Residential real estate transactions are the most prevalent form of legal transaction in the State of New Jersey. While each real estate transaction is unique in its own way, they do follow a series of events which are described below.
The four phases of a residential real estate transaction in NJ are as follows:
- Contract Formation
- Due Diligence and Inspections
- Lender Financing
- Title Insurance
- The Closing
Understanding the Contract Formation Process
A real estate transaction begins with a Contract. In New Jersey, most residential real estate Contracts commence with a Contract prepared by a real estate broker. Nearly all the houses that are for sale in New Jersey are listed through a real estate broker. The initial Contract signed by the parties is then normally sent to an attorney to review.
One attorney represents the purchaser and another attorney represents the seller of the real estate. New Jersey Law provides for a three-day attorney review period to allow the attorneys to examine the terms of the Contract. During that three-day period, the attorneys typically prepare a letter addendum inserting certain provisions on behalf of their clients. These attorneys then discuss their respective letters and arrive at a final set of terms for the Contract. Once this process has been completed, the Contract is “out of attorney review.”
Requirements of Due Diligence and Inspections
Once a Contract is out of attorney review, the purchasers typically engage an inspector to examine the property for any significant structural or other defects. The inspector provides a written report assessing the property, and the attorney for the buyer forwards this inspection to the attorney for the seller. Normally, there follows a negotiation over any repair items that need to be made. Often, a purchaser may simply agree to a financial credit rather than making actual repairs, if repairs are not significant. When the parties have agreed for the repairs to be performed, the seller then undertakes whatever repairs have been agreed to.
The vast majority of real estate purchases are accomplished with the assistance of a lender. There are a variety of mortgages available to purchasers from conventional mortgages where a purchaser is normally putting at least 20 percent of the purchase price down toward the purchase, to FHA or other less conventional loans where a smaller percentage of monies are put “down” by a purchaser. Loans can be fixed rate or adjustable, but most residential loans have a 30-year term and are fixed rate. A typical real estate Contract will have a date by which a firm mortgage commitment must be received from the buyer. Once this mortgage commitment is received, the parties can then begin to prepare for a Closing.
Financing the Purchase
As soon as a buyer signs a Contract to purchase real estate, the process of obtaining financing starts. Most residential real estate contracts have a mortgage contingency, which gives the buyer a certain amount of time, normally about 45 days, to obtain a written commitment for a mortgage from a lender. In many cases, the buyer may have started the process even earlier, obtaining a pre-qualification from a reputable lender. The lender can issue a “prequal letter” to buyers to strengthen their hand when negotiating with a seller of real estate. After a Contract is finalized, the buyer will submit an application to a lender seeking a mortgage commitment. This process can take anywhere from a couple of weeks to 6 weeks or more depending upon the circumstances. When a lender has reviewed and approved the application, a written mortgage commitment is issued.
Understanding the Title Insurance Process
If a lender is involved in a transaction, then the lender will insist and require that title insurance be purchased insuring the property. Title insurance is an insurance policy that protects the purchaser and the lender from defects in the “title” to the property. This can include defective deeds, overlaps in property descriptions, undischarged liens, old mortgages that have not been discharged, and other items that might impair the value of the property. Normally, a lender would like a survey to be done on the property and for the title company to issue a title insurance policy that insures the property as depicted in the survey. The fee for title insurance is a one-time premium payable at Closing.
Finalizing the Sale at Closing
Once all the above items have been completed, a Closing is scheduled typically at the office of the buyers’ attorney. If there is a mortgage or financing involved, the buyers would first close on their loan so that funding is available for the Closing. The buyers’ attorney receives the funds from the lender and then issues checks payable to the seller, the title insurance carrier, the realtors involved, the attorneys involved, the municipality for the payment of the next quarter’s taxes and any other expenses included on the Closing Statement for the transaction. Once the Closing Loan is completed, the sellers’ attorney delivers the deed and several other documents related to the sale. The deed is recorded and when the checks are issued and the deed is recorded, the transaction is complete.
Work with our Real Estate Attorneys
If you are buying or selling a house in the State of New Jersey, you need an experienced real estate attorney that understands the New Jersey market. The attorneys of Byrnes, O’Hern & Heugle have helped numerous homeowners throughout Monmouth County and across New Jersey.