Introduction:
This section is designed to give a basic understanding of a
typical transaction involving the sale of real estate, even
for those who may have little knowledge of how the process works.
Those who feel that they are knowledgeable about real estate
matters may wish to skip this section (since it is lengthy)
and go straight on to the section entitled, "OUR
SPECIALTY / OUR TERRITORY". Remember, you can always
go back and read Real Estate 101, and you can always just ASK
B & C.
For those who STILL feel confused after reading this section,
do not worry. The Ask Baron Chestney feature allows you to ask us your questions and get a personalized
response. Think of it as the "HELP" section. Before
using Ask Baron Chestney, though, you
may want to check our FAQ section (Frequently
Asked Questions), because if you have a question, someone else
may have had the same question in the past, and we may have
the answers you need right on the website. Lastly, there is
no such thing as a "dumb question". We all need to
start somewhere!
The
Parties in a Basic Real Estate Transaction:
Seller:
Let us begin with a simple illustration which will help explain
how the sale of a home works. There are several parties involved.
Suppose that Mr. and Mrs. Seller are an elderly couple who have
just entered retirement. They own a home in the Sunset district
of San Francisco, where they currently live. The Sellers have
selected a beautiful condominium in Tempe, Arizona as their
retirement home, and are ready to move in very soon. Because
the Sellers have managed their funds wisely over the years,
they were able to purchase their retirement condo using their
savings, while still living in their San Francisco house. The
Sellers are now ready to sell their Sunset district house, and
move to their new retirement home in Arizona. So, they call
Mr. Broker, who is a real estate broker in San Francisco.
Broker:
Mr. Broker is a professional who specializes in helping people
buy and sell real estate. He lives and works in San Francisco,
and he is familiar with the Sellers' neighborhood. Mr. Broker
has a "team" of other professionals that help him
do his job. Although they aren't actually employees of Mr. Broker,
they are close business associates. For example, there is Mr.
Pestman, who checks the houses for termites, fungus, and other
sorts of damage. There is Ms. Lender, the loan officer at the
neighborhood bank who helps make loans to people who want to
buy a home. Mr. Appraiser helps to determine the value of the
home. Mrs. Escrow helps coordinate the legal documents and the
transfer of money from buyer to seller. Lastly, Miss Agent is
an actual employee of Mr. Broker. She is the person that Mr.
Broker will send to meet the Sellers, and she will work closely
with the Sellers. Mr. Broker may be thought of as the "leader"
of this team of professionals that will make our sample real
estate deal happen. We will talk more about these team members
later.
Buyer:
Mr. and Mrs. Buyer are a young couple who have been saving their
money carefully for a few years now. They have good, stable
jobs, and excellent credit. Since their wedding, they have been
renting a two bedroom apartment in the Sunset district of San
Francisco, just a few blocks from the Sellers' house, as a matter
of fact. The Buyers have a 2 year old son, and Mrs. Buyer is
four months pregnant. The Buyers would like a three bedroom
house so that their son and their new baby will each have a
bedroom of their own. Both Mr. and Mrs. Buyer work in the Financial
District of San Francisco, but they love the neighborhood they
are living in now. Since the Sellers' house just happens to
have 3 bedrooms, and is only 4 blocks away from where the Buyers'
apartment is, it seems that the Sellers and the Buyers may be
able to help each other...
Fisherman's Wharf Sign, San Francisco
The
Process Begins:
Mr. and Mrs. Seller received a postcard from Mr. Broker a few
months ago. It introduced Mr. Broker, and listed his phone number
on it. The Sellers wisely kept it handy! The Sellers now decide
that they will call Mr. Broker to ask about his services. Mr.
Broker chats with the Sellers on the phone for ten minutes or
so, gathering some basic information about the Sellers and their
house. He tells the Sellers that Miss Agent, his salesperson,
can come visit them tomorrow to meet them, see their home, and
discuss a plan for marketing the house and offering it for sale.
The Sellers agree to meet Miss Agent at their house tomorrow.
The
Sellers List Their House for Sale:
Miss Agent arrives at the Sellers' home the next day, promptly,
and tours the Sellers' house. She is delighted to see that the
Sellers have a neat, clean, beautiful house. They have really
taken great care of it over the past 30 years. The Sellers are
happy to learn that Miss Agent is polite, knowledgeable, and
helpful in answering their questions. Miss Agent explains that
Mr. Broker is her boss. She explains to the Sellers that, like
all real estate agents, she must work for a real estate broker,
like Mr. Broker. This is because, she explains, a broker has
more experience and knowledge than a sales agent. The broker
must oversee all work done by the sales agent. Miss Agent tells
the Sellers that she will handle the sale of their house, but
that Mr. Broker will be overseeing everything, and he will be
the one to actually finalize the deal and sign off on everything.
Lastly, she tells the Sellers that some real estate agents,
and some real estate brokers, also belong to the National Association
of Realtors, and the California Association of Realtors. These
are professional organizations that require members to pay dues,
and to agree to adhere to an even stricter code of ethics than
the state law requires. Mr. Broker and Miss Agent are members
of these organizations, so they are allowed to use the special
term, "Realtor", as well as the special "R"
logo that accompanies it. The Sellers are impressed with Miss
Agent's presentation, and decide to sign a contract, known as
a listing agreement, giving Miss Agent the right to sell their
house, in exchange for a commission of 6% of the selling price.
The house will be listed for sale at $500,000. Miss Agent calls
Mr. Broker, tells him the good news, and starts getting to work.
She begins by putting a "For Sale" sign on the Sellers'
front lawn, after getting their permission to do so.
The
Buyers Become Interested:
A week after Miss Agent placed the "For Sale" sign
on the property, Mr. and Mrs. Buyer were on their way to work.
Mr. Buyer received a call on his cell phone from his cousin,
Mr. Buyersbroker. Mr. Buyersbroker has been a real estate broker
for several years, though he is not a Realtor. Still, he is
Mr. Buyer's cousin, so Mr. Buyer trusts him completely. Mr.
Buyersbroker has been searching for a house for the Buyers to
buy for several weeks now. He just noticed the "For Sale"
sign as he drove past the Sellers' house on his way to pick
up his dry cleaning. Mr. Buyersbroker writes down the name and
number from Miss Agent's "For Sale" Sign, and asks
Mr. Buyer if he would like to see the house. Based on his cousin's
good judgment, Mr. Buyer decides that it would be wise to do
so. Mrs. Buyer agrees, and adds that they should see the house
tonight, if possible. Mr. Buyersbroker calls Miss Agent to arrange
a tour of the inside of the house. Fortunately, Miss Agent has
been trained well by Mr. Broker. She answers her cell phone
immediately when Mrs. Buyer calls her! After a brief chat, Mr.
Buyersbroker is delighted to hear more about the house, and
is thrilled to learn that the house has 3 bedrooms and is offered
for sale at the fair price of $500,000. Mr. Buyersbroker sets
an appointment with Miss Agent for him and the Buyers to look
at the house at 7pm that very evening. Miss Agent immediately
notifies the Sellers. The Sellers had planned to dine out at
the Cliff Rock, a charming old restaurant a few blocks from
their home, at 6:30 pm that evening. So, everything seems like
it is going very smoothly so far....
The Buyers Make An Offer:
Mr. and Mrs. Buyer met Miss Agent promptly at 7 pm at the Sellers'
house, along with Mr. Buyersbroker. Miss Agent gave the Buyers
and Mr. Buyersbroker a tour of the Sellers' beautiful house,
answering questions about it and showing off its very nice features
to the Buyers. The Buyers were absolutely thrilled. They loved
the house! It was just perfect. They told Miss Agent that they
would like to make an offer. Mr. Buyersbroker spoke up, telling
Miss Agent they would like to offer the full price, $500,000,
because it was the perfect home for his clients and they didn't
want to have their offer rejected because they offered less
than the Sellers were asking. Mr. And Mrs. Buyer invite Mr.
Brokersbuyer and Miss Agent over to their apartment, for a cup
of coffee, where they agree they can all write up an offer that
very evening. They leave the Sellers home, and proceed to the
Buyers' apartment. Mr. Brokersbuyer prepares the offer, and
hands it to Miss Agent, signed by Mr. and Mrs. Buyer, along
with a deposit check in the amount of $15,000, or 3% of the
purchase price. Miss Agent, a true professional, makes 2 calls:
she calls the Sellers to give them the good news, and she calls
her boss, Mr. Broker, to give him the good news. The Sellers
invite Miss Agent to come right on over to their house, as they
are just returning home from their dinner at the Cliff Rock.
Miss Agent says goodbye to the Buyers and Mr. Buyersbroker,
and heads over to meet the Sellers. The Sellers are delighted,
but they tell Miss Agent that they would like to think over
the Buyers' offer, and make a decision tomorrow morning. Miss
Agent agrees, and departs.
The
Sellers Accept the Offer:
The next day, at around noon, Miss Agent receives a call. It
is Mrs. Seller. She tells Miss Agent that she and her husband
talked it over, and decided to accept the Buyers' offer. She
invites Miss Agent over to pick up the signed acceptance of
the offer. Miss Agent visits the Sellers, picks up the paperwork,
and promises the Sellers that she will begin working on the
deal immediately. Miss Agent returns to the office, where she
presents the documents to Mr. Broker. Mr. Broker looks everything
over, feels that it is all in order, and tells Miss Agent to
take everything over to Mrs. Escrow.
Mrs.
Escrow Helps Bring The Deal Together:
Mrs. Escrow is the person at the Escrow Company whose job it
is to help both the Buyers and the Sellers to fulfill the terms
of the sales contract. The sales contract is the document that
the Sellers, the Buyers, Miss Agent, and Mr. Buyersbroker all
worked together to agree upon, and all signed it. Mr. Broker
signed off on it, as well (as required by law), having supervised
the actions of Miss Agent, of course. Mrs. Escrow is a neutral
party. The Escrow Company holds the deposit money in their trust
account, and they make sure that everything is handled fairly
between the parties. They take their orders from Mr. Broker
and Mr. Buyersbroker, who are in turn getting their orders from
the Sellers and the Buyers. Mrs. Escrow sends out Mr. Appraiser
to do an appraisal of the value of the house. Mrs. Escrow sends
out Mr. Pestman to inspect the house for termites, fungus, and
other problems which could devalue the house and cause problems
for the deal. Mrs. Escrow also works with Ms. Lender, the loan
officer of Lenders National Bank. We must go back in time a
little to learn about Ms. Lender....
The Buyers Visited Ms. Lender a Few Weeks Ago:
A few weeks ago, Mr. and Mrs. Buyer met with Ms. Lender. After
seeing a poster in the window of their bank, Lenders National
Bank, the Buyers decided to ask the bank about its home loan
program. The bank was offering low interest rates on home loans.
Ms. Lender took the Buyers through a process called "qualifying"
for a loan. Ms. Lender had the Buyers fill out some paperwork
asking them about their income, their debts, their assets, their
liabilities, and their credit. The Buyers provided copies of
tax returns, as well as paystubs and bank statements, to Ms.
Lender. Ms. Lender pulled copies of the Buyers' credit reports,
as well. After going through the process, Ms. Lender was pleased
to tell the Buyers that they had qualified for a loan, and that
the bank would be willing to loan them $455,000 if they were
able to make a down payment of $45,000 on a house. Ms. Lender
gave the buyers a letter stating that. The buyers have now given
that letter to Mrs. Escrow, which brings us back to the present....
Everyone
Gets To Work!:
Mr. Appraiser visits the Sellers' house. He measures the rooms,
makes notes, inspects things, and makes a report, which is given
to the bank, Miss Agent, and the Buyers. The house is valued
at exactly $500,000-- what do you know! Fantastic. Mr. Pestman
also visits the house. He is pleased to report that he finds
no termites or problems of any sort. The house is in perfect
condition. He writes that in his report, and also circulates
copies of the report to everyone involved. Ms. Lender is hard
at work getting the bank to write a check to make the loan of
$455,000 to the Buyers. She succeeds! Then, Ms. Lender sends
the money to Mrs. Escrow, who places it in the Escrow Company's
trust account. Mr. Pestman and Mr. Appraiser forward copies
of their reports to Mrs. Escrow, as well. Mrs. Escrow collects
all of these documents and places them in the Buyer/Seller transaction
file. Miss Agent, Mr. Broker, and Mr. Buyersbroker are kept
informed and advised by Mrs. Escrow as various items are received,
and they of course advise the Sellers and the Buyers as progress
is made.
The
Grand Finale:
Finally, all of these events begin to converge, as our cast
of characters approach the conclusion of our sample real estate
transaction. Mrs. Escrow calls Mr. Broker and Mr. Buyersbroker
and informs them that she is ready to begin closing the transaction,
or "closing escrow". They notify the Sellers and the
Buyers. Mrs. Escrow schedules a time for the Sellers, as well
as the buyers, to come visit her office to sign off on a whole
bunch of paperwork relating to the transaction. There is much
initialing and signing to do. Addresses, as well as other information,
are verified. Mrs. Escrow will go over everything with both
the Buyers and the Sellers, explaining briefly the documents
that they are signing. She will also discuss dollar amounts
with them, discussing with the Sellers what fees and costs they
must pay (according to the sales contract), and what the net
proceeds will be after the deal is finished. She will discuss
also with the buyers the same sorts of things, telling them
what fees and costs they must pay, and giving them a good faith
estimate of the final closing costs and what the total price
will be (how much cash they must pay, to cover all expenses
of closing the deal). If there are problems or discrepancies,
they are discussed among the Buyers and the Sellers, as well
as their representatives, Mr. Broker, Miss Agent, and Mr. Buyersbroker.
Since this is essentially a "perfect" real estate
transaction, we will assume that no such problems arise. Escrow
closes smoothly, and the Sellers receive their $500,000 (less
certain fees, taxes, etc, as well as the real estate sales commission
of 6%, or $30,000 ). The commission of $30,000 is divided up
as follows: Mr. Broker's office gets $15,000, and Mr. Buyersbroker
gets $15,000. NOTE: Only Real Estate Brokers may receive commissions.
Sales agents are given a percentage of the broker's commission,
paid by the broker. A good rule of thumb is that the agent,
Miss Agent, can expect roughly half of the broker's commission,
or $7,500. Mr. Buyersbroker didn't employ an agent-- he brokered
the deal himself on the buyer's side. Therefore, he gets to
keep his $15,000. Ms. Lender, Mr. Pestman, Mr. Appraiser, and
Mrs. Escrow receive fees that are agreed upon in the contract,
some being paid by the sellers, and some being paid by the buyers.
The Buyers receive the keys and legal title to the house!
Epilogue:
Everyone ends up happy! Mr. Appraiser, Mr. Pestman, Ms. Lender,
and Mrs. Escrow all collected a fee for their services. Mr.
Buyersbroker collected a nifty commission for producing a ready,
willing, and able buyer-- namely, the Buyers. Mr. Broker's office
collected the same commission as Mr. Buyersbroker, but, since
he delegated the work to Miss Agent, Mr. Broker must pay Miss
Agent for her work (in this case, half of his commission). The
Buyers are the proud new owners of a fantastic 3 bedroom house
in the neighborhood they love. The Sellers are enjoying the
110 degree (shade temperature) weather in Tempe, Arizona, in
their beautiful new retirement condominium, which they own free
and clear, and are living off the money they made from the sale
of their house ($500,000 less $30,000 commission less assorted
fees, taxes, etc.). Yes, everyone in this example ends up very
happy. Well, there is one exception....the Buyers' EX-landlord
now has a vacancy in his apartment building- the unit that the
Buyers used to rent!!! (He owns 4 or 5 OTHER apartment complexes
in San Francisco, however, so we won't feel too sorry for him....
)
THE
END!!!
CONGRATULATIONS! YOU HAVE COMPLETED THE REAL ESTATE 101 COURSE!
We hope that you found it informative, as well as easy to comprehend.
It is meant to illustrate a very simple, straightforward transaction.
If you still have questions about it, check out our FAQ section,
or, as usual, use our "ASK B&C " help feature...
Most importantly, what you have learned will soon take on a
new and exciting meaning for you, and help you to understand
why Baron & Chestney is different from all the other real
estate companies, and how we have changed the rules and changed
the rules of thumb, to make things more beneficial for you,
the buyer or seller of real estate.
