Meet the Cast of Characters in a Home Sale

Q: My husband and I are in the market for our first house. We think this is a good time to buy, especially when mortgage interest rates are still quite comfortable. We know that once we find a house we like, we have to enter into a contract with the seller. Who prepares this contract? What kinds of real estate professionals should we work with, and when do we get them involved in the transaction?

A: Those are excellent questions. Often, those of us in the real estate business tend to forget that many people -- especially first-time home buyers -- have no real understanding of the process.

A number of players are involved in residential real estate, each of whom has different functions. Let's look at this cast of characters:

Seller. He or she is interested in obtaining the highest market price for the house. While some sellers try to sell without using a real estate agent, in most cases the seller will sign a listing agreement with a real estate brokerage company, giving the real estate broker the exclusive right to market and sell the house.

Real estate broker. A broker is licensed by the state or the District and is authorized to conduct the business of selling real estate, commercial and residential. Typically, brokers have agents working for them, and these agents often conduct open houses and show the seller's property to prospective buyers.

Real estate agents. Agents must also be licensed. In most U.S. jurisdictions, the agent must be licensed for a set number of years to become a broker.

Buyer. This is you and your husband, strangers in the complex world of real estate. All too often, buyers end up paying for everything, including the lender's hidden extras, as well as some illegal charges.

Lenders. The people who lend buyers the money to purchase a house. Lenders are concerned primarily with market rates. (The technical term is "yield.") Most lenders are legitimate; however, there are lenders who prey on unsophisticated buyers, making mortgage loans that are designed to fail, thereby causing the house to be sold at a foreclosure sale. Lenders will require a buyer to sign a promissory note and a deed of trust. The latter, which is recorded on land records in the jurisdiction where the property is located, is the security for the lender and is also referred to as a mortgage. When you buy your house and get a loan, you will receive a deed to the property. You will then deed the house in trust to a trustee selected by the lender. Should you default on your loan obligations, the trustee has the legal right to sell your property at a foreclosure sale. Hopefully, you will never hear from the trustee until you have paid off your loan and have the trust deed released from the land records.

Real estate lawyer. As a buyer, you have the right to retain an attorney of your choice to represent you during the entire transaction, from contract negotiation through settlement. The involvement of lawyers varies by state. In some jurisdictions, a lawyer gets involved only if problems arise; in other states (such as in the Washington area) lawyers are often retained at an early stage, usually before the buyers enter into a contract. The lawyer will also advise the buyers on the best way to take title. If you are single, you buy as "sole owner." If you are married, it is best to take title as "tenants by the entirety." This is the strongest form of protection; if one spouse dies, the property automatically (by operation of law and without having to go through probate) vests in the surviving spouse. Additionally, if there is a court monetary judgment against only one party, the house cannot be sold to satisfy that judgment. It is to be noted, however, that several years ago, the Supreme Court allowed the Internal Revenue Service to break such a title when there was a tax lien against just one of the parties ( United States v. Craft, 2002).

If you are buying with a friend or domestic partner, there are two ways to take title: joint tenants or tenants in common. You should discuss your personal situation with your lawyer to determine the best route.

Title company/settlement attorney. When you are finally ready to buy your house, you will have to use a title company or a settlement attorney. At settlement -- also called "closing" -- a large number of papers must be signed by the buyer and seller. The seller signs a deed, which conveys the property to the buyers, and the settlement statement (a HUD-1). The buyer signs the loan documents, a truth-in-lending statement, a bunch of affidavits and disclosure forms, and the HUD-1. The sales proceeds are collected by the settlement company, which makes the appropriate disbursements. If the seller has a mortgage, it will be paid off. The government charges, such as recordation and transfer taxes, will be paid, as well as any real estate commissions. The balance of the sales proceeds will then be turned over to the seller.

This sounds complex, and for the novice it is confusing and often intimidating. But the various real estate professionals listed above can be helpful. You have to keep in mind, however, that with the exception of an attorney specifically retained by the buyer, most of the other players have one objective: Make the sale and get the commission.

You have asked when you should consider hiring a professional. Here are my suggestions.

You should first contact a mortgage lender and determine how much you can comfortably borrow. You don't want to find your "dream house," only to learn after the fact that you cannot qualify for a loan on that house. Many lenders will give you what is known as a "comfort letter" -- a statement that you are qualified to purchase a house up to a certain amount. I caution you not to show that letter to anyone (other than perhaps your attorney) until after you have signed a sales contract.

Why? Let us assume that the comfort letter says you can qualify for a purchase of up to $500,000. Why provide that to a seller? If the seller knows you can qualify up to that amount, your chances of negotiating a lower price are significantly reduced.

Next, look around and find the house you like. If you want to hire a "buyer's broker," that is your choice. But make sure that the agreement you sign with that broker does not obligate you to pay him or her; should you sign a contract, the seller will pay the buyer's broker, through a split of the commission with the listing broker. Additionally, I strongly recommend that your buyer's broker/agent not be with the real estate company that has the listing from the seller. Although this practice is legal, the possibility of a conflict is just too great, so why take that chance?

You have now located the house you want to buy. Your broker/agent (or the seller's broker, if you are not represented) will prepare a sales contract for you to sign. That's when you should retain an attorney to review the contract. The attorney will assist you in understanding the contract terms, as well as include protections for you. For example, is the contract contingent on your obtaining a satisfactory home inspection from an inspector of your choice? Is the contract contingent on the house appraising at the contract price? In today's market, the appraisal ordered by your lender may be lower than the contract price, and you may have to come up with more money to go to closing.

The process takes time, patience and knowledge. A good professional can smooth the path toward a successful purchase.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.