In this article, we will take a look at some important steps that are the required procedure of a standard real estate transaction in the US. But before that let us see the current situation of the real estate market in the United State
Overview of the situation on the real estate market
2020 brought a change in priorities in the American real estate market. New York has always been considered a top location for investment: it is customary to live in rented apartments in the city, so their owners received a stable income. However, the pandemic dealt a devastating blow to the metropolis: many residents lost their jobs, incomes in the service sector fell critically, and people were unable to pay rent. Someone refused to house, someone passed into the category of non-payers, using the ban on the eviction. By the beginning of 2021, the total debt of tenants exceeded $ 1 billion. The situation is similar in the commercial real estate sector.
At the end of the year, the situation began to improve, but the decrease in rental rates helped in this. Nevertheless, New York remains a center of attraction for investors.
On the contrary, resort locations are experiencing a surge in buyers’ interest: middle-class and wealthy people who have moved to a remote location tend to choose more spacious dwellings in places with a comfortable climate. The rise in demand is followed by an increase in prices. For example, in Miami in the second quarter of 2020, houses rose by 5.6%, and apartments – by 6.2%.
At the same time, the demand in certain locations could grow significantly. So, in October 2020, sales of luxury housing in Miami doubled, and sales of houses in Palm Beach, also in Florida, tripled in the third quarter of the year. One of the consequences of the reorientation of demand from apartments to individual houses is an increase in the average cost of purchased housing.
In general, despite the decline in incomes of a significant part of the population, at the turn of 2020 and 2021, the United States faced a record drop in the stock of vacant housing in the market. True, it is connected not only with the activity of buyers but also with the reluctance of sellers to put up their properties for sale in conditions of instability.
According to the logic of the market, this should lead to an increase in prices, and it is already being observed: in December 2020, prices increased by 13.4% on an annualized basis. In February 2021, the trend continued: the average price increased by 15%, and the number of properties put up for sale decreased by 40%.
Stage 1. Opening a bank account in the USA
A US bank account is required only if the property is purchased on credit. If the payment will be made with your own funds, there is no need to open it.
Stage 2. Preparation of a purchase offer
As soon as you select a property, the realtor will prepare a purchase offer (offer) on your behalf. It is a model agreement drawn up by the state’s real estate associations. It will indicate all the conditions under which you propose to the seller to conclude a deal.
If a loan is attracted, a bank confirmation of loan approval is attached to this proposal. If the buyer plans to pay with his own funds, he is required to provide confirmation of the availability of funds in the bank account.
Stage 3. Signing the sales contract and making a deposit
If the seller accepts your offer, then, accompanied by a realtor, a contract is signed (contract to purchase real estate), which specifies all the conditions: the amount of the sale, deposit, terms of sale, the timing of the inspection, and evaluation of the object, as well as the specific deadline for the transaction.
The obligatory participant in the transaction is a specialized agency, the so-called title company, and the escrow company or buyer’s lawyer registering the transaction (closing attorney). It is they who carry out legal control of the entire transaction, verification, and certification of documents.
Some points of the contract are worth paying special attention to
- Home inspection clause: The contract must contain a mandatory clause on the inspection, which specifies a certain period of time (usually ten days) for its implementation, for which a third party is involved. The purpose of the inspection is to make sure there are no hidden problems with the property. The seller is obliged to provide the buyer and the inspector with free access to the object for these purposes. The buyer agrees to pay for the inspection.
- Loan contingency clause: This clause usually states that if the buyer applied for a mortgage loan, but was refused, he has the right to withdraw from the transaction. Often, he is allowed to return the deposit without further commitments to purchase the property.
- Closing costs: Here it is prescribed who exactly pays for drawing up a contract, insurance and keeping funds on an account of an independent company (escrow). These conditions can vary significantly from site to site. In most cases, all additional costs are the buyer’s responsibility. But it also happens that some of them are taken over by the seller. The contract must clearly indicate all types of expenses and the party who will pay them.As a guarantee of the fulfillment of the obligations assumed, the buyer makes a deposit to the account of an independent company. The deposit is kept by the title company or agency, which has the exclusive right to sell the object.
- Subsequently, it is taken into account in the final calculation.Usually the minimum deposit is 3.5% of the value of the property, but experts recommend offering a larger amount. The larger the deposit, the higher the likelihood that your offer will be chosen by the seller among others. A deposit is a confirmation of the seriousness of your purchase intentions.
If the seller or the buyer does not fulfill their obligations, the contract may be terminated. This happens in the following situations.
- The buyer did not make a deposit on time.
- The buyer or seller cancels the transaction in the absence of force majeure.
- The seller does not perform the work on the object specified in the contract.
- The seller prevents access to the facility for inspection or final inspection.
- The seller does not vacate the premises on time.
Upon termination of the contract through the fault of the seller, the deposit is returned to the buyer.
Buyer’s documents for concluding a sales contract
- Copy of internal passport
- Copy of international passport
- Valid US visa
Stage 4. Conducting a real estate inspection and its additional assessment
Registration of a deal takes on average from 30 to 60 days. At this time, a physical inspection is carried out by a licensed specialist. His task is to identify all flaws and submit a written report. Based on the results of the inspection, the buyer can refuse the transaction if the identified deficiencies are critical, or negotiate a discount with the seller.
Inspection is optional but recommended. The cost depends on the complexity of the object. So, for a small apartment or house with an area of about 140 sq. m will have to pay $ 300-500.
The specialist will determine the structural defects of the building, check the condition of plumbing, communications, electrical wiring. Experts advise inspecting for termites and other wood-borne insects, as well as for gas (radon), lead paint, and various types of mold.
Also, at this stage, an assessment of the market value of the real estate is needed – it is carried out by an independent expert for a fee from the buyer. This is necessary when you take out a mortgage in the USA. The bank will refuse a loan if the appraised value of the property is lower than the selling price.
At the same time, a mortgage loan is being processed if you attract bank financing.
Before buying real estate, it is usually inspected, and when attracting a mortgage – an independent valuation is carried out.
Step 5. Conducting due diligence
After signing the contract of sale, the legal registration of ownership of real estate (title search) is checked. The essence of the procedure is to determine whether the sale of this property is possible, for example, whether the current owners have outstanding mortgage obligations or some other debts. This is done by the buyer’s attorney or escrow company.
The cost of verification is included in the total closing costs. At the same time, a compulsory real estate insurance contract is drawn up. This procedure is undertaken by the title company, which then gives the buyer an insurance policy for the title of real estate (title insurance).
Take note, when buying a land plot, no inspections or insurance are required. According to the realtors themselves, the land is the simplest thing that can be purchased in the United States
Stage 6. Registration of a new owner
At the time of receipt of full payment to the title company or to the account of the lawyer responsible for closing the transaction, the buyer receives a certificate of ownership of the property – the so-called deed.
However, in many states, title passes to the buyer only after registering the deed with a district court or special registration chamber. In this case, the title company submits the document to the district court clerk and then returns the registered deed to the purchaser.
Property registration takes six to ten weeks.
Stage 7. Payment for the transaction
The buyer transfers the principal amount at the closing of the transaction, which is when he is granted title to the property. At the same time, all additional costs, including taxes, are paid.
Funds can be transferred by bank transfer to the account of the attorney conducting the transaction, or to a special account of an independent company.
You can conduct a sale and purchase transaction remotely. To do this, you will need to issue a power of attorney for a lawyer at the US embassy (consulate) in your country. The lawyer sends a special form of power of attorney to the buyer by mail. The buyer will transfer the money to the so-called trust account of his American lawyer, from where it will be transferred to the seller at the conclusion of the transaction.
The risks in this situation are practically reduced to zero – provided that the buyer uses the services of a licensed specialist. The untidiness of the transaction can lead to the loss of the lawyer’s license, and it is very dear since another license for similar activities will no longer be issued. Therefore, the buyer can be sure of the legality of the transaction.
In those states where the transaction is made through an escrow company, documents are signed at the US Embassy and sent to the company, and the money is transferred to the escrow account, from which it is then transferred to the seller after deducting all costs. Such a transaction also carries almost no risks.
Additional costs when buying real estate in the United States
When concluding a sales contract, the parties agree on who bears what costs. Closing costs typically include attorney or title company fees, general property insurance, registry, and court fees. Without a mortgage, they amount to about 1-2% of the transaction amount.
Broker services cost 4-6% of the property price and are usually paid by the seller. Property transfer tax (0.01–2.00% of the transaction amount) is usually also borne by the seller.
The inspection is not required by law, but it is usually recommended to arrange for it. The cost for a small facility is $ 300–500.
When buying on a mortgage, be prepared for a number of additional expenses. You may need:
- independent appraisal of housing – $ 250-600;
- opening an escrow account – $ 40;
- loan issuance fee – about 0.5% of the loan amount;
- mortgage insurance (applied in cases where the first installment is less than 20%) – 0.55-2.25% of the purchase price;
- mortgage broker’s commission – 0.50–2.75% of the object price;
- title insurance (not always required) – 0.5–1.0% of the purchase price.
Real estate is insured at its own choice, but in some cases, insurance is required under the terms of the transaction. This primarily applies to mortgages.
The cost of insurance is from 1 to 5% per year of the price of the object and depends on many factors (for example, is there water nearby and the threat of flooding).
Obligatory expense item. The rates usually range from $ 1000 to $ 1500.
The participation of a notary in the United States is optional, as every lawyer has the right to certify documents.
If the buyer does not speak English, then all documents (purchase offer and contract) must be translated by a certified specialist. The translation cost is about $ 20 per page.
Fees and Charges
Usually when buying real estate they pay:
- title verification fee – about $ 200;
- taxes on real estate in the city and district for two months – their general rate for the year is 1–2% of the value of real estate.
How to get a mortgage in the USA
In the United States, there is a special banking product – a mortgage loan for foreigners. Credit conditions for each organization are different. Usually, the minimum loan amount is $ 100 thousand, the minimum down payment is from 30% (depending on the property). The interest rate formally starts at 5% per annum, but in reality for foreigners without a credit history, it starts at 7-8%. And even under such conditions, it will not be easy to get a loan. For example, you may be asked for a deposit in the form of another real estate. The loan term reaches 30 years.
- Copy of internal passport
- Copy of international passport
- Valid US visa
Depending on the conditions of the bank, additional documents may be required
- Proof of income
- Tax return
- Letter from an accountant (if the borrower owns a share in the authorized capital of a legal entity) or from an employer (if the borrower is employed)
- Statements from the bank’s current account at the place of permanent residence of the borrower and from the current account in a US bank
To obtain a mortgage, it is best to contact a loan officer – a mortgage broker. As a rule, he works with different lenders and can select a product that suits your requirements. In addition, he will calculate the maximum loan amount, select the optimal interest rate and loan repayment period, taking into account your income, credit history, and down payment.
You will receive official written confirmation of the loan conditions (pre-approval letter). It is very important to first get such confirmation and only then start looking for a house or apartment.
Bank confirmation of loan approval is subsequently attached to the purchase offer.
The United is a wealthy country and the real estate market is booming and open to any to operate but with rules, steps, and procedures to follow in order to be able to operate in. There are no restrictions on the purchase of real estate in the United States for people from outside the US and especially for citizens of the CIS countries. You can draw up a deal for both an individual and a legal entity.
You should know that buying real estate in the US does not give you the right to obtain an American residence permit (green card). But in certain cases, It will help you get visa benefits.
The activities of realtors in the United States are licensed, so the risks are minimized. The standard purchase procedure takes 30-60 days. If it is necessary to obtain a mortgage loan, the terms are increased.