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The sale and purchase of a residential real estate is ordinarily a simple transaction. For first-time prospective buyers, the venture may be not as simple. Too many questions that need to be answered and assurances made before entering into a major purchase of their life. To Filipino immigrants, closing and title companies are foreign. Let me try to briefly trace and simplify the process of selling and buying a residential real estate, not a condominium, particularly from the position of the prospective buyer. Purchase of cooperative shares proceed differently.
A prospective buyer comes into a prospective transaction either with the help of a real estate broker or salesperson who introduces him to the prospective seller, or directly deals with the prospective seller. If a real estate broker is involved, the seller signs a commission agreement with the broker, the latter agreeing to find a buyer of the real estate in exchange for a commission to be paid by the seller if the sale is consummated. If a prospective buyer is found, the broker prepares a binder agreement containing the names of the seller and buyer, their respective address, address of the property for sale, purchase price, contract deposit, loan amount to be applied for, if any, and name and contact information of the attorneys for seller and buyer, if any. In certain transactions, especially when the buyer is rather short of funds, the seller may agree to provide a seller’s concession. The purchase price is of course the total amount of money the seller is willing to part with his property and the buyer is willing to pay to acquire the property. The contract deposit, also known as down payment, is the amount the buyer pays at the time he signs the proposed contract of sale. This contract deposit is ordinarily deposited to the escrow account or IOLA (Interest on Lawyer’s Account) of the seller’s attorney. The higher the contract deposit or down payment, the greater the chances of getting a loan.
“The higher the contract deposit or down payment, the greater the chances of getting a loan.”
The seller’s attorney prepares the proposed contract of sale containing the terms provided in the binder agreement. The proposed contract of sale is usually sent to the buyer’s attorney before it is seen or reviewed by the seller. Note that until it is signed by both the buyer and seller and the contract deposit is paid, the proposed contract remains a proposed contract. Upon receipt, review, and signature of the buyer, the proposed contract of sale, together with contract deposit or down payment is sent to the seller’s attorney. In today’s age, the proposed contract may be emailed by the seller’s attorney to the buyer’s attorney, the buyer signs it, and the contract deposit wired to the seller’s escrow account. If the seller agrees with the terms in the proposed contract, the seller signs it, and sends it back, also via email, to the buyer’s attorney. After this exchange, we have a fully-executed contract, that is signed by both seller and buyer. Note that the contract deposit will only be disbursed to the seller at the time when the ownership of the property is transferred to the buyer, or withdrawn at a time specified in the contract, if such transfer does not take place. The transfer of ownership takes place during or in what we call a “closing”.
“The proposed contract of sale is usually sent to the buyer’s attorney before it is seen or reviewed by the seller. Note that until it is signed by both the buyer and seller and the contract deposit is paid, the proposed contract remains a proposed contract.”
Upon receipt of the fully-executed contract, the buyer must, if he wants financing, apply for a loan with a bank or other financial institution. The contract gives him time, usually 45-60 days from date of contract, to get a loan commitment. A loan commitment is a promise of a financial institution to lend money to the buyer at the time of the closing to pay to the seller. The buyer’s attorney then orders what is known as a title report to find out details about the property, particularly any encumbrances or adverse claims affecting the property. The title company insures the title to the property and represents to the lender that the title is clear. The lender will not release the funds unless the title company insures it.
After a loan commitment is obtained and the title to the property is cleared, a closing is scheduled at a time and place agreed by the parties, usually at the office of the lender’s attorney. At this time of the coronavirus pandemic, or for any other acceptable reason, the seller and/or his attorney need not be physically present at the closing. All documents to be signed by the seller are sent to him beforehand and signed, and then forwarded to the title company to be brought to the closing. The buyer’s attorney may opt not to be physically present, though it is preferable that he attends. The lender requires physical presence of the buyer. At closing, the seller is paid the total purchase price agreed and ownership of the property is transferred to the buyer by way of a Bargain and Sale Deed. The seller pays whatever transfer taxes are due and pays-off whatever loan he owes to any financial institution affecting the property. In other words, the ownership of the real property is transferred the buyer, clean, free of any liens or encumbrances. At this point, the fully-executed contract becomes a consummated contract of sale. The transaction is consummated.
What if there was a seller’s concession? A seller’s concession is an amount added to the actual purchase price that the seller is willing to sell his property. It is the seller’s benevolent act to help the buyer get a higher loan to help in payment of his expenses at closing. The buyer pays for whatever transfer taxes are due from that added amount.
“What happens if the buyer does not get a loan commitment? If to no fault of his, the contract deposit is returned in full. … If you are buying or selling a real estate, it will be prudent to consult your own lawyer.”
Where the purchase is over one million dollars, the seller will pay the so-called mansion tax for the amount over one million.
What happens if the buyer does not get a loan commitment? If to no fault of his, the contract deposit is returned in full. What if the buyer decides not to proceed with the transaction even though he has a loan commitment? He may lose (forfeit) the contract deposit.
If you are buying or selling a real estate, it will be prudent to consult your own lawyer.
ABOUT THE AUTHOR: Manuel B. Quintal, ESQ., practices law in New York since 1989. He is active in the community as a member, an officer or a legal adviser of various professional, business, and not-for-profit organizations. He was a columnist of Newstar Philippines, an English language weekly newspaper published in New York, from 2006-2009. He was Executive Editor of International Tribune, an English language weekly newspaper for the Asian community, based in New York, from 2010 to 2012. He is admitted to practice law in the Philippines and New York State. He has graduate degrees in Political Science and an LL.M. major in International Law.