Disposing of Property

Selling Property: Brokers, Title, Closing, and Taxes

By J. W. Looney.

Property transfers are complicated by local restrictions, state rules, federal regulations and tax laws. The seller often must turn to professionals for guidance in accomplishing the orderly transfer of possession and title to a new owner.

After deciding to sell, the property owner must determine whether to employ a real estate broker or attempt to sell the property without one. Important decisions must also be made about what to include in the sale, and the price the property will be sold for. It is on this latter point that the real estate broker can be of great assistance. In addition, services of an appraiser may be desirable to help determine the property's current value.

If the seller enlists the aid of a real estate broker, the seller and broker must agree on terms of the broker's employment. These terms normally are set out in a "listing" contract.

Typically, brokers in a given area will use standardized listing contracts. The seller and broker may agree to include items that are not part of the standard form contract. If so, these should be specifically detailed. Basic types of listing contracts include open listing, net listing, exclusive listing, and exclusive right to sell.

Open listing may be either an oral or written contract. It is a simple agreement in which the seller agrees to pay a stated commission if the broker obtains a buyer to sign a purchase contract agreeable to the seller. This does not preclude the owner from making the sale nor does it preclude contracts with other brokers.

Although there are certain advantages to the seller, this type contract is not favored by most brokers and may have disadvantages for the seller as well. The broker may not be interested, knowing other brokers will also be authorized to obtain buyers for the property. And a broker who does sign up is less likely to promote and advertise the property.

Net listing is the second type of listing contract. Here the owner sets a base price below which the property is not to be sold. Generally the real estate broker is authorized to add the commission or fee over and above this base amount.

Many owners prefer net listing because they can be assured of receiving the base price. Most brokers do not favor this type contract and many refuse to sign one. Although the arrangement may be oral or written, it is advisable to put all terms into writing particularly the net price expected by the owner.

Exclusive Listing

A more common type of listing contract is the exclusive listing, preferred by most real estate people. One broker is appointed to act as agent for the seller for a set time often three or six months.

The broker who obtains a buyer during this period is assured of a commission. Thus, brokers are more likely to promote and advertise the property.

A similar arrangement is exclusive right to sell. But here the broker is entitled to a commission if the property is sold at any time during the contract term even if the owner arranges the sale.

As a practical matter, most brokers prefer this arrangement. However, many sellers often have contacted potential buyers on their own before the listing. So it is fairly common practice to modify the exclusive right to sell contract by providing that the broker gets no commission if a sale is concluded with a buyer previously contacted by the seller.

No matter which type listing contract is used, seller and broker should agree on a number of essential points. Particularly important is that the sale price and terms of sale be specified, and any personal property to be sold with the real estate be designated.

Both parties should understand the basis on which the real estate commission will be determined. Generally a broker's commission is based on the selling price, and may vary from five to ten percent depending on the type of property involved.

Other provisos of the listing contract may specify the amount of "down payment" or ... earnest money" expected from a Potential buyer, and what is to be done with this money until final transfer of the property.

Multi-Listing

In some areas, brokers have a "multi-listing" service under which a number of brokers can be authorized to sell the same property at the same time.

Many multi-listings provide for sharing the commission between the real estate office obtaining the listing and the office which arranges the sale. Such arrangements often are advantageous to the seller who is assured of the widest possible efforts to obtain a buyer.

Once an interested buyer has been found, the real estate broker negotiates a sales contract between seller and buyer. In most areas, brokers are authorized to prepare the sales contract. It may also be prepared by a lawyer, and in some states local law requires a lawyer.

Negotiations between the parties often are handled exclusively by the broker with no direct contact between buyer and seller until after the sales contract is completed.

The typical contract includes price, financing arrangements, closing date, possession date, type of deed to be transferred, insurance requirements, title examination, agreements on taxes, and other matters the parties wish included. The contract should contain a legal description of the property and specify any personal property involved in the sale.

Many contracts will also include arrangements for a survey of the property and inspections such as termite, plumbing and heating, or electrical.

The contract may include determining who bears the loss if the property is destroyed before the closing date.

Once the parties reach an agreement, the buyer usually deposits earnest money toward purchase of the property. Typically this goes to the real estate agent who puts it into an escrow account in a bank. Earnest money of ten percent of the purchase price ordinarily is required. This will be applied toward the total purchase price once the sale is closed.

Title Examination

Most real estate sales contracts provide for the seller to deliver "marketable title" to the property. That means title can be transferred free of reasonable doubt as to its validity. The purchaser is thus assured that involvement in a lawsuit related to title is unlikely after purchase.

Once the sales contract is agreed upon and earnest money deposited, the buyer gets a specified time to obtain a title examination of the property. The buyer has an opportunity to obtain professional assistance in this examination.

If no title defects appear, the sale can be concluded. But should examination of title reveal defects that raise questions about its validity, the seller is given time to correct the defects. If the defects cannot be corrected within a reasonable time, the buyer may be relieved from the purchase contract.

Much misunderstanding arises in the title examination process because of its complexity. The process requires a thorough search of courthouse records in the county where the real estate is located.

In some states the search is made by professional abstractors who furnish a certified summary of their findings. This summary, called abstract of title, can be examined by the attorney for the buyer. In other states the search is conducted by the attorney directly.