Pitfalls And The Process of Buying And Selling Real Estate

It’s a delicate balance, a real estate transaction.  There are a lot of things that can and do go right but a lot that can and do go wrong.  Just this past Friday the escrow company a seller picked out sent the wrong wiring instructions to my buyer’s lender and when the bank funded the loan they sent $400,000 to the wrong title company.  Talk about a mess.  Fortunately the money was retrieved and we closed on time.  Speaking of money, have you ever wondered how the money gets exchanged in a real estate transaction?  Some states have the two parties and their attorney’s sit opposite one another at the closing table to exchange the money for title.  In California we use a neutral third party called escrow to effect the transaction. When speaking with a client, I like to describe the fundamental role of escrow this way:  Picture me holding out both arms.  To one side the buyer hands me a bag of money one, and the other the seller hands me the deed.  Then picture me crossing my arms.  This is escrow’s most fundamental task.  Without this service one could imagine the exchange as the buyer gingerly holds out the money and hopes the seller doesn’t grab it real quick and run away.  So escrow is a facilitator.

Escrow is also charged with coordinating the required paperwork for the title company.  The escrow officer orders the preliminary title report often referred to as the “Prelim” from the title company.  The prelim tells everyone who owns the property, what liens are held against the property, including tax liens and mortgage liens.  The prelim could also show any recorded judgments against the seller as well.  The title company provides the insurance that the buyer is purchasing the home with clear title.  Escrow also receives the lender’s paperwork like the loan documents from the buyer’s lender and they ensure the buyer receives all the necessary reports and disclosures to complete their due diligence.  These might include items like home owner’s association minutes and budgets, rules and regs; the clear termite report if that was negotiated; the natural hazard disclosure report which in California includes everything from earthquake zone disclosures, to red legged frog protected habitat disclosures.  The NHD as it is often referred, will also have important information like radon zone classification and ratings and most recently the additional disclosure of gas transmission line disclosures.

Once a home sale is successfully negotiated by the parties, the real estate agent(s) will forward the contract to the designated escrow company.  This is referred to as “opening escrow.”  So who pays for this service?  Customarily this is shared or “split 50/50.”  Like all aspects of a real estate transaction, this needs to be written in the purchase agreement and is a negotiated item.  I one time had to pay the buyer’s side of escrow because I missed the line that called out a 50/50 split and since it was my fault, I picked up the cost rather than my seller.  It only takes one time; I haven’t made that mistake again.  By the way, escrow companies are regularly audited, at least in California, by the Department of Corporations.  This ensures they have the appropriate bonds to protect the parties in the event someone makes a critical mistake or an unscrupulous employee try’s something fraudulent or illegal.  For the most part the risks to both buyer and seller have been largely mitigated by these audits and the Association of Realtor standard Residential Purchase Agreement or RPA.  Of course “For Sale by Owner” transactions do not have the safeguards in place like transactions where licensed real estate brokers and agents are involved; a pretty good reason to not sell your home on your own.

There is however, one point in almost every transaction where there are no protections, where there is risk for the buyer: When the buyer actually takes possession and sees the property for the first time, without the seller and their stuff inside.  Per the California Association of Realtors RPA, the seller is required to deliver the home to the buyer in substantially the same condition the buyer bought it in.  The fixtures and everything negotiated for is still there, left behind for the buyer.  The buyer will almost always conduct a final property verification or walk through prior to the close of escrow.  But what happens when a seller takes the drapes or they remove a light fixture when they move out?  What’s the buyer supposed to do and what can the agents do?  You might think that the buyer would hold up the close of escrow and demand either the return of the items or some form of compensation.  But more often than not, the buyer doesn’t actually see the empty home until the seller has moved out the day of closing.  Unless negotiated otherwise, a seller is not required to vacate their property prior to close of escrow and the money exchanged and the deed recorded in the buyer’s name.  Thankfully, the removal of included items doesn’t happen very often.  What does happen however, is that a seller moves their stuff out and they leave damage behind that either no one knew about and no one anticipated.  I recently had a transaction where the seller moved out and left behind a 2’ water damaged portion of hardwood floor.  There had been a large potted plant that hadn’t been move in years and once moved, revealed that the pot had leaked and the floor was a buckled and stained.  In this case I had the seller and had to tell them they were going to have to compensate the buyer or have the floor repaired.  It turned out a repair meant refinishing the entire wood floor.  The seller had no interest nor willingness in giving their buyer a brand new floor, and since every home is sold “as is,” a negotiation ensued whereby the seller agreed to write a check to the buyer in the amount of $1,000; roughly a third of the cost to replace or refinish the floor.  Luckily I had an upstanding seller and an understanding buyer, but can you imagine if the seller said, “Go pound sand,” and walked away from their responsibility?   On occasion this does happen.  More common examples of issues at close are when a seller takes away their area rug revealing a faded and sun damaged wood floor that was not evident when the carpet was down.  Or when a flat screen TV is removed and the wall behind was never painted.  Even little things like picture frame hangers and nail holes can be a problem.  One time I had a seller conscientiously pull out all the nails and meticulously patch and paint every hole with a small roller.  But when the paint dried it became clear that the walls had faded and the touch up made the walls look like a Dalmatian.  The seller was gone and the buyer had to repaint and boy were they pissed.   Even the best intentions can sometimes cause a problem with a transaction.  I think of all points in a transaction, this is the one I am always most nervous about.  Usually resolution falls on the shoulders of the Realtors involved.  I make a call, the other agent makes a call.  Most of the time it’s little dollars and the situation gets resolved amicably.  Just another example that using a well-respected Realtor for representation doesn’t cost, rather it saves.

About Tim Freund

Tim Freund has been a licensed real estate agent/broker since 1990. He spent 14 years as a new home sales rep, ran his own boutique resale brokerage for 5 years and is currently an Estates Director for Dilbeck Estates/Christie's International Estates in Westlake Village, Ca. Tim is a Certified Residential Specialist (CRS), an Accredited Buyer's Representative (ABR), a Corporate Mobilty Specialist (CMS) and a Senior Real Estate Specialist (SRES). Tim has successfully negotiated a loan modification for a client and is a professional short sale negotiator. Tim has been married 28 years, has 2 children, is a native Californian and has been a resident of the Conejo Valley since 1991.
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