What Every Home Buyer Should Know

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The Real Estate Transaction, A Realtor's Role

We would like to start by taking a step back and explaining the role of the agents in a real estate transaction. Most people are familiar with the real estate agent as representative of a home seller: listing and advertising a property for sale; representing the seller(s) during the offer and negotiation process; and so on. Where there appears to be some confusion is related to the representation available to a home buyer. Home buyers are permitted - and, in my opinion, always should have - independent representation, an agent to look after their interests throughout the entire process. Yet in many cases, buyers choose instead to deal with the sellers directly through the listing ("seller's") agent. The most common reason for this strategy appears to be the impression amongst buyers that by dealing directly with the listing agent - and thus minimizing the number of "middlemen" involved in the transaction - they will somehow get a better deal. This misconception arises from a misunderstanding as to how real estate agents get paid. Working with a Real Estate Agent.

When a seller lists a property for sale through a real estate agent and their associated brokerage, they agree on a sales commission to be paid upon the successful sale of the property; usually, this is either a fixed price, or, more commonly, a percentage of the eventual selling price. This commission gets divided between two parties: the first is the agent and brokerage representing the seller; the second, the agent and associated brokerage representing the buyer. It is important to realize that the seller pays for the buyers representation in the transaction even if the buyer chooses to forgo that representation. The full commission gets paid out even if the buyer goes directly through the listing agent; there is no savings to the seller, thus no reason to give the buyer a "better price".

As potential home buyers, hiring the right agent to work for you, one that will listen to their needs, and look out for their interests. Both the buyer(s) and the seller(s) should have their own representation, in my opinion.
The Agreement of Purchase & Sale
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Once the buyers have found the perfect house, and would like to put in an offer to purchase, they would have their agent fill out an "Agreement of Purchase and Sale". This agreement spells out all the details and conditions of the sale deemed acceptable by the buyers. It involves many clauses, the most important being the purchase price & date of possession; other clauses could include financing conditions, insurability of the property, successful building inspection, successful title search, water & septic tests (if applicable), and so on, as well as a deadline for a reply from the sellers. The offer is then submitted to the sellers through their agent, accompanied by a deposit from the potential buyers (typically 3% - 5% of the offered price).

The sellers' agent then presents the offer to the sellers, going over all the details to ensure they understand all the details and conditions. The sellers can respond in one of three ways:

(1) The sellers accept the offer, and all its details and conditions, "as is", and acknowledge such by signing the offer, in which case a deal has been agreed upon by both parties.

(2) The sellers do not accept the offer, but feel that it is a good starting point for the negotiation process. They would formally reject the offer, and submit a counter-offer to the buyers, spelling out the details and conditions deemed acceptable by the sellers.

(3) The sellers do not accept the offer, and feel that both parties are too far apart for negotiations to be worthwhile at this point in time. They could either formally reject the offer, or simply let it expire (go beyond the deadline for a response).

Presented with a counter-offer, the buyers can respond in one of two ways:

(1) The buyers accept the counter-offer, and all its details and conditions, "as is", and acknowledge such by signing the counter-offer, in which case a deal has been agreed upon by both parties.

(2) The buyers do not accept the counter-offer. They could either formally reject the counter-offer, or simply let it expire.

Whereas a seller may choose to counter an offer from a buyer, the buyer has no option to counter a counter-offer. If they continue to be interested in the property, they must submit a new offer, and begin the process all over again. This process of offer and counter-offer can happen several times, until either a deal is finally agreed upon by both parties, or they decide to move on, and the entire process can be quite stressful to both the buyers and sellers.

Going back a step, the lifetime of an offer or counter-offer depends totally on circumstances: a selling agent can't be expected to be in two places at once; the sellers or buyers may be tied up; and so on. I usually call the selling agent to inform them that my clients are interested in putting in an offer, and ask how long the will need to deal with the offer - then, with my clients, we decide how long to leave it open for.

Now We Have An Accepted Offer: Firming Up the Deal
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Once a deal has been agreed upon by both parties, the transaction moves into another phase, where the deal is "firmed up". During the initial negotiation process, various conditions were attached to the sale of the property; now, both parties are given the opportunity to ensure, to their satisfaction, that those conditions have been met, or to do what is necessary to satisfy those conditions. The time allowed to perform this due diligence varies according to circumstances but is typically a few business days, rarely exceeding 10 business days except under special circumstances; the time allow for each condition is spelled out in the sales agreement, and both buyers and sellers should be mindful of those deadlines.

Moving on to specifics, some of the more common issues in "firming up" a house are:
(1) Legal - The parties are given a period of time to have their lawyers review the sales agreement. I can't stress strongly enough to people to work with a lawyer who specializes in real estate law; deals can get complicated very quickly, and it is important to be represented by someone who is both knowledgeable of, and comfortable with, the entire process.

(2) Financing - The buyers are given a period of time to demonstrate, to the satisfaction of the sellers, their ability to finance the purchase. Usually, a letter from the buyers' financial institute indicating the bank's willingness to mortgage the property is all that is necessary. I usually recommend that buyers visit with a mortgage specialist - to get an indication of what they can afford - before putting in any offers, in which case there should be no surprises here, and the financing clause should be wrapped up within 2-3 days.

(3) Insurance - The buyers are given a period of time (usually 5 business days) to confirm that the property is insurable; they don't have to insure the property yet (they don't own it), they just need to make sure they can get insurance on it when the time comes to take possession. These days, insurance companies are very picky about what they insure - what used to be a given, no longer is - and this clause can occasionally be problematic, due to heating systems, wiring, roofs, oil spills, and so on.

(4) Building Inspection - The buyers are given a period of time to have the house inspected for defects and such. Building inspectors typically do not give the house a pass/fail grade; they simply identify defects and areas of concern as they see them. How those defects and concerns are dealt with is something to be agreed upon between the buyers and the sellers.
(5) Title Search - The buyers' lawyer will search the title of the property to ensure that there are no legal obstacles to the buyers obtaining clear title to the property. The lawyer will also make sure that tax payments have all been made and there are no liens on the home, or any personal property the seller has agreed to sell as part of the deal. This duration for this clause is typically 10 days.
(6) Documentation - The sellers are usually required to provide to the buyers relevant supporting documentation: 12 months heating costs; a property condition disclosure statement; a location certificate; current tax assessment; copies of lease agreements for any leased equipment (furnaces, etc); and so on. The buyers are given a period of time to review the documentation to ensure that everything is to their satisfaction.

So what happens if one or more of these conditions are not satisfied? One of two things can happen:

(1) The deal falls through, and both parties move on. Some conditions are deal breakers, the inability of the buyers to obtain adequate financing being the most common.

(2) The buyers and sellers return to the negotiating table to resolve these issues to their mutual satisfaction. By far the most common issue that arises is a latent defect in the house: an oil tank or wiring which is too old, in which case the house is not insurable; defects which came to light as the result of the building inspection, such as a foundation which leaks; the water sample taken from the well failed the water test; and so on. Typical solutions agreed upon by both parties might be: the sellers agree to fix the defect at their expense; the buyers and sellers agree on a reduction in price, to reflect the expense that will be incurred by the buyer to fix the defect; and so on. These types of issues are common, and easily solved, but can often be a source of stress to buyers and sellers.

Once All The Conditions Have Been Met, The House Is SOLD, & A Sold Sign Will Be Placed On the property

At this time:
A copy of all the documents will be sent to the purchasers' lawyer.
The buyers will firm up all of the financing details with the bank, and likely go in to sign the mortgage.
The property should be surveyed, if necessary.
The buyers will want to make sure they have connected the phone, cable and utility to ensure an easy transition of service and billing.
The buyers will book a moving company, or rent a moving van, as soon as they know what day they are moving.
The buyers should make an appointment to meet with their lawyer to go over all the closing costs. The lawyer will prepare a statement of adjustments. This confirms the selling price, adjustments i.e. oil, propane, taxes, and the balance (less the deposit). The buyers' lending institution will draw up a certified cheque for the lawyer to hold in trust.
The buyers will want to have their homeowner's insurance in place on the closing date.
On the actual closing date, the buyers should do a closing walk through of the property to ensure that: everything is in the house which should have been left as agreed upon; all chattels are in good working order; the house is clean and free of garbage.
The purchaser's agent should be present and working with the buyers during the whole transaction. They should be present for the building inspection, water tests and closing walk through.

After walking through the house, the buyers should meet with their lawyer to sign all of the document and release the funds to the vendors, and pick up the keys. They should make sure that they have all of the keys: side doors, garage door, shed, mailbox, etc.... It's also a good idea to have the locks changed.

Happy unpacking.