Chapter 1 - Overview - Before, During, and After the Real Estate Transaction

Question 1

Loan Pre-Approval Letter

Answer 1

Borrower has provided all documentation to the lender and the lender has run a credit report. Lender then issues a LOAN PRE-APPROVAL LETTER stating the borrower is pre-approved for a loan to purchase the property.

Solid proof of borrower’s ability to qualify for the loan

An agent must verify a buyer is ABLE to purchase a home by having the buyer complete a LOAN APPLICATION, have the lender run a CREDIT REPORT, then submit this info to an UNDERWRITER who will provide a “LOAN PREAPPROVAL LETTER” verifying the buyer can qualify for a home purchase to a certain maximum amount.

Question 2

Loan Pre-qualification

Answer 2

Borrower has merely started the loan process and has NOT been PRE-APPROVED for a loan. // Only shows borrower contacted a lender // Not as substantial as the opposite (pre-approval letter)

Question 3

Comparative Market Analysis (CMA)

Answer 3

Analysis performed by a real estate agent to help the seller price a property for sale.

Question 4

Appraisal

Answer 4

A formal report on the VALUE of a parcel of real property.

Question 5

Collateral

Answer 5

Placing something as security for a loan.

Question 6

Listing Agent

Answer 6

aka Seller’s Agent - real estate agent representing the seller of a property

Question 7

Down Payment

Answer 7

$$ a buyer pays out of pocket when a loan is used to purchase property

Question 8

Real Estate Listing Agreement

Answer 8

When a listing/selling agent obtains a listing, they will ask the seller to sign a REAL ESTATE LISTING AGREEMENT along with an Agency Disclosure Form.

LISTING AGREEMENT is a contract allowing the listing/selling agent to:

1. List the property for sale
2. Accept an earnest money deposit from the buyer on behalf of the seller
3. Receive a commission

Question 9

Commission

Answer 9

Usually a % of the property sale price. Paid to the broker who then pays the salesperson.

Question 10

What is the next step after a LISTING AGREEMENT and AGENCY DISCLOSURE FORM has been signed by both the SELLER and AGENT.

Answer 10

Agent cant start MARKETING the property for sale.

examples:
for sale sign, MLS, MLS lockbox, etc.

Question 11

Warranty of authority

Answer 11

Given by the seller to the listing agent– allows the agent to place the property on the market and accept an earnest money deposit from the buyer. Usually given in the Real Estate Listing Agreement.

The agent has the authority to sell the property for the seller, find a buyer, and accept an earnest money deposit from the buyer and o behalf of the seller.

Question 12

Tenants living on a property have how many days to vacate?

Answer 12

Tenants who have lived in a property for less than a year - 30 day notice

Tenants who lived for a year or more - 60 day notice

Question 13

Selling Agent

Answer 13

aka Buyer’s Agent - real estate agent who is representing the BUYER

Question 14

What is an offer?

Answer 14

Buyer makes an OFFER to the seller to purchase real property. Accomplished by completing:

1. Purchase Agreement and Joint Escrow Instructions
2. Agency Disclosure Form (to disclose, elect and confirm the agency relationship that exists between the buyer and RE salesperson)

Question 15

Real Estate Purchase Agreement and Joint Escrow Instructions

Answer 15

A purchase agreement/contract that specifies the PRICE + TERMS of the property purchase

Completed when making an offer

Question 16

Disclosure Regarding Agency Relationship form (Agency Disclosure Form)

Answer 16

Discloses “who is representing whom” in a RE transaction.

Completed along with Purchase Agreement while making an offer

Question 17

When is the Agency Disclosure Form signed?

Answer 17

Usually signed along with the Purchase Agreement during an offer

Question 18

Counter Offer

Answer 18

Instead of rejecting an offer, the seller makes a counter offer back to the buyer for the sale of real property.

This can go back and forth until both parties reach a mutual agreement.

Question 19

After a potential buyer has presented an OFFER to the seller, what are the seller’s 3 possible responses?

Answer 19

1. Accept the offer
2. Reject the offer
3. Make a counter offer back

Question 20

When is a Contract (agreement) between buyer and seller formed?

Answer 20

When the seller ACCEPTS the buyer’s offer AND AFTER the buyer has been notified of the seller’s acceptance.

Seller will accept by signing the PURCHASE AGREEMENT –> Buyer is then notified –> a contract is now formed

If the seller rejects the offer, no contract is formed.

Counter offers will continue back and forth until both parties come to a mutual assent (agreement) regarding PRICE + TERMS of the property purchase, then a contract is formed.

Question 21

What is Escrow?

Answer 21

The process in which MONEY or OTHER DOCUMENTS are held by a disinterested third party (stakeholder)

An Escrow Agent is used to hold the BUYER’S EARNEST MONEY DEPOSIT until the buyer inspects the property and decides to move forward with the purchase or terminate the transaction.

Question 22

Earnest Money Deposit

Answer 22

Will be held by an Escrow Agent – is used by the seller to ensure the buyer is serious about purchasing the property.

Question 23

Who does the Escrow Agent represent at the opening and after closing of escrow.

Answer 23

When escrow is opened and through the escrow period an Escrow Agent represents BOTH the buyer and seller.

After close of escrow (when all T+Cs have been met), escrow agent will become an INDEPENDENT agent of the buyer and INDEPENDENT agent of the seller, SEPARATELY.

Question 24

What happens if a buyer and seller are in an escrow dispute and both parties demand payment of the buyer’s EARNEST MONEY DEPOSIT?

Answer 24

The escrow agent must receive a court order prior to disbursing funds.

Question 25

Real Estate Transfer Disclosure Statement (TDS)

Answer 25

The primary DISCLOSURE for one-to-four unit residential properties in California and asks the SELLER TO PROVIDE INFORMATION regarding the CONDITION of the property.

Provided by the SELLER to the BUYER.

Additionally, both the buyer + seller’s agents must VISUALLY INSPECT accessible areas of the property and report any findings on the TDS form (or an Agent’s Visual Inspection Disclosure form (AVID) if TDS is not required).

Question 26

Preliminary Title Report

Answer 26

aka Prelim - an offer by the Title Insurance company to issue a policy of title insurance

Question 27

Title Insurance

Answer 27

Insurance that PROTECTS A BUYER from TITLE DEFECTS existing on a property.

Used by buyers to ensure they are receiving CLEAR TITLE to a property.

Question 28

Covenants, Conditions and Restrictions (CC&Rs) -

Answer 28

Written restrictions for a parcel of real property.

CC&Rs restrict the use of the property and can impact its usabilty and valuation. Should be received by both agents along with the Preliminary Title Report to determine if there are any UNREASONABLE RESTRICTIONS or DEFECTS on the title to the property.

Usually imposed by builders, developers, property owners, neighborhood associations or HOAs, they’re designed to protect property values in the community and tell you what you can and can’t do while living in your home or condominium complex.

Question 29

Addendum

Answer 29

Used to include ADDITIONAL TERMS that are added to the purchase agreement/contract.

Question 30

What are the 3 contingencies?

Answer 30

1. Physical Inspection Contingency
2. Appraisal Contingency
3. Finance Contingency

Question 31

What is a contingency?

Answer 31

A clause in a purchase agreement specifying an action or requirement that must be met for the contract to become legally binding

Question 32

What are the steps to a loan process?

Answer 32

“OPU”

1. Loan is originated by a Loan ORIGINATOR
2. Supporting documents are verified by a Loan PROCESSOR
3. File will be examined and a lending decision (loan approval/ approval with conditions / denial) is made by a Loan UNDERWRITER

Question 33

Request for Repairs Addendum

Answer 33

Used during a PHYSICAL INSPECTION CONTINGENCY to ask a seller to make specific repairs to the property prior to close of escrow.

Question 34

What is an Appraisal Contingency? - What next steps must occur when an appraisal comes in lower than the purchase price of a home, before the transaction can move forward?

Answer 34

Appraisal Contingency - if the property does not appraise for the purchase price, the buyer may be able to back out of the transaction by not removing the Appraisal Contingency

Next steps to move forward–

1. Buyer increases down payment ; OR
2. Seller agrees to reduce purchase price ; OR
3. Buyer challenges appraisal

Question 35

What is a Physical Inspection Contingency? What are some common repairs requested?

Answer 35

During this period, buyer may hire a home inspector and/or any subsequent inspections resulting from the home inspector’s findings.

After a home inspection has been completed, the buyer may ask the seller (Request for Repairs Addendum) to repair some items prior to removing the PHYSICAL INSPECTION CONTINGENCY and moving forward with the purchase.

Common repairs– Repairs related to health and safety issues - broken windows, missing window screens, other items that aren’t working properly and affect the overall value and desirability

Question 36

In an Appraisal Contingency – How can a buyer challenge an appraisal?

Answer 36

If existing sales comparables (comps) justify a higher property value than the appraiser’s opinion of value in the appraisal report, the buyer (with the help if their agent) may challenge the appraisal

Question 37

What is a Financing Contingency? Who is it beneficial for and how?

Answer 37

Typically used when a LOAN is used to FINANCE the home. Stays in effect until a loan is funded.

Benefits the buyer by allowing the buyer to not remove the contingency and not move forward with the transaction up until the loan is funded just before close of escrow.

Question 38

Escrow Rescission Form

Answer 38

Instructs the escrow officer to terminate the escrow when a buyer decides to not move forward.

Question 39

According to DRE, what is “Final Verification of Condition” ?

Answer 39

“The agreement will specify that the buyer has the right to make a final inspection of the property within 5 days prior to closing, not as a contingency of the sale but solely to confirm the property is in the same condition, any repairs have been completed as agreed between the parties and the seller has complied with all other contractual obligations.”

Source: DRE Reference Book, Chapter 20 Basic Contract Provisions and Disclosures in a Residential Real Estate Transaction, pg. 485

Question 40

What are some forms of real estate ownership / buyer vesting?

Answer 40

1. Severalty (sole ownership)
2. Tenants in common
3. Joint tenancy
4. Community property
5. Tenancy in Partnership
6. Co-ops
7. LLCs
8. Domestic corporations
9. Foreign corporations
10. Joint venture
11. nonprofit orgs

Question 41

What is Escrow Proration and name an example.

Answer 41

Items an escrow officer will prorate if the seller has paid in full ahead of time.

Example– If a property tax bill was paid by the seller for the entire year and escrow closes on their property halfway through the year, the seller will be reimbursed for the half of the year that they no longer own the property.

Question 42

What is Title Insurance?

Answer 42

Used to insure the TITLE to real property.

Title insurance companies investigate a property’s chain of title and other title defects that may affect the marketability of a property.

Title insurance companies maintain title plants that continuously monitor recorded documents that may affect title to real property.

If there is a cloud on the title that was caused by a recorded document not being discovered by the title insurance company, then the title insurance company may be required to pay for the buyer’s loss. It may insulate the seller from title defects that are discovered after close of escrow.

Question 43

Grant Deed

Answer 43

After contingencies are removed, final inspections are complete, right before close of escrow: A GRANT DEED will be signed by the seller and delivered to the buyer.

A GRANT DEED is a document used in CA to transfer legal title to real property.

Normally delivered to the buyer through RECORDATION of the GRANT DEED at the County Recorder’s office.

Question 44

When does Close of Escrow occur?

Answer 44

When all TERMS and CONDITIONS of the ESCROW have been SATISFIED and the escrow is considered “PERFECTED”.

Question 45

Supplemental Assessment

Answer 45

When a buyer purchases a property with a low assessed value, and the new assessed value is significantly higher, a supplemental assessment may occur.

For example – may occur if the property is a new home and the builder had a very low property tax assessed value (such as Cost) when the unimproved lot was subdivided.

Question 46

What are some items that may surface after close of escrow?

Answer 46

1. Seller occupying the property after close of escrow
2. Home warranty policy issues
3. Supplemental assessments
4. Cloud on the title to the property

Question 47

What happens when a seller is still occupying a property after close of escrow?

Answer 47

A seller Occupancy Addendum / Seller in Possession Addedum will be used when a seller moves out of the property AFTER close of escrow. This establishes the seller as a tenant of the buyer.

Appropriate insurance to use will be Owner, Landlord, and Tenant (OLT) Policy until after the seller/tenant moves out, then a Homeowner’s Policy will be the best choice for the buyer AFTER the tenant has moved out.

Question 48

Home warranty policy

Answer 48

Used to PROTECT THE BUYER against a home’s major components BECOMING INOPERABLE during the first year (or longer) of home ownership.

If a home warranty policy was negotiated in the purchase agreement, the escrow agent will usually order the home warranty policy and will be paid by the buyer and/or seller throughout escrow.

Example– In case some items do stop working after close of escrow - The buyer will call the home warranty company and have the item repaired/replaced instead of suing the seller for non-disclosure of a material fact.