Whenever large amounts of money change hands, encountering scams or fraud can be a risk. Real Estate is often a target because uninformed buyers do not use the safeguards that have been built into the purchase process to help protect them.
I recently read of a scam where a guy would find empty foreclosed homes, break in, change the locks, and put up a “For Sale by Owner” sign. He would then meet with prospective buyers and offer to carry the financing with only $5,000 down. He would pocket the down payment money and do the same thing again a few more times before moving on to “sell” another house that wasn’t his to sell.
Caveat Emptor is Latin for “buyer beware”. You must remember that an ounce of prevention is always worth a pound of cure. No one except attorneys win when things go through the legal system. To help avoid potential pitfalls in purchasing a home, start by using a licensed agent to represent you. They can guide you to the best licensed and insured escrow and title insurance companies to help you locate a licensed home inspector and licensed appraiser. These professionals can help assure your transaction goes smoothly and your best interests are protected.
Escrow companies gather documents from the buyer and seller and hold funds in a trust account to disburse as instructed by the purchase contract at closing. They are also responsible for preparing the title for transfer and recording it. The escrow officer will not allow the escrow to close until all documents are received, reviewed and signed. In some states, attorneys specializing in real estate transactions oversee the closings.
Title companies review the chain of title and check for any liens, judgments, or encumbrances that need to be cleared before the title can transfer. They will issue clear title and defend you if a lawsuit is brought by another claiming an interest or ownership in the property. Title companies work closely with escrow officers to ensure a smooth transaction.
Home inspectors are an important part of the purchase process. They are hired by the buyer to thoroughly inspect the property for functionality of all appliances and systems, such as heating and air conditioning (HVAC), water heaters, roofs, etc. Their report is often used to have the seller correct noted deficiencies before close of escrow, or to make an allowance for these repairs in the purchase price.
Appraisers determine the market value of the property for the buyer and lender. They use a variety of methods to determine value, the most important of which is recently sold “comps” or comparable sales in the local area. Appraisers must be licensed and are paid for by the buyer, however they are now regulated by a third party Appraisal Management Company and are chosen at random from a Rolodex so the lender cannot chose who appraises the home. In fact, the buyer’s agent cannot communicate with the appraiser once the appraisal has been developed and sent to the client.
When you use a conventional lender to finance a piece of real estate that you are buying, they require you to use these 4 professional services to ensure they are protected on the property that they are lending you money to purchase.
When you pay cash or use seller financing on a property, you are not required to review anything or use any of these services. However, the only way to assure you have a great investing experience no matter what is to go through the proper steps of being a wise investor. No matter your level of investment experience, the Marshall Reddick Real Estate Network (MRREN) always encourages our investors to follow these simple steps. The cost of these services is minimal compared to the protection they provide.
When you take the time to do things correctly, you will have peace of mind since everything is being handled properly by professionals.