News Archives InfoFax Affordable Finance Initiatives Nonprofit Resources research mainpage
Download as
word processing file

A. Pre-Contract

1. Prepare "Contract for Purchase and Sale" of Real Estate. This is usually done by the Buyer, but it may be done by either party. The Buyer will often want the Contract to contain various contingencies clauses that allow him to cancel upon the occurrence of specified circumstances. A common type of contingency allows the Buyer to cancel if he or she is unable to obtain financing. Developers often negotiate various contingences that allow them to cancel in the event that their "due diligence" investigation reveals that the property is not suitable for their proposed project (issues such as zoning, environmental pollution, appraisals, government funding, etc.). Rather than having a series of specifically worded contingency clauses it may be preferable to simply have a "free look" type provision that gives the Buyer a specified period of time in which he or she can cancel the contract for any reason (thus allowing for the performance of whatever due diligence investigations deemed appropriate).

2. Prepare Memorandum of Contract for Purchase and Sale (optional) for recording in the public records of the county where the property is located. This document should be used if the Buyer has some concern about the property being transferred by the Seller prior to closing.

3. Prepare an Earnest Money Escrow Agreement, when needed, wherein a third party (such as the attorney for one of the parities or the title company) will hold the buyer's deposit so that the buyer will know that the deposit will be returned expeditiously in the event that the buyer is entitled to its return pursuant to a contingency that may be specified in the Contract (such as a financing contingency, etc.). The Escrow Agreement does not unnecessarily have to be a separate document but can be included in the body of the Contract for Purchase and Sale (with the Escrow Agent signing the document so as to indicate his or her agreement with the escrow provisions).

4. Execute Documents: The documents prepared in accordance with paragraphs 1, 2, and 3 above should be executed by the Buyer and the Seller and the Earnest Money Escrow Agreement should also be executed by the Escrow Agent. All documents should be carefully reviewed by both the Buyer and the Seller with particular attention directed to the costs and expenses to be paid by the respective parties so that there will be no misunderstandings at closing.


5. The above documents are executed by the parties

6. Financing: If the purchase is to be financed with a loan, the Buyer must obtain a commitment from the lender and then work to meet all of the lenders stated requirements. Most lender will require that the borrower put the property up as collateral. For that reason the closing on the mortgage loan and the closing on the purchase of the property must occur simultaneously.

7. Title Insurance: The prudent Buyer will order a title insurance commitment from a reputable title insurance company (the actual policy will be issued after the closing). This document will indicate any existing liens, mortgages, judgments, or other title defects that may need to be cleared up prior to closing (or paid off at the closing). Sometimes the Contract for Purchase and Sale will requires the Seller to provide the Buyer with the title insurance commitment.

8. Leases: The Buyer should examine any leases currently in effect on the property (title is usually taken subject to all existing lease agreements).

9. The Buyer, if so desired, may order an appraisal of the property

10. The Buyer orders a survey of the property, a termite inspection and an inspection of the building.

11. The Buyer needs to request "estoppel" affidavits from all mortgage and lien holders. Optionally, the Buyer can request a mortgage holder's permission to assume the obligations of the Seller under their mortgage along with conditions and instructions for assumption.

12. Call the zoning office of the county in which the property is located to check current zoning on the property to be sure it is compatible with your intended use.

13. Check with the city and the county real property tax collector to be sure the taxes and all other assessments have been paid and ask for the amount of taxes due for the most recent tax year, because this figure will be used to prorate taxes on the closing date.

14. Call the Recording Department for the county in which the property is located to determine their fees for recording all documents and any other fees which must be paid at the time of recording, such as documentary stamps and intangible tax, in order to prepare the closing statement.


15. Closing Statement: There needs to be a statement indicating how closing costs and sale proceeds are to be paid and disbursed. The closing statement is usually, but not always, prepared by the Buyer. If a mortgage loan is being used to pay a portion of the purchase price there will be one closing statement for both the loan closing and the closing on the purchase of the property (wherein the costs and disbursements for both transactions are consolidated). Most of the figures required for a closing statement are self-explanatory. However, some discussion is necessary with reference to the prorations for taxes and interest on mortgages: (i) Taxes - Real property taxes are usually due near the end of the year to which they apply and are prorated to the date of closing, with a credit given to the Buyer for the number of days the Seller has owned the property based on the taxes on the property for the prior year. The new owner, i.e., the Buyer, will then be responsible for paying the entire tax bill for the year in which he obtained title to the property. (ii) Interest - Interest on most mortgages is paid in arrears, i.e. a mortgage payment which is due on November 1st will cover interest due on the mortgage from October 1st through October 31st. Therefore, if closing is to take place on the 15th day of October, the interest for the month of October should be prorated to the date of closing, with the Buyer receiving a credit for the number of days the Seller owned the property during the month of October. The Buyer will then be responsible for paying the entire principal and interest payment due on November 1st.

16. If a mortgage loan will be used to pay the purchase price, prepare a Mortgage and Security Agreement and a Promissory Note covering the financing. Prepare an Assignment of Rents and Leases if required by any new mortgage holder.

17. The Buyer must have cash or a certified or cashier's check for the amount needed for closing, as indicated by the closing statement, and must bring an insurance policy covering the property listing any mortgage holders as "loss-payees".

18. All closing documents should be properly executed and all monies should be paid out in accordance with the closing statement.


19. Record the Deed, all Satisfactions of Mortgage, Termination Statements under the Uniform Commercial Code, plus any new Mortgages and Assignments of Rents and Leases. The Buyer is generally only responsible for recording the Deed and any Assignments of Rents and Leases required by any new Mortgage holder, together with the payment of recording fees, documentary stamps and intangible tax as required under the Contract for Sale and Purchase; however, the Buyer should confirm that the Seller has recorded all Satisfactions of Mortgage and Termination Statements under the Uniform Commercial Code.

20. Once all documents are recorded, request that the Owner's Policy of Title Insurance be issued.