Real Estate Basics

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CLICK HERE>GLOSSARY OF REAL ESTATE TERMS<CLICK HERE

Welcome to Real Estate Basics. This page is dedicated to giving consumers an overview of how the residential real estate business is conducted in this area. If you are uncertain of any terms in this article, please refer to the Glossary.

Properties and Ownership

Let's use Des Moines as an example. On any given street there are a number of homes. Every home is owned, either by an institution, organization, a trust, or an individual, by an instrument called a Deed. The homeowner is given a bundle of ownership rights in accordance with federal, state, and local laws and regulations. The Deed is the owner's proof and certificate of ownership.

The homeowner is not free to do what they want on the land however, laws and regulations will govern how they may use the property. They are also obligated to pay taxes on the property twice a year to the local government to maintain services in the city/township and county. Depending on where the land sits, an owner may have severe restrictions on how they may behave on the property or use the land.

The Property Market

Owners of property may wish to sell the rights to their property for various reasons. Often the property has been pledged as security for a loan, maybe the loan was to buy the property itself, a mortage.

With residential property (homes), the seller often approaches a Broker, for example Remax, to help sell the property on consignment, meaning the seller will pay a fee only if the home sells. This Broker has fulfilled certain requirements set by the State of Iowa to be able to handle the sale. The Broker will often have representatives, Agents, that will actually represent the client with her sale. Agents who are members of the National Association of Realtors, and in turn The Iowa Association of Realtors, and the Des Moines Area Association of Realtors, may call themselves, and use the term, REALTOR®.

Listing the Home

Real Estate Agents in most cases are commissioned salespeople. They use the Brokerage to list the client's property for sale, often with the Multiple Listing Service, or MLS, a collection of cooperating brokerages that offer to share commissions with one another. So, for example, if my a prospect wants to sell-list a home with me, the seller signs an agreement whereby the brokerage will take the listing, and I will be his agent-representative on the sale. I put a sign in his yard that identifies me, Matt Grohe, and identifies the broker, RE/MAX. The property is also put on the MLS where any agent who pays a subscription fee may view it, though the public may also view it free on Realtor.com, DMAAR.com, Yahoo! MSN, and so on. There are over 1600 agents in the area, and thousands of searches on DMAAR.com and Realtor.com, so getting the property on the MLS provides very good exposure to the marketplace.

The MLS and Cooperation-Exploding the Myths

Now, in the case of RE/MAX and most other brokerages in the area, any MLS participating agent can show a MLS listed home to a prospective buyer, that includes agents from Iowa Realty, Coldwell Banker, First Realty Prudential, Burnett, Moulton, Hunzicker, and the like.

This is confusing for many buyers. The perception seems to be that listings are exclusive, for example a RE/MAX agent can only show RE/MAX homes, or that agents with another brokerage get angry if I want to show the buyer a home listed by say, Burnett Realty. Honestly, they do not get angry, they welcome the buyer agent because agents want to sell homes so that seller can pay them! Sure agents would like to sell the home themselves, but in the MLS we cooperate, so it is OK for buyers with a RE/MAX agent for example to put an offer on any home from any MLS listed Broker. Buyers may also use their MLS cooperating agent to present offers to any other seller for that matter. In fact, if a property is MLS listed, the agent or seller in the vast majority of cases cannot prevent a buyer with an agent from a competing broker from viewing the home.

The Buyer Agent and Commission Splits

Buyers often wonder how their agent gets paid. In this market sellers agree when they list their property with a MLS Broker to offer a certain percentage of the total commission to the buyer agent. Usually the commission is split in half. For example, the traditional commission has been 7% in this market. On a $100,000 home that's $7,000 the seller would agree to pay, if the home sells. Half ($3,500) stays with the listing agent, and half, $3,500 (3.5%) is offered to any agent who can bring in a buyer. While the buyer does not pay the agent directly, since the buyer pays for the house, it is the buyer's money that the seller will turn around and give to the buyer agent in the event of a sale.

Flat Fee Brokers

Some Brokerages do not use the MLS and do not offer to share commissions with outside agents. In Des Moines there is one such company, flat fee broker Next Generation Realty. They charge the seller a set price if they sell the home, and require the seller to hold open houses, do showings and so on. In this situation the buyer will be represented by the same agent who lists the home, which in my opinion can sometimes cause problems. The property will not appear on Realtor.com, DMAAR.com, and will likely not be sold by any of the 1600 MLS cooperating agents. The property will usually just be advertised in newspapers and on the Broker website with all inquires essentially handled solely by the listing agent. In some special cases however, a flat fee seller will agree to offer an extra commission for a buyer agent.

For Sale By Owner, FSBOs

Some sellers, usually to avoid paying a commission, will try to sell their home directly. They may do this by simply putting a sign in the yard. If a buyer wants to purchase the home they may use the services of an agent, but the fee will have to be paid either by the seller, or by the buyer client themself. There are now organizations to help the FSBO seller by allowing them to put heir home on the MLS for a small fee, they then agree to a percent of the sale price as an incentive for MLS agents to bring in a buyer.

Foreclosures and HUD Homes

Sometimes people cannot make their house payments. In these instances the lender will have to step in and take away the rights of the owner to occupy and hold title to the property through court action. Every state has different procedures by which creditors may seize rights from an owner. There is a short period where an owner may reclaim the home by a Right of Redemption, by paying all money owed in full. Usually though, people who get behind cannot exercise this option. The property then goes through a process where the debts are discharged and it is put back on the market with an MLS cooperating Broker. The purchaser of the property will get a clear title, and the purchased home will be no different than any other.

Offers to Purchase

Let's say a buyer has found a property to purchase. The buyer makes an offer in writing, spelling out the terms of the sale and the consideration, and puts up a small deposit known as Earnest Money. The offer is given to the listing agent, or seller, and negotiated. If both parties tentatively agree to some terms, the agreement is said to be Executable, meaning that if conditions of the deal are met, the property will be sold. The money put up by the buyer is held in trust, or Escrow, until the terms of the agreement are met or it is rescinded by one party.

Escrow

Most buyers use a lender to help them finance their purchase. When that happens, the lender will hire an attorney to research the title of the property. Specifically, they will research the property to make sure that the seller can actually sell the property, that any debts against the property will be paid by the seller, and that anything that will affect the lenders security or the buyer's rights to the property is made known before the sale closes. During this time the Escrow company will begin on the seller's side to contact mortgage companies and arrange payoffs for any money that is owed on the property, or any money that was borrowed using the property as collateral. Sometimes transactions stall in this phase. Things can happen with the sellers ability to sell the property, or with the ability of the buyer to finalize the purchase.

Closing

If everyting goes well however, the rights to the property will be transferred to the new owner. The new owner will then be responsible for paying taxes, and maintaining the property in accordance with all laws, codes and regulations. The consideration (money) the buyer has given will be divided up to whomever the seller owed money to. The Broker(s) will receive their fees at that time as well in accordance with the terms of the initial listing agreement and the buyers offer to purchase.

Thank you for taking the time to read through this article. I hope it was helpful to you. If you have other questions about real estate ownership, or about the buying and selling process, please fill out the form below and I will provide you with a speedy reply. Thanks again!