Real Estate Closing:

- the transfer of the real estate title from seller to buyer according to the sales contract
- the buyer receives the title to the real estate and the seller receives the money.
- However, there are numerous requirements and costs associated with closing that make it
more complex than buying something at a store.
- Both requirements and costs result from the sales contract itself, from tradition and local
custom, and from local, state, and federal laws.
Preclosing Procedures
- Right before the closing, the buyer will want to be sure that everything is in order.
- main purpose of preclosing procedures is to ensure that everything is in order surveys,
property insurance, title insurance, title certi!cate, and the mortgage.
"he buyer should inspect
the title evidence#
the seller$s deed#
proof that encumbrances have been removed#
the survey showing the exact boundaries of the property#
the results of any inspections, repairs, or alterations#
and any leases that pertain to the property.
walk-through
% when the sales contracts allow the buyer to make a !nal inspection of the property right before
closing, usually with the broker
% to ensure that the property has been maintained,
% that agreed-upon repairs were made, or
% that there were no other signi!cant alterations of the realty that were not
planned.
survey
% done so that the buyer will know the exact boundaries of the property
- shows the placement of buildings, driveways, fences, and other signi!cant landmarks, and
will also
- show any encroachments from or to ad&oining property
closing statement
- inspected by both buyer and seller to ensure that everything is in order.
- "he seller will also want to be assured that the buyer has the money to close the transaction.
payof statement
- obtained if the seller has a mortgage or other liens 'obtains a payo( statemnet for each lien
that lists the exact amount of money needed to pay o( the mortgage or lien on the property as
of the date of the closing)
- usually include not only the remaining principal and interest, but also any prepayment
penalties and the fee for issuing a certifcate of satisfaction 'aka satisfaction piece).
- "he seller will receive credit for any reserves in escrow to pay for future taxes and insurance.
mortgage reduction certifcate
- obtained by the buyer from the mortgagee if the buyer is assuming the seller$s mortgage
- will list the exact amount of the balance as of the closing date, the interest rate, and the date
of the last payment.
Title Procedures
- "o be sure that the buyer is receiving good title, the buyer and the lender require that the seller
delivers either
astract of title % will list most encumbrances
title commitment % obtained from a title insurance company 'seller generally pays for
this title search)
opinion of title ! written by the buyer$s attorney once the title abstract is delivered
* will list all encumbrances 'liens, easements, and deed restrictions) that
are in the title record
* will provide whether the title is good.
+++,t is not, however, a guarantee of good title.
+++ -ince the seller$s title search is generally done weeks or months before the closing, the buyer
should do a .
nd
search of the title record right before closing to ensure that no new encumbrances
have been added to the record.
a"davit of title ! seller swears, to the best of his knowledge, that nothing has
occurred since the seller$s title search to cloud the title, and that there
have been no events that would possibly call into question the seller$s
ownership rights or that would give others an interest in the real estate,
such as would occur for unpaid property improvements, which could
sub&ect it to a mechanic$s lien.
- ,f anything on the a/davit of title proves to be false, then the title
insurance company or buyer can sue the seller for damages.
Closing
- the actual settlement and transfer of the real estate.
- can either be face to face, where all parties and their representatives meet in a room to
exchange documents, or
done through an escrow agent, who, as a disinterested party, receives all of the
documents and !nali0es the settlement and transfer.
1ost real estate closings must be reported to the ,nternal Revenue -ervice using #orm $%&&-'(
Proceeds from Real Estate Transactions, listing the seller$s social security number, the sales
price, and any reimbursements to the seller of prepaid property taxes.
"ypically, the closing agent reports to the ,R-, or, in some cases, the lender.
Real Estate 'ettlement Procedures )ct *RE'P)+
"he Real 2state -ettlement 3rocedures 4ct 'R2-34) was designed to inform the buyer of real
estate about closing costs and to prevent abusive practices that in5ate the costs of closing for
the buyer.
"his federal 4ct, administered by the ,ousing -ran and .evelopment ',-.) agency,
applies to any closing using !rst-lien federally related loans, which includes most mortgages,
for residences, condominiums, and cooperatives consisting of 6 to 7 units.
,t requires that the lender disclose the costs of the closing to the borrower and prohibits the
lender from demanding excessive deposits for escrow accounts, which are accounts required by
most lenders to pay for future real estate taxes and insurance premiums.
R2-34 also prohibits referral fees, such as kickbacks, for directing the buyer to other services
when no services are actually performed.
-ome brokerages have a controlled usiness arrangement 'C/)) that allows it to o(er
several related home-buying services, such as for title insurance, home inspections, and even
moving. "hese business relationships must be disclosed. "he brokerage may also o(er
computeri0ed loan origination 'C12) services that allow a potential buyer to easily shop for a
loan. However, R2-34 requires that the broker inform the buyer that she can shop for those
services elsewhere, and is not restricted to using only the settlement services provided by the
8B4 or the 89:.
R2-34 has the following speci!c requirements
within ; days of the loan application,
o the borrower must receive a special H<= settlement cost information booklet
that provides an explanation of closing and its costs#
o the borrower must receive a good-faith estimate of the settlement costs#
the buyer has a right to review a !lled-in -niform 'ettlement 'tatement ',-.-$
#orm) at least 6 business day before closing.
"he H<=-6 form itemi0es all charges that are paid by either the buyer or the seller at closing.
,tems that were paid by either party outside of closing do not have to be listed. However, if the
lender required that any charges be paid before closing, then these must be listed as paid
outside of closing 'P2C).
#ace-to-#ace Closing
4 face-to-face closing is where all parties and their representatives meet at a speci!c place and
time, usually at an o/ce of one of the party$s representatives, to exchange the documents and
to ensure that all necessary steps have been taken so that the buyer can receive marketable
title and the seller receives his money. Hence, this type of closing is often referred to as passing
papers.
:ne person*the broker, an attorney, or a lender$s or title company$s representative*conducts
the meeting.
>hen the documents are exchanged, they are recorded in the proper order so that the chain of
title is not interrupted. ?or instance, the certi!cate of satisfaction must be recorded before the
seller$s deed to the buyer. 4nd only after the title is transferred to the buyer can the buyer
pledge the property for a mortgage.
Closing in Escrow
Because the requirements of settlement and transfer are stipulated by the sales contract and by
law, the procedure of closing in escrow is basically the same as a face-to-face closing except
that all of the documents are sent to an escrow agent, who is a disinterested ;
rd
party, with no
relationship to either the buyer or the seller or their representatives. "he main bene!t of closing
in escrow is that the parties and their representative do not have to meet*they &ust send the
required documents to the escrow agent, who then examines to make sure everything is in
order, then e(ects the settlement and transfer.
"he escrow agent has the right to examine the title to ensure that there are no defects and that
all conditions are satis!ed. ,f everything is in order, the escrow agent sends the seller the
purchase money, and records the deed for the buyer, and the mortgage, if any.
,f the title has defects, the escrow agent will deduct the amount necessary to remove the liens
from the seller$s money. ,f the title cannot be cured, then the agent will return everything to the
senders of the material, e(ectively cancelling the sale.
Closing 'tatements
4t closing, there are expenses that either the buyer or seller is wholly liable for and is expected
to pay. 1ost of these costs are closing costs, which pay for closing itself rather than for the
property or bills associated with the property. -ome of these expenses include the following
Buyer usually, if applicable, pays for
o 9oan costs
origination fee
discount points
appraisal fee required by lender
credit report
lender@s inspection fee
mortgage insurance application fee
assumption fee
o :ther payments required by lender
mortgage insurance premiums
ha0ard insurance premiums
title insurance
survey fees
o Aovernment Recording and "ransfer 8harges
recording fees and releases
municipal taxes or stamps
state tax or stamps
o :ther -ettlement 2xpenses, if applicable
commission for buyer@s agent
buyer@s attorney fees
-eller usually pays for
broker@s commission
title search
prepayment penalties, if any
certi!cate of satisfaction fee
Prorations
"here are some expenses at closing where both buyer and seller have some liability. >hen a
sales contract is !nally signed, the sales price is agreed upon. >hen buying an item at a store,
the buyer pays the purchase price and maybe some sales tax in return for the item. But a real
estate sale is not that simple because there are bills associated with the real estate that the
seller has already paid for a certain period, during which both seller and buyer will have owned
the property, or there will be bills covering the same period that the buyer will have to pay later
on. 4 large part of the closing is the proration of these expenses between buyer and seller
according to how long each will have owned the property during the time period covered by
each bill.
1ost closings use prorations that are calculated through the day of closing, meaning that the
seller is assumed to own the property on the day of closing. ,f the prorations are to be calculated
up to the day of closing, then the buyer is assumed to own the property on the day of closing.
>hich method is chosen depends on the sales contract, the traditional approach for the locale,
or state law.
3roration results in credits and debits for both buyer and seller. 4 credit for the seller increases
the amount that he is entitled to receive whereas a credit for the buyer decreases the amount
that she must pay. 4 deit for the seller decreases the amount that he is entitled to receive
whereas a debit for the buyer increases the amount that she must pay. "he ma&or credit for the
seller is the sales price of the property, which is also the ma&or debit for the buyer. "he other
credits and debits modify the amount of money that the buyer actually pays to the seller at
closing.
Bills can be divided into prepaid items, which are expenses that have been paid by the seller
at the beginning of the billing period, and accrued items, which are expenses that will be paid
by the buyer at the end of the period. 3repaid items are credits to the seller and debits to the
buyer# accrued items are debits to the seller and credits to the buyer. Hence, it is obvious that
what is a credit to the seller is a debit to the buyer, and vice versa.
"he proration of most expenses, including taxes, mortgage, interest, and insurance premiums, in
most localities uses a ;BC-day year, called a anker3s year 'aka statutory year), which is
divided into 6. ;C-day months. "he actual proration is then determined by summing the
monthly bills and daily bills according to the following formulas
4onthly Rate 5 6early Rate 7 $8
.aily Rate 5 4onthly Rate 7 9%
Prorated Credit or .eit 5 *:umer of 4onths ; 4onthly Rate+ < *:umer of .ays ;
.aily Rate+
E;ample = Proration of an )ccrued >tem or Prepaid >tem -sing a /anker3s 6ear
"he buyer and seller close on 2ctoer $?. Real estate taxes of @9(A%% on the property are paid
at the end of the year. "hen, using a banking year, the calculations are as follows
1onthly 3rorated Rate D @9(A%% E 6. D @9%%
=aily 3rorated Rate D @9%% E ;C D @$%
Hence
3rorated =ebit to -eller D @9%% x $% F $? x @$% D @9($?% D 3rorated 8redit to Buyer.
,f the real estate taxes had been prepaid by the seller, then the same amount would have been
a credit to the seller and a debit to the buyer.
-ome prorations, such as for the division of rents from the property, use a ;BG-day year ';BB in
a leap year). ,n this case, a daily bill is calculated, then multiplied by the number of pertinent
days
.aily Rate 5 6early Rate 7 9AB
Prorated Credit or .eit 5 .aily Rate ; :umer of .ays in Relevant Period
E;ample = Proration of Rents
"he buyer is closing on .ecemer $B on a property that has a studio that is rented out for
@9$% per month. "he sales contract calls for prorating the rent through the day of closing.
Rents are calculated using the actual number of days, but because rent is paid month to month,
only the number of days in the month of the closing needs to be counted.
Hence
=aily Rent D @9$% E ;6 D @$%
@$% x $B D @$B% D 8redit to -eller D =ebit to Buyer
"he rent deposit is transferred from seller to buyer, so the deposit is a debit to the seller and a
credit to the buyer.