The Basics of Real Estate Transactions: A Beginner’s Guide

Maybe you just want to buy your first home, or maybe this first property purchase is the beginning of your real estate investment career. Either way, understanding real estate transaction basics is essential.

Real estate closings can be a lengthy process so don’t worry if you can’t fully understand the way they work immediately. There are a lot of steps involved and we can’t guarantee all transactions will be the same, but there is a real estate transaction law that clears up what is necessary to take place. We’ll give you the basics so you know what to expect as a property buyer going into residential real estate transactions.

The Parties Involved in Real Estate Transactions

Buying a property typically involves a list of different players. In addition to yourself and the property seller, expect the following people to play some role in your real estate transactions:

• Real estate agent/broker
• Bank/lender
• Real estate transaction attorney
• Title company

Typically, those are the main parties that assist in finalizing real estate contracts and closing the deal.

The 8 Basic Steps of Real Estate Transactions

Let’s go through the basic steps of property transactions, so you can see how the above-mentioned parties may be involved and in which stage their assistance is sometimes required.

Related: How to Find Real Estate Deals: The Ultimate Guide

Step 1: Purchase Offer

Once you’ve found an investment property that you’re set on, you need to put in an official offer. Real estate investing for beginners is sometimes difficult because you don’t yet know what property valuation methods to use. If someone is selling a property that you’re interested in, but you don’t have the experience or tools to determine the right purchase offer, you may need to enlist the help of a real estate agent.

Related: How Much to Offer on a House: An Investor’s Guide

Real estate agents will help you draw up a formal contract with a good purchase offer for said property. Once you and the seller reach an agreement on the terms and contingencies, you both sign the sales contract and begin the process of this real estate transaction.

Step 2: Escrow Process

Not all areas require you to open an escrow account, but it is recommended. Why? Escrow describes a neutral third-party responsible for holding the documents and funds during the duration of the transaction process as real estate transactions can take weeks.

The best way to mitigate any risk of non-compliance with the terms of the contract from either party is to open an escrow account. This way, you’ll have some backup if the property seller tries to back out after the process has already begun. In this case, if there was no neutral party keeping things under control, you would’ve just wasted your time and money.

Step 3: Title Search

A title search will confirm to you that the seller of this property is actually the owner and has the legal right to sell it. It’ll also show up if there are any claims on this property. You don’t want to invest in a real estate property only to find out later that you’re stuck with multiple unresolved claims.

Step 4: Hire an Attorney

If this is your first time buying an investment property, you might want to get a professional legal opinion. There’s a lot of paperwork involved in real estate transactions. And it could be difficult for anyone, whether beginner or experienced, to go through them and understand all the legal terms. You don’t want to miss something important in the documents. In some states, real estate law requires the involvement of a legal party.

Step 5: Get Pre-Approved for a Mortgage

This isn’t necessary for real estate transactions, but for some property buyers, getting a mortgage pre-approval is actually their first step. That’s because it sets your financial limit from the beginning so you know what budget you’re working with. This will filter out any investment properties out of financial reach from the initial search, saving you time. Being pre-approved can also help you close on a property faster.

With a mortgage pre-approval, you also have the option of locking in an interest rate. This is obviously favorable as you don’t want your mortgage payments to be subject to any market fluctuations.

Step 6: Watch Out for Junk Fees

This is more of a tip than a real estate transaction basic, but it’s an important one. The cost of closing a real estate deal can sometimes add up to a lot more than you expected. Because you’re a newbie in the game, people might try to inflate the cost of their services. This will leave you paying a lot more than you need to. Your mortgage lender will try to hit you with a list of expenses we’ll sum up as junk fees. These typically include:

• Administrative fees
• Application and appraisal review fees
• Processing fees
• Settlement fees

Make it clear to your lender that you’re aware of these fees, and talk to them about reducing the costs.

Step 7: Home and Pest Inspection

This is a necessary step in any residential real estate transaction. You need to have an official report on the investment property’s condition. Do your research and hire an inspector for a couple of hundred dollars. That small fee will be worth it to know there aren’t any major structural problems with the property that you overlooked. (Check out the ultimate inspection checklist to learn what you need to be looking for.)

A pest inspection is another thing you need to seriously consider. Make sure there aren’t any infestations. If there are, you should request any problems to be taken care of before the purchase is complete.

Step 8: Renegotiate the Offer Before Closing

Before any real estate sales are confirmed to go through, renegotiate the purchase offer according to any issues you found. If your inspections unveiled some major problems the seller was trying to hide or didn’t mention, you have the right to demand repairs or a lower price.

Before you reach the end of any real estate transactions, it’s recommended that you walk through the investment property and make sure everything’s good. If repairs were agreed upon, check to make sure the seller fixed the issues. At this point, you’ve taken enough time to analyze the real estate deal and can confidently sign the closing papers.

Helping Hand for Beginners

You should never rush through real estate transactions. Make sure the basic steps we mentioned are covered so you won’t end up regretting your purchase decision. To make sure you’re really investing in a good income property, take advantage of Mashvisor’s tools. We offer data and analysis reports so that you can find the best investment properties in your real estate market. Our tools will help you go from a beginner buying your first investment property to an expert owning multiple investment properties. Learn more about our product.

If you’re a property seller looking to learn more about real estate transactions, read: How to Sell Your House: A Complete Step-by-Step Guide.