It is customary for a buyer to deposit money into an escrow or trust account once the Real Estate Purchase Contract (REPC) is signed by both parties. This payment is known as earnest money, and while the amount is negotiable, it often ranges between $500 and $5,000 in typical residential transactions. The escrow/trust account is typically maintained by a title company or real estate brokerage. In transactions which are completed successfully, the earnest money is held in escrow until the closing, at which time it is applied toward the purchase price. In most transactions, the REPC gives the buyer the right to terminate the contract for one or more reasons (these are known as contingencies), in which case the earnest money is returned to the buyer. However, if the buyer breaches the agreement, the seller can usually elect to keep the earnest money as a remedy for buyer's default. Many of the terms and conditions in a real estate contract are related to earnest money, and it is important to understand how the earnest money will be handled in your transaction.
In addition to providing certain escrow and closing services, title companies provides title insurance. Although it is not required by law, an owner’s policy of title insurance protects the buyer’s investment by insuring the buyer’s ownership interest in the real estate. It usually costs less than one percent (1%) of the purchase price, and should always be obtained. It is customary for the seller to pay for the buyer’s title insurance policy. Lenders always require title insurance so, in practice, it is a required component of most real estate transactions. Typically, a title commitment will be provided by the title company soon after a purchase agreement is entered into. This document sets forth the terms and conditions on which the title insurer is willing to issue a policy of title insurance to the buyer at closing (note: most title company offices seen around town are technically title agencies; the insurance policies themselves are underwritten by large, national title insurance companies). The title commitment also identifies all matters of record (encumbrances) relating to the property, for example: mortgages, liens or other assessments against the property, as well easements, covenants, restrictions and other similar matters. The title insurance policy is subject to all such matters of record, which are considered exceptions to coverage. As part of due diligence, a buyer should review the title commitment and be sure the buyer understands the significance of each identified exception.
Although 'settlement' and 'closing' have distinct meanings in the standard approved REPC, generally, these terms refer to the culmination of the purchase and sale transaction, at which the deed and all other documents are signed and delivered (and recorded in the county records, if applicable), and all funds are received, paid and distributed. Closings typically occur at the office of the title company, although it isn't uncommon for one or both parties to sign documents in advance and mail the documents to the title company, and not attend the closing in person. One of the most important documents at closing is the settlement statement (or closing statement). The settlement statement offers a detailed breakdown of all charges and adjustments to the parties in connection with the closing of the transaction. Each party should carefully review each line item on the settlement statement to be sure the entire accounting is accurate.
Those interested in doing a for sale by owner transaction (buying or selling a house without a real estate agent) should understand what a multiple listing service is, and why it is involved in most Utah home sales. A multiple listing service (or “MLS”) is a tool, in the form of an online database, that allows real estate brokers, and their agents, to share information with each other about properties being offered for sale, and about the commission splits that are available upon the sale of those properties. Brokers and agents make money when transactions occur, so it’s in their interest to help each other complete as many transactions as possible. A typical listing on an MLS will include a significant amount of information about a particular property, as well as information about the brokerage that represents the seller and the share of their commission that they will pay to a brokerage that represents a buyer, assuming a purchase transaction is completed.
The Wasatch Front Regional Multiple Listing Service (WFRMLS), which serves most of Utah, is owned by various local Realtors associations. The National Association of Realtors, and their local affiliate associations, are trade associations serving real estate brokers and sales agents who have paid fees and become association members. In order to use the WFRMLS, a broker must be a Realtor, must pay a subscription fee, and must agree to the policies and procedures of the WFRMLS. One requirement of every listing on the WFRMLS is that it must state the compensation offered to cooperating brokers who are also members of the WFRMLS. In other words, the listing must indicate the commission split (often 3% of the purchase price – half of the 6% that seller’s brokers commonly charge) that a buyer’s broker will be paid if his or her client purchases the property. By using the WFRMLS, its members are agreeing, with each other, to pay the commission splits shown on the listing.
Full access to information on the WFRMLS is limited to member brokers and agents; however, most of the same information is accessible to the public on numerous websites. Most people searching for a new house today utilize these websites in order to find information about properties that are available, including listing prices. By having a house listed on the MLS, FSBO sellers can maximize their exposure and the likelihood that their house will be found by a potential buyer. Today, for sale by owner sellers can pay a small fee (often a few hundred dollars or less) for the limited service of having a broker list their property on the MLS. These are known as ‘flat fee’, or ‘MLS only’ listings. Generally, these listings will direct interested parties, including buyer’s agents, to contact the seller directly for more information or to submit a purchase offer. As discussed above, all MLS listings, including FSBO listings, must indicate what compensation is offered to a buyer’s agent. For sale by owner sellers can designate any commission amount or percentage they choose, however unless a reasonable commission is offered, buyer’s agents may be inclined to ignore the listing.
Some buyers decide not to hire a real estate agent, hoping the seller will agree to lower the purchase price if there is no buyer’s agent requiring payment of a commission. In this scenario, it is important to understand that the seller’s agent must also agree to the arrangement. Remember, a seller enters into a listing agreement with a listing agent, and promises to pay that agent a commission (for example, 6% of the purchase price) if the house is sold. If a buyer’s agent procures a buyer, the listing agent will pay a portion of its commission to the buyer’s agent. If there is no buyer’s agent, the listing agent is entitled to the entire commission. In this situation, a FSBO buyer can ask the seller and the listing agent to modify their commission agreement (for example, by reducing the listing agent’s commission to 3%, along with reducing the purchase price by 3%). The likelihood of the seller and listing agent agreeing to this request will probably depend on market conditions and how much other interest there is in the seller’s property. If the seller is unwilling to lower the purchase price, it might make sense for the buyer to use a Utah real estate agent that offers a home buyer commission rebate.