Preliminary Title Report (or Title Commitment)

The initial document generated when a policy of Title Insurance is ordered.  The Title Report shows all of the existing encumbrances on the title to the property.  This includes liens, as well as any other interest in the property held by someone else, such as an easement. A prudent buyer will have the Title Report reviewed by an attorney to identify any encumbrances of concern. It is rare for there to be an issue… but it happens. Only an attorney is qualified to interpret a Title Report.

A title company may offer a courtesy "title review." Note, however, that the title company's interests are not identical to yours. For example, the title company likely will not call out a shared driveway easement because the title company has no concern with it. The buyer? Well, that's a different matter. Don't rely on the title company's review of title.

Pre-Approval Letter

A letter issued by a lender stating that a buyer is "pre-approved" for a particular loan amount and purchase price. The term does not have an agreed definition and can apply generally to any such letter.

A Pre Approval Letter is Critical.

However, not every pre-approval letter is the same. There are three different types that vary in strength. Paricularly in a hot housing market, where there may be competing buyers, a smart buyer will make sure to get the strongest letter possible.

Pre-Approved is the Simplest.

In its simplest form, a “pre-approval letter" is based simply on what is reported by the buyer to the lender about their assets, debts, and income. These letters are often generated online. Because the lender is relying solely on what the buyer typed into the form (and the buyer was surely feeling optimistic!) there is a good chance that reality does not match. In other words, the letter notwithstanding, the buyer may not be able to actually get the loan. Accordingly, sellers do not give much weight to a pre-approval letter.

A Pre-Qualified Letter is Better.

A step up is the “Pre-Qualified Letter.” A pre-qualified letter is based on documents provided by the buyer to the lender. The loan officer (the consumer-facing employee of the lender) then uses those documents to confirm that the buyer is qualified for the sale price. This gives the seller at least some assurance that the buyer — and their offer — is legit.

A Pre-Underwritten Letter is Best.

The best of all is a “Pre-Underwritten Letter.” This letter tells the seller that the an actual loan underwriter has received and reviewed the buyer’s documents, and confirmed that the buyer can get the loan needed for the purchase. A “loan underwriter” is the person who actually reviews and approves — or denies — loan applications. So an offer that includes a pre-qualified letter is going to be considered the strongest, at least in terms of financing.

Read your Pre Approval Letter Closely to Confirm.

Because these terms are all fairly “loose,” your lender may not totally understand if you ask for a pre-qualified or pre-underwritten letter. When you get the letter, read it closely. It should say what the lender has received and reviewed, whether by an underwriter or not. So by the terms of the letter, if nothing else, you can determine the strength of the letter. And if needed, you can follow up to improve it.

Offer Expiration Date

The most misunderstood date in real estate!

Quite simply, this is the date on which an offer will expire.  Most commonly, the offer is prepared and extended by the buyer, to the seller. But a seller can also extend an offer to sell, to a potential buyer.

In either event, until the offer expiration date, the recipient of the offer has the right to accept the offer, which creates a binding contract.  Acceptance happens by signing and returning the document.

After that date, simply signing and returning is not enough. Rather, the extender of the offer has the right to approve the contract before it is binding.  In other words, if the seller returns the signed offer after the expiration date, it is a counteroffer subject to buyer's approval. 

Many sellers freak out when they see the offer expiration date. Don’t! If a buyer takes the time to extend an offer, they are very, very unlikely to bolt if the seller does not timely accept it. Rather, any rational buyer will show a little patience. So “missing” an offer expiration date is not a big deal!!! The buyer will almost certainly be thrilled to hear from you, whenever that may be.

Besides, any counteroffer by the seller terminates the offer. So if you get an offer and you know that you will be making a counter offer, then the offer expiration date is irrelevant. You won’t be accepting the offer in any event.

In almost all instances. the Offer Expiration Date is largely irrelevant. Either the seller will counter, or the buyer will still be thrilled to get back a signed document a day or two “late.”

Managing Broker

A real estate broker who is licensed to supervise other real estate brokers, Every real estate firm must have a managing broker who is responsible for supervising the firm's agents. Here in Washington, the legal term is Managing Broker and is defined by statute. The WA Deparment of Licensing issues the Managing Broker license.

Joint Tenants

When two or more people unmarried to each other co-own real estate, they own either as tenants in common, or joint tenants. When married, they own as community property.

For an unmarried couple, ownership as joint tenants may make the most sense. Joint tenants must own in equal shares, which may be a problem. But if both people contribute an equal amount, or if one is comfortable contributing more but only being half owner, then this option is available. The biggest benefit of joint tenancy is that, when one dies, the ownership automatically passes to the surviving owner. So it can be part of a very basic estate plan.

When people own as tenants in common, they have some flexibility in ownership. Tenants in common can own in unequal percentages. When one tenant in common dies, their ownership interest goes according to their will (or the law of intestate succession). So this works generally well when the co-owners are not also in a committed relationship.

For more, here is a good blog post on co-ownership of real property by single people (on FSBOLawyers.org).

FIRPTA (Foreign Investment in Real Property Tax Act) Explained

In 1980, the US enacted the Foreign Investment in Real Property Tax, or FIRPTA. The law requires foreign owners of real property to pay a 15% tax when they sell. In a twist, though, it is the buyer, not the seller, who is responsible for determining whether the tax is due. When due, the buyer must make sure it is paid.

FIRPTA is a law with teeth.

Specifically, the buyer must determine whether the seller is a “foreign person” as defined by the law. The seller is “foreign” if they are either a non-resident alien individual, or a foreign entity (a corporation, LLC, trust, estate, etc., that was legally created and exists in another country).

The law allows a buyer to accept a specific certification from the seller confirming the seller’s status. If the seller is a foreign person, then the buyer is responsible for withholding 15% of the sale proceeds and forwarding the money to the IRS. If the buyer fails to do so, then the buyer is liable for the tax due. Ouch.

Buyers: Make sure to comply with FIRPTA.

Otherwise you could have a very, very nasty surprise from the IRS: a bill for 15% of the sale price. On an average Seattle home, that would be about $100k. Double ouch!

Real estate forms should address FIRPTA

For a long time, the Northwest Multiple Listing Service forms (used by real estate agents) did not address this issue. Nonetheless, the vast majority of closing agents and escrow companies made sure the proper forms were completed, and the tax was paid when due.

In a recent revision, the NWMLS finally included terms to ensure compliance with FIRPTA. The standard contract form today requires the seller to indicate whether they are a “foreign person.”. The seller also must complete and sign a “FIRPTA Certification” (the NWMLS Form 22E). If the seller is “foreign,” then the contract instructs the closing agent to withhold and forward the amount due to the IRS, with the proper forms.

There is some confusion among real estate agents about how to use the NWMLS Form 22E FIRPTA Certification. Nonetheless, the NWMLS at least addresses the issue, meaning compliance is much more likely today.

In addition, I have my own free FIRPTA Certification.

Closing Agents and FIRPTA in WA

in this state, our closing agents are Limited Practice Officers. Licensed through the state Bar Association, they act essentially as legal technicians by preparing the legal documents needed to close a transaction.

Unfortunately, it appears an LPO may not be legally authorized to complete tax forms. If that is the case, then arguably they LPOs may not complete the forms required for FIRPTA compliance. On a practical level, nothing has changed and closing agents continue to honor the instructions in the contract about FIRPTA. But it is unclear how this will play out going forward.

Financing Contingency

A contractual term that requires a buyer to secure financing before the contract becomes binding.  So if the buyer’s financing fails, the buyer gets the earnest money back. However, most contracts require the Buyer to take certain steps in order to retain this protection, such as applying within a certain number of days of contract.

Escrow

Generally, a person or company that holds money or other property on behalf of other people who each have an interest in or claim to the property.  Real estate transactions require escrow because of the many parties (buyer, seller, lender, title insurance) and the many moving parts.

Escrow does a lot: it holds the buyer's earnest money and, when closing is near, the balance of the purchase funds (usually from the buyer and from a lender); it prepares the deed and all other documents needed to close the transaction; it makes sure the lender's documents are executed and recorded; it records the deed and accounts for all funds, disbursing the proceeds to the seller; and otherwise it makes sure the terms of the Purchase and Sale Agreement are given effect.

The person who actually provides the escrow services is the Closing Agent.

Earnest Money

Funds deposited into escrow by the buyer to demonstrate the buyer’s commitment to the contract.  The buyer breaches the contract if he fails to complete the purchase without some legal excuse for not doing so. The most common excuse is due to an unsatisfied contingency. In most instances, if the buyer breaches the contract then the buyer will forfeit the earnest money.

In Washington, a seller can keep up to 5% of the earnest money if the buyer breaches the contract. More than that, and you need specific contractual language in order for the term to be enforceable. So absent unusual circumstances (and the assistance of a lawyer) don't ask for more than 5%.

Real Estate Glossary: Due Diligence

The investigation of all aspects of home to confirm it is the right home for you. Due diligence begins with a physical inspection of the property, but it doesn't end there. It also includes a review of title, to identify any encumbrances on the property that might limit or restrict your use. Common examples include easements, such as a shared driveway, or Conditions Covenants and Restrictions (CC&Rs), which may also obligate you to a homeowners' association.

Speaking of which, if there is one, make sure you (a) know what it is responsible for, and (b) its financial health. If the HOA is essentially broke with expenses on the horizon... well, that's probably not an HOA you want to be a member in.

If you're planning on making any significant changes to the property, then you must also confirm that those changes will be allowed. You should consult your land use code of the city, county, state, etc. to confirm.

Due diligence usually happens once a home is under contract, with contingencies to allow for it. However, if there are multiple competing buyers, then you may want to engage in some abbreviated due diligence pre-offer so that you can eliminate your contingencies.

Finally, if done during a contingency, then defects in the property can be used to re-negotiate the contract. For example, a seller may agree to make certain repairs, or maybe the parties agree to reduce the sale price.