LEGAL TALK by Phyllis Oeser



How to proceed with your real estate transaction if you choose NOT to use a title company

In our previous article we discussed the decision of whether to close your real estate transaction at a title company. Just as a reminder from the last article, you will not have this choice to make if the buyer is obtaining a loan from a bank or mortgage company, as the bank or mortgage company will require the transaction to be closed at the title insurance company.

However, if the seller is owner financing, or if the party is paying cash, the decision is up to buyer and seller. Again, the most effective way for the buyer and seller to protect their investment is to close with title insurance. However, there are many transactions people chose to close without title insurance.

If you are using a realtor, the realtor may know of a real estate attorney who will prepare the necessary documents and act as the escrow agent for the transaction. If you are not using a title company to close the transaction, you will need to locate an attorney who prepares documents for real estate transactions. You may ask your friends, banker, mortgage broker, realtor, title company or many others who work in the real estate for a referral to an attorney. Be sure to ask the referring party what relationship they have with the referral attorney.

Once you have located an attorney, this attorney will usually agree to act as the escrow agent, meaning the attorney will accept the earnest money contract signed by both parties and the earnest money check. Again, the earnest money contract will be the road map with the details of how the transaction is going to be funded and the dates of various deadlines, including the date the transaction should close. It should be made very clear, preferably in writing, whether the attorney is representing the buyer or seller, or whether the attorney represents neither party and is simply preparing the documents according to the instructions of the clients. If you are the party who is not being represented you will be better protected if you locate your own attorney to review the earnest money contract and the documents prepared to close the transaction. This should not be very expensive and will give you the assurance you need to feel comfortable signing the documents to close the transaction.

There are many different ways to finance and close a real estate transaction. However, due to a limited amount of space and time, I am only going to discuss the two most basic and common ways. The banks and mortgage companies typically use three different documents to establish the amount of the loan, to protect their right to foreclose if the loan is not paid and to convey the title of the property from the seller to the buyer. These three documents are: Real Estate Promissory Note, Deed of Trust and a General or Special Warranty Deed.

When property is sold in this manner, it transfers the interest of the property to the buyer at the time of the closing of the transaction, and the buyer can file for a homestead exemption if they are going to reside in the home as their primary residence. When owner financing, the only interest the Seller retains is their rights as the beneficiary of the Real Estate Promissory Note. The Sellerís rights as a beneficiary include the right to collect the payment each month, the right to demand the property is maintained in good condition, the right to demand the taxes are timely paid, the right to demand the property is properly insured and other miscellaneous rights. The seller also has a right to be listed as the mortgagee on the insurance policy to insure they are contacted in the event a claim is made. If the seller is listed as the mortgagee, any payment for an insurance claim will be made payable to the buyer and the seller. This procedure is to insure the insurance proceeds are used to repair the home to maintain it in good condition.

The other less common way to finance and close a real estate transaction is by Contract for Deed. Many people come to see me asking for a Contract for Deed because they were used a lot in the past. Clients are more familiar with this document and think as a Seller it offers them greater protection. The Contract for Deed fell out of favor because of the sellerís potential to abuse its power. The Contract for Deed does not transfer any interest in title to the real property until the last and final payment has been made. In the past, sellers used this document to finance property to low income or high credit risk people because they could take the property back without going through the foreclosure process. This process became so abusive that the legislature stepped in and passed laws that provide some basic rights of notice to the buyers through Contract for Deed, similar to the foreclosure process. The Contracts for Deed also seem to create a lot of work for the court system. Therefore, I usually suggest to my clients that it is better to document their owner financing the same way as banks and mortgage companies.

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