Real Estate Legal Terms

These articles were prepared by The Law Office of Mary Anne Vance, P.S., 1111 Union Bank of California Center, 900 Fourth Avenue, Seattle, Washington 98164, phone (206) 682-2333. It is a general statement of the law of the State of Washington law on real estate issues as of February 1998. The laws of other states differ from Washington law, and this article is not intended to describe the law of any state except Washington. These articles are intended for general informational purposes. They are not legal advice for a reader in any particular legal situation. The only way to obtain legal advice on a particular situation is to consult a real estate attorney.

Index

  • Closing is the completion of a sale of real estate. The buyer pays the sale price to the seller and the seller delivers a deed to the buyer. The closing agent sends the deed for recording with the county auditor to give notice to the public that the buyer now owns the property.

    Usually, an escrow agent or closing agent collects the sale price from the buyer and the deed from the seller. When the deed is recorded, the escrow agent pays the sale price to the seller.

    Often, the buyer borrows part of the purchase price from a lender, and the seller has a mortgage on the property. Usually, the earnest money agreement between buyer and seller provides that the seller will pay off their mortgage at closing. In that situation, the escrow agent collects the sale price partly from the buyer and partly from the buyer's lender, and pays the sale proceeds to the seller's lender to pay off the seller's mortgage and pays any funds left over to the seller. The escrow agent will also receive loan documents from the buyer's lender and have the buyer sign those documents. The escrow agent will then record the deed of trust or mortgage in favor of buyer's lender, to give notice to the public that the buyer's title is subject to the new loan document.

    In addition to paying seller and seller's lender, the escrow agent will pay other expenses, including property taxes through the date of closing, real estate agents' commissions, Washington real estate excise tax (which is 1.78% of the sale price in most parts of King County), recording fees, buyer's loan fees, reserves for taxes and insurance for buyer's lender, title insurance, and escrow fees. These payments will be charged to whomever of buyer or seller is required to pay them under the earnest money agreement. These charges and payments are summarized in a settlement statement prepared by the escrow agent.

    Buyers and sellers should ask the escrow agent to send them or their attorneys copies of the documents they will be asked to sign several days before the signing. This allows the documents to be reviewed more carefully, questions raised, and mistakes corrected before the meeting to sign the documents at closing.

  • A deed is a document used to transfer title to real estate. A deed must be in writing and must be signed by the owner in the presence of a Notary Public, and the notary's seal must be placed on the deed. The current owner is called "the grantor." The new owner of the property is called "the grantee."

    To give notice to the public that a new owner has title to the property, you must record the deed with the auditor of the county where the real estate is located. Record the deed immediately. If the deed is not recorded, the former owner can deed the property to another person, mortgage it, or cause the property to be subject to judgments and liens in favor of the former owner's creditors.

    To record a deed, a Washington State real estate excise tax affidavit signed by both grantor and grantee must be filed and the real estate excise tax must be paid. The real estate excise tax is 1.78% of the sales price in most areas of King County. Some transfers, such as gifts, are exempt from real estate excise tax. The County Treasurer or a real estate attorney will know if the transfer is exempt from tax. A statutory warranty deed is the most common type of deed. By this deed, the grantor warrants that his or her title to the property is clear of all liens and claims except those stated on the deed, and promises to defend the grantee's title against any other claims against that title made by anyone else.

    A special warranty deed is sometimes called a "bargain and sale" deed. This deed has a more limited warranty, that grantor has not placed any liens or claims on the property, except those stated on the deed, and promises to defend the grantee's title against any claims against that title made by persons claiming through the grantor.

    A fiduciary's deed contains warranties similar to those of a special warranty deed. It is used by trustees, personal representatives of estates, and guardians to make clear that the limited warranties are only on behalf of the estate and not by the fiduciary personally.

    A quit claim deed has no warranties of title and no promises to defend title. It says, in effect, that the grantor may or may not have any title to the real estate, but if grantor does, it is conveyed to the grantee.

  • Sellers should be aware that buyers can, and do, sue their sellers over undisclosed defect in real property. Identifying what the seller needs to say about their property so that the seller does not have to deal with post-closing lawsuits and complaints from buyers is an essential part of any sales effort.

    Effective January 1, 1995, most sellers of residential real property in Washington must complete a required form of Real Property Transfer Disclosure Statement. Sellers of vacant land do not have to use the form. Personal Representatives of estates are exempt from completing the form; this makes sense because Personal Representatives usually do not have enough information to complete a disclosure statement.

    Sellers do not have to provide a disclosure statement if the buyer waives receipt of a disclosure statement. However, the buyer then has a right to rescind the earnest money agreement until closing occurs unless the buyer also waives the right to rescind the earnest money agreement. A seller who does not live in the property, such as a guardian of an estate, can usually negotiate such double waivers with buyers. Sellers who live in the property will find it much harder to sell real estate without completing the disclosure statement.

    The disclosure statement is a series of questions about the seller's property, including issues related to title, water, sewer and septic systems, structural conditions, electrical and plumbing systems, appliances, heating and cooling systems, homeowners' associations, soil conditions, susceptibility to flooding, and hazardous or toxic substances, including underground storage tanks. Each question is answered "yes," "no," or "don't know."

    The problem for sellers is that they are often tempted to answer "yes" or "no" when the answer really is "don't know." For example, it is impossible to know whether there are encroachments onto the seller's property from the neighboring property or encroachments onto the neighboring property from the seller's property without a survey. Sellers who give wrong answers on the disclosure statement are given some limited protection, but the wrong answer can subject the seller to legal liability to the buyer.

    Even if no disclosure statement is being provided, the seller has a duty to disclose material defects about the property known to the seller that are not obvious to the buyer. Common examples are termites or other pest infestations and asbestos insulation. Material defects are defects which most buyers would consider important. If the seller thinks a particular fact might be important to the buyer, it probably is important and should be disclosed.

  • An earnest money agreement is a contract between a buyer and a seller of real estate. It is also called a real estate purchase and sale agreement. An earnest money agreement must be entirely in writing, and should include all provisions the buyer and seller think are important. Oral agreements regarding sale of real estate are almost always unenforceable.

    Many buyers and sellers use preprinted forms of earnest money agreements. Forms printed by the Northwest Multiple Listing Association are probably the most frequently used in King County. The forms address many issues buyers and sellers need to deal with. But forms are not available for all of the issues which can become important.

    Buyers and sellers can add to, delete, or change the language in the forms. But they need to be sure they understand what the language means before they sign the agreement. Drafting clear and enforceable language can be more complicated than buyers and sellers may think. When in doubt, have a real estate lawyer draft the language or review it.

    If you want to have an attorney review your earnest money agreement and feel you must sign it before seeing your attorney, you can write into the agreement that it is conditioned on review and approval by your attorney on or before a specific time. In setting that time, be sure to allow enough time for the attorney to review it. If you sign the earnest money agreement without this condition, it is a binding contract and you do not have the right to change it even if your attorney would have advised you not to sign it without changes.

  • A deed of trust is a type of mortgage. Typically, it is used along with a promissory note signed by the owner of real estate. The owner of the real estate is called "the grantor" of the deed of trust. By signing the deed of trust, the grantor gives an independent party, who is called "the trustee," a power of sale over the real estate. If the grantor does not make payments or perform other obligations due to the lender, who is called "the beneficiary," the beneficiary can direct the trustee to foreclose the deed of trust.

    A deed of trust can be foreclosed using the power of sale. This is called "nonjudicial foreclosure." A deed of trust can also be foreclosed by bringing a lawsuit against the grantor and other parties with interests in and claims to the real estate. This is called "judicial foreclosure."

    Most Washington deeds of trust are foreclosed non-judicially. If the deed of trust is foreclosed non-judicially, all of the grantor's rights in the property are terminated, and all of the beneficiary's claims against the grantor are satisfied.

    If the property is worth less than the amount owed to the beneficiary, the beneficiary may want to bring a judicial foreclosure. Judicial foreclosure allows the beneficiary to recover a judgment against the grantor for the difference between what the beneficiary is owed and the value of the property. This is called a "deficiency judgment." The drawback to judicial foreclosure in Washington is that there is up to a one-year redemption period in which the grantor can undo the foreclosure by paying the full amount due the beneficiary. During this redemption period, the beneficiary does not have title to the property, and the grantor may be entitled to live in the property rent-free.

    Nonjudicial foreclosure is started by giving a Notice of Default to the grantor and other persons who have an interest in the property. A specific form of the Notice of Default is required by statute and the statutes have detailed rules about how the Notice must be given.

    If the grantor does not pay what is owing, including the beneficiary's attorney's fees within 30 days after the Notice of Default is issued, the trustee can issue a Notice of Trustee's Sale and Notice of Foreclosure. The forms of these notices and how they must be given are also specified by statute. The Notice of Trustee's Sale will set a date, at least 90 days after the Notice of Foreclosure is given, at which the property will be sold at a public Trustee's Sale if the grantor does not pay what is owing.

    The property can be sold to the highest bidder at the Trustee's Sale if the grantor does not pay what is owing. The beneficiary's bid will usually be the amount owed to them; the beneficiary does not pay any cash for such a bid. In most cases, the beneficiary will be the high (and only) bidder.

    Recording the Trustee's Deed completes the foreclosure. The grantor has the right to remain in the property for no more than 20 days after the Trustee's Sale and very limited rights to set aside the foreclosure.

  • A real estate contract is a contract in which the buyer agrees to pay the seller the balance of the purchase price over time and the seller agrees to deliver a deed to the buyer when the contract is paid in full. Until the contract is fully paid, the seller holds title to the property, subject to the real estate contract.

    If the buyer stops making payments on the real estate contract or does not perform other obligations of the contract, the seller can start a forfeiture of the contract. If the contract is forfeited, all of the buyer's rights in the property are terminated. The seller retains title to the property, which is no longer subject to the real estate contract.

    Forfeiting a contract satisfies all of the seller's claims against the buyer. If the property is worth less than the amount owed to the seller, the seller may want to bring a lawsuit against the buyer to foreclose the contract. Also, most pre-1986 real estate contracts and some newer contracts do not let sellers add their attorneys' fees to what the buyer must pay to stop a forfeiture. Sellers may want to foreclose such contracts.

    Forfeiture is started by giving notices of intent to forfeit the contract to the buyer and other persons who have interests in the property and occupy the property. A specific form of the notice of intent to forfeit is required by statute and the statutes have detailed rules about how the notice must be given.

    The buyer then has at least 90 days to pay what is owing to the seller, usually including the seller's attorneys' fees and costs. This is called a "cure of default." If the buyer pays the money in default, the forfeiture must stop.

    If the buyer does not pay the required amount within the time allowed, the seller can issue a second notice called a declaration of forfeiture. The form of this notice and how it must be given is also specified by statute.

    The recording of the declaration of forfeiture completes the forfeiture. The buyer has a limited right to set aside the forfeiture and has the right to remain on the property at least 10 days after the declaration of forfeiture is recorded.

  • A lien is a claim for money owed against another person's real estate. Deeds of Trust and mortgages are examples of liens. Tax authorities also have either automatic liens against property for unpaid taxes or have the right to file liens. A County's lien for unpaid property taxes is an automatic lien.

    If there is more than one lien on property, its priority determines the order in which it is paid. A lien which has priority over another lien is sometimes called a "senior lien." A lien which does not have priority over another lien is sometimes called a "junior lien." The most senior lien is called a "first lien," the next most senior lien is called a "second lien," and so on.

    Washington law requires that liens, except automatic liens, be recorded with the Auditor of the County where the real estate is located. This is deemed to give notice to everyone, even if they do not check the Auditor's records. If a lien is not recorded, it will generally not have priority over a later lien which is recorded. The earliest recorded lien has priority over a later recorded lien, even if the later recorded lien was dated and signed before the first recorded lien was dated and signed.

    If you have a lien, you can foreclose the lien. Foreclosing the lien transfers title to the real estate to the lienholder and clears all junior liens from the title. For example, the beneficiary of a first lien Deed of Trust who forecloses clears any later recorded Deed of Trust from title. The holder of the second Deed of Trust is not entitled to payment by the holder of the first Deed of Trust. However, the beneficiary of a second lien Deed of Trust who forecloses cannot clear the first lien Deed of Trust from title, and takes subject to that first lien Deed of Trust. That includes the duty to make payments due on the first lien Deed of Trust to avoid its foreclosure.

    Lien priorities are complicated. There are exceptions and special situations in which these general rules do not apply. Consulting a real estate attorney on such issues is a good idea.

  • Seller financing occurs when a seller of real estate lends a buyer part or all of the purchase price and lets the buyer make payments over time. At closing, the buyer usually signs a promissory note and a deed of trust or a mortgage. If the buyer does not make the required payments, seller can foreclose and take the property back.

    If a seller agrees to finance the sale, the earnest money agreement should require the buyer to provide a good credit report and copies of income tax returns and bank statements. When the seller receives the credit history of the buyer, the seller should have the right to either cancel the sale because of bad credit or go ahead with the sale.

    In the earnest money agreement, the seller must attach a copy of the promissory note and deed of trust to be signed at closing. If seller approves "unfavorable" forms of the promissory note and deed of trust as part of the earnest money agreement, seller cannot later require buyer to change at closing.

    If the seller already has a loan on the property which the seller does not want to pay in full, the seller should be sure the property is not subject to a "due-on-sale clause" which allows the lender to call seller's loan due if the property is sold. Most bank deeds of trust contain such provisions. Sellers with such deeds of trust cannot do seller financing without their lender's consent. Neither can a seller avoid a due-on-sale clause by granting a lease with an option to purchase to a buyer.

    Sellers must be especially careful about "second deeds of trust." This occurs when buyer borrows part of the purchase price from a bank. The bank takes a "first deed of trust" to secure its loan. Seller receives a "second deed of trust" junior to the first deed of trust. If buyer stops payments to the bank, the bank could foreclose its "first deed of trust." This cancels the seller's second deed of trust from title. The bank has no obligation to pay the seller the balance due on seller's second deed of trust.

    Another problem can occur if the buyer sells the property and seller's deed of trust does not have a due-on-sale clause: then seller has to accept monthly payments from the new owner. Also, buyers may damage the property by cutting timber or botching a remodel job, so that the property is worth less than the loan balance. Then when the seller forecloses, the seller takes back a piece of property worth less than the loan.

  • Title Insurance is a title company's guarantee that title to a parcel of real estate is affected only by matters shown on a written report. A title company reports only matters shown in the public records of the county where the real estate is located. These matters are referred to as exceptions to title. Examples include easements, deeds of trust, mortgages, Superior Court judgments, mechanic's and materialmen's liens, and government liens, such as those filed by the Internal Revenue Service, Washington's Department of Revenue, and Washington's Department of Social and Health Services.

    If the title company does not report a matter of public record, the title company will pay the insured's damages. Often, this is the reduction in value of the property due to the exception or the amount required to pay off a financial lien. The title company may also provide an attorney to help you in litigation, depending on policy provisions.

    In an earnest money agreement, title insurance is used to identify creditors who must be paid off at time of closing so that the sellers can give clear title to the buyer. This is an owner's policy. A lender's policy can be issued to the buyer's lender. If seller financing is involved, it is advisable for the seller to obtain a lender's policy.

    Also, when issuing a policy pursuant to an earnest money agreement, the title company will report not only existing exceptions to title but matters, such as judgments or liens against the buyer, which would become exceptions if the buyer purchases the property. If seller financing is requested, the seller must make certain that any deed of trust or real estate contract the buyer gives to seller will not be inferior to those exceptions.

    A standard policy of title insurance guarantees title but does not guarantee the property boundaries. If the buyer wants protection against claims by neighboring property owners to part of their land, the buyer must order an extended policy of title insurance. Extended coverage costs more, and a survey may be required. Buyers who want extended coverage should call several title companies, because some are less likely to require surveys than others.

  • There are many legal rules which identify what happens to real estate owned by a husband and wife if one of them dies or they divorce, or if judgments or liens are filed against them.

    For two or more unmarried people buying real estate together, the rules are not so clear cut. People in this situation -- including unmarried heterosexual couples, gay couples, lesbian couples, and business partners -- should consider making written agreement to identify their rights and duties with regard to the property.

    For couples, issues that they may need to be addressed include: will they have equal or unequal shares in the property? Will their ownership shares change over time? Who will pay loan payments, taxes, and insurance? Who, in addition to the couple, can live in the property? If one party wants to sell their ownership interest, when can they require the other member of the couple to make an offer and when can they require that the property be sold to third parties? What rights does the survivor have in the property if one member of the couple dies? If there is a legal dispute, should the party who prevails be allowed to recover their attorneys' fees? If the property is rented, how should rental income and tax deductions be divided?

    For business partners, including partnerships, corporations, and limited liability companies, their current documents probably address many of these issues. The documents should be reviewed to be sure they cover the issues which could arise from purchase and operation of the real estate.

    The documents required to address these issues can be complicated and should be prepared by, or with the assistance of, an attorney. The parties should also consult their tax advisors to be sure they understand how their tax situation will be affected by owning real estate with people other than their spouse.

    For information, see: The Law Office of Mary Anne Vance, P.S.