Advisories & Insights

With the tremendous amount of local real estate activity, first-time property-buyers will do well to understand the basic elements to property transactions. Most rights and responsibilities are formed at the signing of the purchase agreement, but a lot of things factor into a deal before it closes. Understanding a little about the various players and issues is essential to formulating the deal you want.

 

Agreements to buy or sell property are almost never enforceable unless they are in writing, signed by both parties and contain all material terms to the deal including a proper description of the property. Typically, the agreement is an "earnest money agreement." The buyer gives a deposit, called "earnest money," which is forfeited if he fails to exert reasonable efforts to complete the purchase.

 

Sophisticated buyers, such as developers, often prepare their own offers, but simplified earnest money agreement forms can be purchased from some office supply stores or online. Buyers searching for property with the assistance of an agent can usually rely upon the agent to provide an appropriate earnest money agreement; even so, the use of attorneys to prepare earnest money agreements for large or unique transactions is common.

 

Agents agree to advertise the sellers' property under a listing agreement. Listing agreements typically result in the seller paying commission only upon a completed sale. Historically, commissions have been 7 percent for residential and 10 percent for bare land, but special rates are becoming available for residential as well as commercial property.

 

A buyer is under no obligation to use exclusively a particular agent and generally owes no fee to his agent, but a buyer's agent is, by brokerage industry agreement, usually entitled to a portion of the commission at closing. While the buyer ordinarily is not bound to his agent, an agent representing a buyer nonetheless owes fiduciary duties to the buyer.

 

Offers are most often conditional, perhaps subject to the buyer's ability to obtain financing or complete a 1031 exchange, or to the issuance of government permits for building, subdividing or changing zoning of the property. Such contingencies have to be written into the initial earnest money agreement or the buyer may be forced into property he cannot use or, at a minimum, will lose his earnest money if he backs out.

 

The buyer, seller – or either's agent – can submit the earnest money agreement to escrow. While some sales close without escrow, the vast majority of deals require the seller to provide title insurance. Title companies offer escrow services to their customers. Such escrow services are a very economical way to professionally handle the buyer's loan documents, prorate the property taxes, ensure proper and timely release of seller's underlying mortgages, and record the deed to the buyer.

 

Traditionally, sellers pay the majority of closing costs. Closing costs include title insurance, escrow fees, and excise tax. Excise tax is, by law, the seller's obligation, and runs about 1.7 percent of the gross sales price. Sellers should therefore keep it in mind when setting the price.

 

1031 exchanges are in vogue. Available only for sales and purchases of commercial property, the 1031 exchange enables the seller to use sale proceeds to buy replacement "like kind" commercial property without currently paying capital gain tax on the property sold. Sale proceeds must be parked with an exchange accommodator and used to buy the replacement property within 180 days after the original property is sold, or the exchange fails and capital gain liability will be incurred.

 

If you are unsure about any aspect of your potential sale or purchase, seek tax and legal advice before entering into listings or earnest money agreements.