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Real Estate 101


This section is designed to give a basic understanding of a typical transaction involving the sale of real estate, even for those who may have little knowledge of how the process works. Those who feel that they are knowledgeable about real estate matters may wish to skip this section (since it is lengthy) and go straight on to the section entitled, "OUR SPECIALTY / OUR TERRITORY". Remember, you can always go back and read Real Estate 101, and you can always just ASK B & C.

For those who STILL feel confused after reading this section, do not worry. The Ask Baron Chestney feature allows you to ask us your questions and get a personalized response. Think of it as the "HELP" section. Before using Ask Baron Chestney, though, you may want to check our FAQ section (Frequently Asked Questions), because if you have a question, someone else may have had the same question in the past, and we may have the answers you need right on the website. Lastly, there is no such thing as a "dumb question". We all need to start somewhere!


The Parties in a Basic Real Estate Transaction:

Let us begin with a simple illustration which will help explain how the sale of a home works. There are several parties involved. Suppose that Mr. and Mrs. Seller are an elderly couple who have just entered retirement. They own a home in the Sunset district of San Francisco, where they currently live. The Sellers have selected a beautiful condominium in Tempe, Arizona as their retirement home, and are ready to move in very soon. Because the Sellers have managed their funds wisely over the years, they were able to purchase their retirement condo using their savings, while still living in their San Francisco house. The Sellers are now ready to sell their Sunset district house, and move to their new retirement home in Arizona. So, they call Mr. Broker, who is a real estate broker in San Francisco.

Mr. Broker is a professional who specializes in helping people buy and sell real estate. He lives and works in San Francisco, and he is familiar with the Sellers' neighborhood. Mr. Broker has a "team" of other professionals that help him do his job. Although they aren't actually employees of Mr. Broker, they are close business associates. For example, there is Mr. Pestman, who checks the houses for termites, fungus, and other sorts of damage. There is Ms. Lender, the loan officer at the neighborhood bank who helps make loans to people who want to buy a home. Mr. Appraiser helps to determine the value of the home. Mrs. Escrow helps coordinate the legal documents and the transfer of money from buyer to seller. Lastly, Miss Agent is an actual employee of Mr. Broker. She is the person that Mr. Broker will send to meet the Sellers, and she will work closely with the Sellers. Mr. Broker may be thought of as the "leader" of this team of professionals that will make our sample real estate deal happen. We will talk more about these team members later.

Mr. and Mrs. Buyer are a young couple who have been saving their money carefully for a few years now. They have good, stable jobs, and excellent credit. Since their wedding, they have been renting a two bedroom apartment in the Sunset district of San Francisco, just a few blocks from the Sellers' house, as a matter of fact. The Buyers have a 2 year old son, and Mrs. Buyer is four months pregnant. The Buyers would like a three bedroom house so that their son and their new baby will each have a bedroom of their own. Both Mr. and Mrs. Buyer work in the Financial District of San Francisco, but they love the neighborhood they are living in now. Since the Sellers' house just happens to have 3 bedrooms, and is only 4 blocks away from where the Buyers' apartment is, it seems that the Sellers and the Buyers may be able to help each other...

Fisherman's Wharf Sign, San Francisco
Fisherman's Wharf Sign, San Francisco


The Process Begins:
Mr. and Mrs. Seller received a postcard from Mr. Broker a few months ago. It introduced Mr. Broker, and listed his phone number on it. The Sellers wisely kept it handy! The Sellers now decide that they will call Mr. Broker to ask about his services. Mr. Broker chats with the Sellers on the phone for ten minutes or so, gathering some basic information about the Sellers and their house. He tells the Sellers that Miss Agent, his salesperson, can come visit them tomorrow to meet them, see their home, and discuss a plan for marketing the house and offering it for sale. The Sellers agree to meet Miss Agent at their house tomorrow.

The Sellers List Their House for Sale:
Miss Agent arrives at the Sellers' home the next day, promptly, and tours the Sellers' house. She is delighted to see that the Sellers have a neat, clean, beautiful house. They have really taken great care of it over the past 30 years. The Sellers are happy to learn that Miss Agent is polite, knowledgeable, and helpful in answering their questions. Miss Agent explains that Mr. Broker is her boss. She explains to the Sellers that, like all real estate agents, she must work for a real estate broker, like Mr. Broker. This is because, she explains, a broker has more experience and knowledge than a sales agent. The broker must oversee all work done by the sales agent. Miss Agent tells the Sellers that she will handle the sale of their house, but that Mr. Broker will be overseeing everything, and he will be the one to actually finalize the deal and sign off on everything. Lastly, she tells the Sellers that some real estate agents, and some real estate brokers, also belong to the National Association of Realtors, and the California Association of Realtors. These are professional organizations that require members to pay dues, and to agree to adhere to an even stricter code of ethics than the state law requires. Mr. Broker and Miss Agent are members of these organizations, so they are allowed to use the special term, "Realtor", as well as the special "R" logo that accompanies it. The Sellers are impressed with Miss Agent's presentation, and decide to sign a contract, known as a listing agreement, giving Miss Agent the right to sell their house, in exchange for a commission of 6% of the selling price. The house will be listed for sale at $500,000. Miss Agent calls Mr. Broker, tells him the good news, and starts getting to work. She begins by putting a "For Sale" sign on the Sellers' front lawn, after getting their permission to do so.

The Buyers Become Interested:
A week after Miss Agent placed the "For Sale" sign on the property, Mr. and Mrs. Buyer were on their way to work. Mr. Buyer received a call on his cell phone from his cousin, Mr. Buyersbroker. Mr. Buyersbroker has been a real estate broker for several years, though he is not a Realtor. Still, he is Mr. Buyer's cousin, so Mr. Buyer trusts him completely. Mr. Buyersbroker has been searching for a house for the Buyers to buy for several weeks now. He just noticed the "For Sale" sign as he drove past the Sellers' house on his way to pick up his dry cleaning. Mr. Buyersbroker writes down the name and number from Miss Agent's "For Sale" Sign, and asks Mr. Buyer if he would like to see the house. Based on his cousin's good judgment, Mr. Buyer decides that it would be wise to do so. Mrs. Buyer agrees, and adds that they should see the house tonight, if possible. Mr. Buyersbroker calls Miss Agent to arrange a tour of the inside of the house. Fortunately, Miss Agent has been trained well by Mr. Broker. She answers her cell phone immediately when Mrs. Buyer calls her! After a brief chat, Mr. Buyersbroker is delighted to hear more about the house, and is thrilled to learn that the house has 3 bedrooms and is offered for sale at the fair price of $500,000. Mr. Buyersbroker sets an appointment with Miss Agent for him and the Buyers to look at the house at 7pm that very evening. Miss Agent immediately notifies the Sellers. The Sellers had planned to dine out at the Cliff Rock, a charming old restaurant a few blocks from their home, at 6:30 pm that evening. So, everything seems like it is going very smoothly so far....

The Buyers Make An Offer:
Mr. and Mrs. Buyer met Miss Agent promptly at 7 pm at the Sellers' house, along with Mr. Buyersbroker. Miss Agent gave the Buyers and Mr. Buyersbroker a tour of the Sellers' beautiful house, answering questions about it and showing off its very nice features to the Buyers. The Buyers were absolutely thrilled. They loved the house! It was just perfect. They told Miss Agent that they would like to make an offer. Mr. Buyersbroker spoke up, telling Miss Agent they would like to offer the full price, $500,000, because it was the perfect home for his clients and they didn't want to have their offer rejected because they offered less than the Sellers were asking. Mr. And Mrs. Buyer invite Mr. Brokersbuyer and Miss Agent over to their apartment, for a cup of coffee, where they agree they can all write up an offer that very evening. They leave the Sellers home, and proceed to the Buyers' apartment. Mr. Brokersbuyer prepares the offer, and hands it to Miss Agent, signed by Mr. and Mrs. Buyer, along with a deposit check in the amount of $15,000, or 3% of the purchase price. Miss Agent, a true professional, makes 2 calls: she calls the Sellers to give them the good news, and she calls her boss, Mr. Broker, to give him the good news. The Sellers invite Miss Agent to come right on over to their house, as they are just returning home from their dinner at the Cliff Rock. Miss Agent says goodbye to the Buyers and Mr. Buyersbroker, and heads over to meet the Sellers. The Sellers are delighted, but they tell Miss Agent that they would like to think over the Buyers' offer, and make a decision tomorrow morning. Miss Agent agrees, and departs.

The Sellers Accept the Offer:
The next day, at around noon, Miss Agent receives a call. It is Mrs. Seller. She tells Miss Agent that she and her husband talked it over, and decided to accept the Buyers' offer. She invites Miss Agent over to pick up the signed acceptance of the offer. Miss Agent visits the Sellers, picks up the paperwork, and promises the Sellers that she will begin working on the deal immediately. Miss Agent returns to the office, where she presents the documents to Mr. Broker. Mr. Broker looks everything over, feels that it is all in order, and tells Miss Agent to take everything over to Mrs. Escrow.

Mrs. Escrow Helps Bring The Deal Together:
Mrs. Escrow is the person at the Escrow Company whose job it is to help both the Buyers and the Sellers to fulfill the terms of the sales contract. The sales contract is the document that the Sellers, the Buyers, Miss Agent, and Mr. Buyersbroker all worked together to agree upon, and all signed it. Mr. Broker signed off on it, as well (as required by law), having supervised the actions of Miss Agent, of course. Mrs. Escrow is a neutral party. The Escrow Company holds the deposit money in their trust account, and they make sure that everything is handled fairly between the parties. They take their orders from Mr. Broker and Mr. Buyersbroker, who are in turn getting their orders from the Sellers and the Buyers. Mrs. Escrow sends out Mr. Appraiser to do an appraisal of the value of the house. Mrs. Escrow sends out Mr. Pestman to inspect the house for termites, fungus, and other problems which could devalue the house and cause problems for the deal. Mrs. Escrow also works with Ms. Lender, the loan officer of Lenders National Bank. We must go back in time a little to learn about Ms. Lender....

The Buyers Visited Ms. Lender a Few Weeks Ago:

A few weeks ago, Mr. and Mrs. Buyer met with Ms. Lender. After seeing a poster in the window of their bank, Lenders National Bank, the Buyers decided to ask the bank about its home loan program. The bank was offering low interest rates on home loans. Ms. Lender took the Buyers through a process called "qualifying" for a loan. Ms. Lender had the Buyers fill out some paperwork asking them about their income, their debts, their assets, their liabilities, and their credit. The Buyers provided copies of tax returns, as well as paystubs and bank statements, to Ms. Lender. Ms. Lender pulled copies of the Buyers' credit reports, as well. After going through the process, Ms. Lender was pleased to tell the Buyers that they had qualified for a loan, and that the bank would be willing to loan them $455,000 if they were able to make a down payment of $45,000 on a house. Ms. Lender gave the buyers a letter stating that. The buyers have now given that letter to Mrs. Escrow, which brings us back to the present....

Everyone Gets To Work!:
Mr. Appraiser visits the Sellers' house. He measures the rooms, makes notes, inspects things, and makes a report, which is given to the bank, Miss Agent, and the Buyers. The house is valued at exactly $500,000-- what do you know! Fantastic. Mr. Pestman also visits the house. He is pleased to report that he finds no termites or problems of any sort. The house is in perfect condition. He writes that in his report, and also circulates copies of the report to everyone involved. Ms. Lender is hard at work getting the bank to write a check to make the loan of $455,000 to the Buyers. She succeeds! Then, Ms. Lender sends the money to Mrs. Escrow, who places it in the Escrow Company's trust account. Mr. Pestman and Mr. Appraiser forward copies of their reports to Mrs. Escrow, as well. Mrs. Escrow collects all of these documents and places them in the Buyer/Seller transaction file. Miss Agent, Mr. Broker, and Mr. Buyersbroker are kept informed and advised by Mrs. Escrow as various items are received, and they of course advise the Sellers and the Buyers as progress is made.


The Grand Finale:
Finally, all of these events begin to converge, as our cast of characters approach the conclusion of our sample real estate transaction. Mrs. Escrow calls Mr. Broker and Mr. Buyersbroker and informs them that she is ready to begin closing the transaction, or "closing escrow". They notify the Sellers and the Buyers. Mrs. Escrow schedules a time for the Sellers, as well as the buyers, to come visit her office to sign off on a whole bunch of paperwork relating to the transaction. There is much initialing and signing to do. Addresses, as well as other information, are verified. Mrs. Escrow will go over everything with both the Buyers and the Sellers, explaining briefly the documents that they are signing. She will also discuss dollar amounts with them, discussing with the Sellers what fees and costs they must pay (according to the sales contract), and what the net proceeds will be after the deal is finished. She will discuss also with the buyers the same sorts of things, telling them what fees and costs they must pay, and giving them a good faith estimate of the final closing costs and what the total price will be (how much cash they must pay, to cover all expenses of closing the deal). If there are problems or discrepancies, they are discussed among the Buyers and the Sellers, as well as their representatives, Mr. Broker, Miss Agent, and Mr. Buyersbroker. Since this is essentially a "perfect" real estate transaction, we will assume that no such problems arise. Escrow closes smoothly, and the Sellers receive their $500,000 (less certain fees, taxes, etc, as well as the real estate sales commission of 6%, or $30,000 ). The commission of $30,000 is divided up as follows: Mr. Broker's office gets $15,000, and Mr. Buyersbroker gets $15,000. NOTE: Only Real Estate Brokers may receive commissions. Sales agents are given a percentage of the broker's commission, paid by the broker. A good rule of thumb is that the agent, Miss Agent, can expect roughly half of the broker's commission, or $7,500. Mr. Buyersbroker didn't employ an agent-- he brokered the deal himself on the buyer's side. Therefore, he gets to keep his $15,000. Ms. Lender, Mr. Pestman, Mr. Appraiser, and Mrs. Escrow receive fees that are agreed upon in the contract, some being paid by the sellers, and some being paid by the buyers. The Buyers receive the keys and legal title to the house!

Everyone ends up happy! Mr. Appraiser, Mr. Pestman, Ms. Lender, and Mrs. Escrow all collected a fee for their services. Mr. Buyersbroker collected a nifty commission for producing a ready, willing, and able buyer-- namely, the Buyers. Mr. Broker's office collected the same commission as Mr. Buyersbroker, but, since he delegated the work to Miss Agent, Mr. Broker must pay Miss Agent for her work (in this case, half of his commission). The Buyers are the proud new owners of a fantastic 3 bedroom house in the neighborhood they love. The Sellers are enjoying the 110 degree (shade temperature) weather in Tempe, Arizona, in their beautiful new retirement condominium, which they own free and clear, and are living off the money they made from the sale of their house ($500,000 less $30,000 commission less assorted fees, taxes, etc.). Yes, everyone in this example ends up very happy. Well, there is one exception....the Buyers' EX-landlord now has a vacancy in his apartment building- the unit that the Buyers used to rent!!! (He owns 4 or 5 OTHER apartment complexes in San Francisco, however, so we won't feel too sorry for him.... )


We hope that you found it informative, as well as easy to comprehend. It is meant to illustrate a very simple, straightforward transaction. If you still have questions about it, check out our FAQ section, or, as usual, use our "ASK B&C " help feature...

Most importantly, what you have learned will soon take on a new and exciting meaning for you, and help you to understand why Baron & Chestney is different from all the other real estate companies, and how we have changed the rules and changed the rules of thumb, to make things more beneficial for you, the buyer or seller of real estate.


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