real Estate Ownership

Property owners enjoy five private property rights. These rights allow property owners to enjoy their property and use it in the manner they see fit. The right of possession gives the title holder legal ownership rights. The right of control gives property owners the right to use their property how they wish. Limits such as HOA bylaws or local zoning laws can be placed on this right.

The right of exclusion allows property owners to say who can and cannot come on their property. The right to enjoyment allows a property owner to lawfully enjoy their property how they wish. The right of disposition gives owners the ability to sell or transfer ownership rights how they see fit.

[Real estate] is usually the most expensive transaction in somebody’s life. It’s just silly to not have an attorney who will be responsible for looking everything over and shepherding the file through the closing. These contracts are not easy to read. Having an attorney spend half an hour explaining the contract from beginning to end so that you feel more comfortable and understand what you’re citing is a huge benefit.

Jeffrey S. Marks

Methods for Transferring Ownership Rights in a Real Estate Transaction

Several methods are available for transfer ownership of real estate. If you are going to sell the property, you do so through a deed. There are four types of deeds. The one you use will depend on what type of transfer you intend to make.

  1. A quitclaim deed makes no warranties or guarantees
  2. A warranty deed makes guarantees that the property is free of other ownership interests
  3. A survivorship deed transfers ownership to multiple people; then, when one of the owners dies, their interest gets transferred to the other joint owners
  4. The fourth type of deed is a gift deed, which is often used to transfer ownership among family members when the property is a gift

Not all ownership transfers are done through a real estate sale. A property owner can transfer their ownership interest in their will to a beneficiary. This can happen through a probate court or avoid probate by placing ownership in a trust.

Ownership transfer can also happen through court procedures. For example, a couple getting divorced are joint owners. The court could order one of the individuals to transfer their interest to the other. Bankruptcy is another situation where the court may order a transfer of ownership interest.

Another situation where ownership transfers is during a foreclosure. Mortgage lenders may initiate foreclosure proceedings when a borrower fails to make their agreed-upon payments. A court will then grant the lender’s request and grant them ownership rights. This typically leads to a property sale so the lender can recoup their money.

Real estate transactions can be complicated, with multiple opportunities for legal issues to arise. Common issues that arise with residential real estate transactions typically revolve around the title, lack of disclosure, boundaries, and outstanding liens.

Title Disputes

Disputes over a property title arise when more than one person claims to have a legal ownership interest in a property. A title search is conducted to reduce the risk of this happening, and buyers can purchase title insurance.

Breach of Contract

A breach of contract occurs when a party to the contract does not follow the terms of the agreement. When one party fails to fulfill their part of a contract, the other party has a right to sue for breach of contract. Generally, residential real estate agents use standardized contracts with boilerplate terms. However, it is smart to have an attorney review these standardized terms. They may not fully protect your rights.

Disclosure Requirements and Misrepresentation

In most states, the seller of the property must disclose property defects that can impact the property’s value. If the seller fails to do this, the buyer could choose to file a lawsuit later upon discovery after the sale. Common hidden defects include mold, roof holes, or leaks. 

Boundary and Access Disputes

Sometimes, a property owner may grant another party access or use rights. If these easements are not properly recorded, land disputes can arise later when a future owner does not want to honor the agreement. Boundary disputes can happen if there are no easements, and property lines are simply recorded incorrectly. In some situations, the people living on adjacent properties follow different property lines than those that are legally recorded. This could be out of practicality or convenience. However, it can cause issues later when one neighbor decides to sell.

Outstanding Liens

If a property owner took out a loan or mortgage to make their purchase, then the lender likely put a lien on the property. The buyer will want the seller to satisfy that loan, so the lender removes the lien before completing the sale. Otherwise, the buyer will have to take responsibility for the loan.

Other liens can be placed on the property, such as a mechanics lien. This can happen when a homeowner hires a contractor to do work on the home and then doesn’t pay them. These would also need to be addressed before the sale.

What Should I Look For in a Purchase Agreement?

Having a real estate attorney review the purchase agreement is always advisable. Their experience will enable them to look for terms adverse to your best interest. They can also confirm that the terms you want included are present. Marks highlights the importance of understanding the contract to avoid disputes. “I think the biggest issue that stems from real estate transactions is people misunderstanding the contract.”

If you decide to review the purchase agreement yourself, start by looking for the basic terms of the deal. This includes the party identities, property description, and purchase price. Then, look for the terms that would define the sale price and ownership transfer:

  • Amount of earnest money deposit
  • Financing terms
  • Title insurance responsibility
  • Property tax responsibility
  • Home inspection terms
  • Closing date
  • Possession date
  • Personal property and fixtures included in the sale
  • Right of inspection
  • Any as-is terms
  • Tax prorations
  • Contingencies

How Are Real Estate Transactions Finalized?

Buying and selling real estate is a process. While a buyer could technically see a property they like and write a check, this is not how the majority of people buy their home. Instead, most buyers want to reduce risk by doing due diligence. They also lack the funds to pay out of pocket for a home sale. Most residential real estate transactions follow this process.

Step 1: Contract Execution

When a buyer finds a property on the multiple listing service (MLS) that they are interested in, they can have their real estate broker or agent contact the seller or the seller’s agent. The two parties will come to a sale price agreement and formalize this by signing a contract. Each state’s MLS has its own rules, so the status and process can vary. In California, the seller’s agent will update the MLS from a status of active to active under contract. As the property moves through the transaction process, its status will be updated to pending and sold.

Step 2: Opening an Escrow Account

The buyer will typically pay earnest money to symbolize their interest and seriousness in buying a piece of property. This money is held by an escrow agent, a neutral third party that holds the money until it is released to either the buyer or seller.

Step 3: Title Search and Examination

The due diligence process begins once the contract is signed and the escrow money is paid. During this phase, the real estate agent will have a title search performed. This will include a search of public records to validate the seller’s ownership rights. Some states allow a title company to perform this service, while others require an attorney to do so.

Step 4: Home Inspection and Appraisal

Another part of due diligence includes an inspection of the property. Real estate professionals arrange for an assessor to physically inspect the property. The assessor will look at the records to determine recording accuracy and evaluate the property’s market value. All of this information will aid the buyer in determining whether the property is worth the amount the seller is asking for. If the buyer discovers defects, they can negotiate with the seller.

Step 5: Securing Financing

Some buyers choose to get pre-approved before looking for real estate to buy. Others choose to wait until they find a home they wish to buy. Either way, you will need to finalize the financing before you can complete the sale. A loan to purchase real estate is called a mortgage loan. You will need to sign documents provided by the lender that outline interest rates, repayment schedule, and the property being used as collateral for the loan.

Step 6: Closing

The final step of a real estate deal is the closing. At this meeting, the final documents get signed, money is transferred, the escrow is released, and closing costs are paid. At this point, the seller walks away with payment, and the buyer walks away with the real estate title.

Do You Need a Lawyer for a Real Estate Transaction?

Some states require a real estate attorney to manage your real estate transaction. Other states only require you to have an attorney review the title documents. Finally, some states do not have any requirements for including an attorney. However, you can still consult with an attorney even if your state does not have any requirement to do so. Having a lawyer review your documents can ensure you agree to the terms you want and none that you do not want. Your attorney can also help you negotiate terms.

Find an Experienced Real Estate Lawyer

If you are ready to become a property owner, then it is time to consider hiring a real estate attorney. Look for one that works with clients who want to buy a new home. An experienced real estate attorney can guide you through the buying process. They can help you negotiate contract terms, prepare legal documents, and facilitate the closing.

Visit the Super Lawyers directory to begin your search for an experienced real estate attorney. For more information, read our guide on what is real estate law.

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