Real estate transaction
Encyclopedia
A real estate transaction is the process whereby rights in a unit of property (or designated real estate
) is transferred between two or more parties, e.g. in case of conveyance one party being the seller(s) and the other being the buyer(s). It can often be quite complicated due to the complexity of the property rights being transferred, the amount of money being exchanged, and government regulations. Conventions and requirements also vary considerably among different countries of the world and among smaller legal entities (jurisdictions).
In more abstract terms, a real estate transaction, like other financial transaction
s, causes transaction cost
s. To identify and possibly reduce these transaction costs, the Organization for Economic Co-operation and Development (OECD) addressed the issue through a study commissioned by the European Commission,
and through a research action.
The mentioned research action ‘Modelling Real Property Transactions’ investigated methods to describe selected transactions in a formal way, to allow for comparisons across countries / jurisdictions. Descriptions were performed both using a more simple format, a Basic Use Case template, and more advanced applications of the Unified Modelling Language. Process models were compared through an ontology-based methodology, and national property transaction costs were estimated for Finland and Denmark, based on the directions of the United Nations System of National Accounts
.
Real estate transactions: subdivision, conveyance, and mortgaging, as they are performed in the five Nordic countries are described in some detail. A translation into English is available for the Danish part.
in the United States or Canada might involve
some or all of the following steps:
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
) is transferred between two or more parties, e.g. in case of conveyance one party being the seller(s) and the other being the buyer(s). It can often be quite complicated due to the complexity of the property rights being transferred, the amount of money being exchanged, and government regulations. Conventions and requirements also vary considerably among different countries of the world and among smaller legal entities (jurisdictions).
In more abstract terms, a real estate transaction, like other financial transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
s, causes transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
s. To identify and possibly reduce these transaction costs, the Organization for Economic Co-operation and Development (OECD) addressed the issue through a study commissioned by the European Commission,
and through a research action.
The mentioned research action ‘Modelling Real Property Transactions’ investigated methods to describe selected transactions in a formal way, to allow for comparisons across countries / jurisdictions. Descriptions were performed both using a more simple format, a Basic Use Case template, and more advanced applications of the Unified Modelling Language. Process models were compared through an ontology-based methodology, and national property transaction costs were estimated for Finland and Denmark, based on the directions of the United Nations System of National Accounts
United Nations System of National Accounts
The United Nations System of National Accounts is an international standard system of national accounts, the first international standard being published in 1953...
.
Real estate transactions: subdivision, conveyance, and mortgaging, as they are performed in the five Nordic countries are described in some detail. A translation into English is available for the Danish part.
United States and Canada
The sale of a houseHouse
A house is a building or structure that has the ability to be occupied for dwelling by human beings or other creatures. The term house includes many kinds of different dwellings ranging from rudimentary huts of nomadic tribes to free standing individual structures...
in the United States or Canada might involve
some or all of the following steps:
- Hiring of a real estate brokerReal estate brokerA real estate broker, real estate agent or realtor is a party who acts as an intermediary between sellers and buyers of real estate/real property and attempts to find sellers who wish to sell and buyers who wish to buy...
the seller and handle the logistics of the advertising and sale, except for "for sale by ownerFor sale by ownerFor Sale By Owner, or FSBO , is the process of selling real estate without the representation of a real estate broker or real estate agent...
" properties where the owner(s) may consult legal counsel or obtain copies of a real estate contractReal estate contractA real estate contract is a contract for the purchase/sale, exchange, or other conveyance of real estate between parties. Real estate called leasehold estate is actually a rental of real property such as an apartment, and leases cover such rentals since they typically do not result in recordable...
. - A buyer may enter the picture in a variety of ways: from seeing advertisements in the media, seeing signs outside a property, or contacting a real estate agent to see a property.
- A buyer may engage the services of a real estate broker to represent her/him and handle the logistics of finding suitable properties, enabling him/her to become qualified to buy, and the showing of appropriate properties.
- Advertisement of the price and property details with a Multiple Listing ServiceMultiple Listing ServiceA multiple listing service is a suite of services that enables real estate brokers to establish contractual offers of compensation , facilitates cooperation with other broker participants, accumulates and disseminates information to enable appraisals, and is a facility for the orderly...
, newspaper or web classifiedClassified advertisingClassified advertising is a form of advertising which is particularly common in newspapers, online and other periodicals which may be sold or distributed free of charge...
listing, lawn signLawn signLawn signs are used for local advertising. They can be used by business such as real estate and are popular in election campaigns in some countries. They are small signs that can be placed on the property of a business or on the lawns of a candidate's supporters...
, or poster in the real estate office. - Private showings or general open house for interested buyers or buyers' real estate agents.
- Interested buyers may get pre-approval for a mortgageMortgage loanA mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
of a certain amount from a bank, if they cannot afford the full purchase price in the range they are exploring. - Preparation of a written offer to purchase. If prepared by a real estate agent on behalf of the buyer, it is generally done on pre-printed and legally-approved forms provided by the real estate broker's office. An agent representing the buyer will advise his/her client as to the value of including specific contingency clauses such as time to obtain a mortgage commitment or to arrange for inspections. The buyer includes an earnest money paymentEarnest paymentAn earnest payment is a deposit towards the purchase of real estate or publicly tendered government contract made by a buyer or registered contractor to demonstrate that he/she is serious about wanting to complete the purchase...
check which accompanies the offer, and which is generally not deposited until all parties are in agreement. - Submission of offers by interested buyers. Multiple offers may result in biddingBiddingBidding is an offer of setting a price one is willing to pay for something. A price offer is called a bid. The term may be used in context of auctions, stock exchange, card games, or real estate transactions....
, with best offer (not necessarily the highest bid) being awarded the sale. A single offer may often be below the initial asking price, resulting in negotiation between the buyer and seller over the final price, or possibly the rejection of the offer by the seller. - After acceptance of a particular offer, a real estate contractReal estate contractA real estate contract is a contract for the purchase/sale, exchange, or other conveyance of real estate between parties. Real estate called leasehold estate is actually a rental of real property such as an apartment, and leases cover such rentals since they typically do not result in recordable...
is ratified by all parties. It usually creates a short interim period (typically no more than 30 days, often much less) to allow the buyer to thoroughly inspect the property (often with the assistance of a professional home inspector). - Some states, such as New York, require that a seller provide a property condition disclosure statement to the buyer outlining in detail the full condition of the property.
- Depending upon the jurisdiction and traditional practice, a title search is then ordered from a third party settlement or escrowEscrowAn escrow is:* an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money and/or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfillment of...
company, pending final settlement. - An AppraisalReal estate appraisalReal estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property's Market Value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently...
, commissioned, as per custom, by the buyer or seller to determine the value of the building and land to satisfy the lender. - Depending upon how the contingency paragraphs are worded, if any defects are discovered during the inspection, the buyer may ask that they be repaired, ask that the sale price be lowered, or choose not to purchase the property.
- The closing of the sale ends the escrow period and completes the transfer of ownership to the buyer. At this time, and all monies change hands and a number of closing costs are paid by the buyer or seller.
- If as real estate broker is used in the transaction, closing is the time that payment is made to the brokers involved.