Real Estate Transactions

Introduction

Real estate transactions are the legal processes by which interests in real property are transferred from one party to another. A typical real estate transaction involves a purchase agreement, financing, title examination, closing, and recording. The law governing real estate transactions includes contract law, property law, and regulatory requirements at the federal, state, and local levels.

The Purchase Agreement

The purchase agreement is the central contract in a real estate transaction. The agreement must be in writing under the Statute of Frauds and must describe the property with sufficient certainty. The agreement typically includes the purchase price, financing terms, closing date, and conditions precedent such as the buyer obtaining financing and satisfactory inspections.

Standard contingencies in purchase agreements include: the financing contingency (allowing the buyer to withdraw if financing cannot be obtained), the inspection contingency (allowing the buyer to inspect the property and negotiate repairs), and the appraisal contingency (requiring the property to appraise at or above the purchase price).

Title Search and Title Insurance

Before closing, the buyer’s attorney or title company conducts a title search to determine the state of title to the property. The title search examines public records, including deeds, mortgages, liens, judgments, and other encumbrances affecting the property. The title search identifies defects in title that must be cured before or at closing.

Title insurance protects the buyer and lender against losses caused by defects in title that were not discovered in the title search. The title insurer issues a policy that insures against losses from title defects, including forgery, undisclosed heirs, and recording errors. Title insurance is a one-time premium paid at closing and provides coverage for as long as the insured party holds an interest in the property.

The Closing

The closing (also called settlement) is the event at which the buyer and seller formalize the transfer of property. At closing, the buyer pays the purchase price, the seller delivers the deed, and the parties sign the necessary documents. The closing is typically handled by a title company, escrow agent, or attorney.

Documents signed at closing include: the deed (transferring title from seller to buyer), the promissory note and mortgage or deed of trust (evidencing the buyer’s debt and granting a security interest to the lender), and the settlement statement (itemizing all financial aspects of the transaction).

Recording Acts

After closing, the deed should be recorded in the county where the property is located to protect the buyer’s title against subsequent claims. Recording acts establish the legal framework for determining priority among competing claims to the same property. Three types of recording acts exist: race statutes (the first to record wins regardless of notice); notice statutes (a subsequent good faith purchaser without notice of a prior unrecorded interest prevails); and race-notice statutes (a subsequent purchaser who records first and has no notice of prior interests prevails).

Recording provides constructive notice to the world of the recorded interest. Unrecorded interests may be valid between the parties but are vulnerable to subsequent purchasers who record without notice.

Financing

Most real estate transactions involve financing through a mortgage or deed of trust. The borrower (mortgagor) grants the lender (mortgagee) a security interest in the property to secure repayment of the loan. The mortgage is a lien on the property that gives the lender the right to foreclose if the borrower defaults.

The real estate financing market is heavily regulated. Federal laws governing real estate lending include the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), and the Equal Credit Opportunity Act (ECOA). These laws require disclosure of loan terms, prohibit discrimination, and regulate settlement practices.

Conclusion

Real estate transactions are complex legal processes that require coordination among buyers, sellers, lenders, attorneys, and title professionals. The purchase agreement, title search, title insurance, closing, and recording work together to effectuate the transfer of property interests. Understanding the legal framework for real estate transactions is essential for property lawyers, real estate professionals, and anyone involved in buying or selling real estate.