Residential Real Estate Fundamentals

Real estate transactions are among the largest financial decisions most people make, yet the process varies significantly by jurisdiction. Before any real estate assistance, establish: (1) the jurisdiction (country, and often state/province), (2) whether purchase, sale, or refinance, and (3) property type (primary residence, second home, investment). Each variable changes the rules, costs, and timeline.

The Transaction Lifecycle

Every residential transaction follows a similar arc regardless of jurisdiction: property identification, offer/negotiation, due diligence, financing (if applicable), and closing/settlement. The terminology and mechanics differ—Americans close with title companies or attorneys; Brits complete through solicitors; Australians settle through conveyancers—but the underlying process is recognizable.

Offer and acceptance creates a binding contract in most jurisdictions, though the exact moment of commitment varies. Some markets use verbal offers; others require written contracts. Contract formation basics (offer, acceptance, consideration) apply to real estate transactions, though real estate contracts have specific requirements and standard clauses. For general contract concepts, see Contracts Primer. Earnest money or deposit demonstrates buyer commitment and is typically held by a neutral third party. The amount varies by market custom—1-3% in US markets, 5-10% in UK/Australia.

Due diligence is the buyer's opportunity to investigate the property. This includes physical inspections, title/ownership verification, and review of disclosures. Most contracts include contingencies or conditions that allow buyers to withdraw if issues arise. The due diligence period length varies by jurisdiction and is negotiable.

Closing or settlement is the final exchange: buyer receives title/deed, seller receives funds, and ownership transfers. This process takes 30-60 days in most US markets, 8-12 weeks in the UK, and 30-90 days in Australia. Timeline depends on financing complexity, title issues, and local customs.

Key Parties and Their Roles

Real estate agents (or brokers) represent buyers or sellers (sometimes both, which creates conflicts). They're licensed professionals who facilitate transactions, but their fiduciary duties and compensation structures vary by jurisdiction. Commission is typically paid by the seller but built into pricing. In most markets, 5-6% total commission split between listing and buyer agents is standard, though this is changing.

Attorneys/solicitors/conveyancers handle the legal transfer of property. Required in some jurisdictions (New York, UK), optional in others (California). Even where optional, complex transactions benefit from legal review. They examine title, prepare documents, and ensure proper transfer.

Lenders provide financing and have significant control over transaction timeline. Their requirements (appraisals, inspections, insurance) become contractual obligations. Lender delays are a leading cause of closing postponements.

Title companies/escrow agents are neutral third parties holding funds and documents, ensuring all conditions are met before disbursement. In the US, they also provide title insurance. This role is handled differently elsewhere—solicitors in UK, settlement agents in Australia.

Inspectors and appraisers provide independent assessments. Home inspectors evaluate physical condition; appraisers establish market value for lenders. These are distinct roles with different purposes.

Property Rights and Ownership

Fee simple (freehold in UK/Australia) is complete ownership of land and structures indefinitely. This is the most common ownership type for houses. Leasehold means owning the structure but leasing the land, common for UK flats and some condominiums. Leasehold length matters enormously—under 80 years remaining creates financing and resale problems in the UK.

Condominiums/strata involve owning your unit while sharing common areas with other owners through an association. Monthly fees cover shared maintenance; special assessments can arise for major repairs. Review association financials and rules carefully—restrictions on rentals, pets, and modifications vary widely.

Title represents legal ownership. Title can be held by individuals, jointly (several forms with different survivorship implications), or through entities (trusts, LLCs). How title is held affects estate planning, liability, and taxes.

Financing Fundamentals

Down payment is the buyer's equity contribution. Minimum requirements vary by loan type and jurisdiction—as low as 0% for some government programs, typically 5-20% for conventional loans. Lower down payments usually mean higher ongoing costs (mortgage insurance, higher rates).

Loan-to-value (LTV) is the loan amount divided by property value. An 80% LTV means 20% down payment. LTV affects rate, mortgage insurance requirements, and approval likelihood. Lenders prefer lower LTV as it represents less risk.

Debt-to-income (DTI) measures monthly debt payments against gross monthly income. Lenders use two ratios: front-end (housing costs only) and back-end (all debt). Conventional limits are typically 28% front-end, 36-43% back-end, but programs vary. DTI is often the binding constraint for borrowers.

Pre-approval vs pre-qualification: Pre-qualification is a rough estimate based on stated income. Pre-approval involves verified documentation and is a conditional commitment to lend. In competitive markets, pre-approval (or proof of funds for cash buyers) is essentially required to make competitive offers.

Interest rates vary based on credit score, LTV, loan type, and market conditions. The rate you're quoted initially may differ from what you lock. Points (prepaid interest) can buy down the rate—whether this makes sense depends on how long you'll hold the loan.

Due Diligence Essentials

Home inspection examines physical condition—structure, systems (HVAC, electrical, plumbing), roof, foundation. Inspectors identify issues but don't estimate repair costs. Budget 0.1-0.3% of purchase price for inspection. Common findings: deferred maintenance, aging systems, minor water intrusion. Major structural or environmental issues are less common but can kill deals.

Title search examines ownership history to identify liens, encumbrances, and defects that could affect clean transfer. Title insurance (standard in US, rare elsewhere) protects against undiscovered defects. Common issues: unreleased liens, boundary disputes, missing heirs, recording errors.

Appraisal is the lender's independent valuation. If the appraisal comes in below purchase price, buyer must make up the difference in cash, renegotiate, or cancel. Appraisal gaps are common in rapidly appreciating markets.

Survey establishes exact property boundaries. Required in some transactions, especially with land or boundary questions. Reveals encroachments, easements, and setback issues.

Costs Beyond the Price

Closing costs include lender fees, title insurance, transfer taxes, recording fees, attorney fees, and prepaid items (insurance, property tax escrow). Expect 2-5% of purchase price in the US; stamp duty in UK/Australia can add significantly more. Closing costs are in addition to down payment.

Ongoing costs beyond mortgage payment include property taxes (highly variable by jurisdiction—0.3% to 2.5% of value annually), insurance, HOA fees, maintenance (budget 1-2% of value annually), and utilities. First-time buyers often underestimate total carrying costs.

Transaction costs on sale include agent commission, transfer taxes, and repairs/preparation. Selling costs typically run 8-10% of sale price, meaning short holding periods rarely build equity.

Key Numbers

Down payments: 0% (some government programs), 3-5% (conventional minimums), 10-20% (standard), 20%+ (avoids mortgage insurance, best rates), 25%+ (investment property minimum).

Commission rates: 5-6% total typically split between listing and buyer agents (varies by market and is changing).

Earnest money or deposits: 1-3% in US markets, 5-10% in UK and Australia.

Closing costs: 2-5% of purchase price in US; stamp duty in UK/Australia adds 3-5%+ depending on property value.

Property taxes: 0.3% to 2.5% of property value annually (highly variable by jurisdiction).

Maintenance budget: 1-2% of property value annually.

Inspection costs: 0.1-0.3% of purchase price.

Transaction timelines: 30-60 days (US), 8-12 weeks (UK), 30-90 days (Australia).

DTI limits: 28% front-end (housing), 36-43% back-end (all debt) for conventional loans.

LTV thresholds: 80% LTV avoids mortgage insurance in many programs; 60-75% LTV gets best rates.

Rental income qualification: Lenders typically count only 75% of expected rent.

Investment Property Considerations

Investment properties face different rules than primary residences. Financing is harder: higher down payments (typically 20-25% minimum), higher rates, stricter DTI requirements, and fewer program options. Lenders view rental income cautiously—typically counting only 75% of expected rent.

Rental income qualification requires documented lease agreements or market rent studies. Lenders want to see the property can carry itself. Vacancy and expense assumptions are built into underwriting.

Tax treatment differs: Rental income is taxable, but expenses (mortgage interest, property taxes, insurance, maintenance, depreciation) are deductible. Depreciation is a non-cash deduction that reduces taxable income but must be recaptured on sale. For detailed tax concepts and entity structure implications, see Tax Primer.

1031 exchanges (US-specific) allow deferring capital gains tax by exchanging into like-kind property. Strict rules: 45 days to identify replacement property, 180 days to close, must be "like-kind" (broad for real estate), cannot receive cash (boot). Requires qualified intermediary to hold proceeds.

Common Misconceptions

"The listing price is negotiable" — Yes, but negotiability depends on market conditions. In hot markets with multiple offers, buyers may pay above asking. In buyer's markets, significant discounts are possible. Check days on market and price history.

"I should wait for prices to drop" — Timing the market is difficult. Prices, rates, and inventory all move. A lower price with higher rates may cost more monthly. Focus on affordability and your timeline, not predictions.

"My agent works for me" — Depends on the relationship. Buyer's agents represent buyers; seller's agents represent sellers. Dual agency (same agent or brokerage representing both) is legal in many jurisdictions but creates conflicts. Understand who your agent represents.

"The inspection will catch everything" — Inspectors examine visible and accessible areas. They can't see inside walls, under foundations, or predict future failures. They also don't test for everything (radon, mold, pests often require specialists). Inspection is risk reduction, not risk elimination.

"I can back out anytime before closing" — Depends on your contract. Contingencies provide exit ramps, but once removed or waived, your earnest money is at risk. Some jurisdictions have cooling-off periods; others don't. Read your contract.

Jurisdiction Note

Real estate is intensely local. Practices that are standard in one market may be unknown in another. Even within countries, state/province laws differ significantly. Always establish jurisdiction first. For jurisdiction-specific guidance: US processes and financing in US Real Estate Primer, UK conveyancing in UK Real Estate Primer, Australian settlement in Australian Real Estate Primer.