Chapter 17

The closing represents the final step in a real estate transaction. The purpose is to transfer title from the seller to the buyer and to transfer the purchase price to the seller. Although this may appear to be routine, certain technical and legal procedures must be completed to affect an orderly transfer of title. Con­siderable pre-closing preparation is often required to meet the terms of the seller buyer purchase agreement.

THE BROKER’S ROLL IN THE CLOSING.

Generally, the broker's job is completed when all the terms of the sale have been met, and the buyer-seller purchase agreement is signed. The closing represents the culmination of the broker's services in the real estate transaction. Having completed the task, the broker has earned a commission and is usually paid out of the proceeds of the sale at the closing. Although most closings are conducted by the attorneys representing the various parties in the sale, the broker is often expected to assist in the pre-closing arrangements and should be knowledgeable in closing procedures. Salespersons, while not expected to become involved in the closing preparations, should have a clear understanding of what takes place.

PRELIMINARIES TO THE CLOSING

The closing is actually the fulfillment of the terms of the purchase agreement between buyer and seller. It is the time when the parties involved meet to finalize the real estate transaction. Prior to the closing, certain preliminary steps must be taken to assure an orderly transfer of title.

DATE AND PLACE OF THE CLOSING

Normally, the time, date and place of the closing are indicated in the purchase agreement. In the event that a closing date is not included, the parties should be consulted to decide upon a mutually agreeable time and place. When circumstances arise which might cause a delay or prevent one of the parties from closing at the designated time, new terms must be agreed upon in writing.

MORTGAGE COMMITMENT

If financing is required, the broker should assist the buyer in applying for a mortgage. When suitable financing is obtained, the lending institution will issue a "Mortgage Commitment" letter stating the amount and terms of the loan and the period of time during which it will honor its commitment.

TITLE SEARCH

Although the seller is obligated to convey "good and marketable" title, it is the responsibility of the buyer to determine if the seller owns clear title, except for encumbrances permitted by the contract. This may be accomplished by means of a title search performed by the buyer or bank’s attorney. A title search reveals defects or flaws in the chain of ownership, such as liens, attachments, judgments or outstanding encumbrances which may prevent the seller from conveying good title according to the terms of the agreement.

In searching title, the attorney examines the records at the Registry of Deeds, and the Bankruptcy and Probate Court records, if necessary. To determine if there are any tax liens or special assessments against the property, a municipal lien certificate is obtained from the city or town clerk.

ENGINEER'S SURVEY.

When a mortgage is involved, the lender will require a survey of the land showing the boundary lines and the location of the buildings. This is necessary to make certain that the land matches the description on the deed. It also indicates if there are any buildings extending beyond the property line.

INSPECTION OF THE PROPERTY BY THE BUYER OR PROFESSIONAL. Most contracts contain a clause permitting the buyer to have the property inspected by an expert to determine if there are any major defects in the structure, wiring, plumbing and heating equipment. The inspection will also reveal the presence of termites, hazardous materials or other hidden defects. In the event of a negative report, the buyer has the option of withdrawing from the sale. The buyer should also make a personal inspection of the property to determine if there are any visual defects or unrecorded easements.

SELLER’S OBLIGATION TO CLEAR DEFECTS PRIOR TO THE CLOSING

If any defects are discovered by the title search or inspection of the property, the seller must cure them prior to the closing or the buyer will be under no obligation to accept title. The lawyers for the parties will consult and determine what action must be taken or what documents must be obtained to accomplish this. The acceptance of a deed does not cure defects in title.

BUYER'S WALK-THROUGH.

Shortly before the closing the buyer should inspect the property to see that all required repairs have been made, that the premises are clean and well maintained, and that all fixtures are in place.

CLOSING PROCEDURE

WHERE CLOSINGS ARE HELD AND WHO ATTENDS.

The time and place of the closing is agreed to in the buyer-seller agreement. Although most agreements designate the county Registry of Deeds as the closing site, the actual time and place are subject to change by agreement of the various attorneys. The closing is usually attended by the buyer and seller and their respective attorneys, the real estate broker, the lender’s attorney and the title insurance company’s agent.

WHAT OCCURS AT THE CLOSING? In a typical closing involving bank financing, the following procedure takes place:

The broker should present a bill for commission and a check from escrow for the earnest money deposit. It is customary, at that time, for the seller to apply part or all of the escrow money to the broker’s commission. The proceeds of the loan are delivered to the buyer by way of one or more checks that the buyer endorses and returns to the bank attorney for proper distribution. Generally, the distributions include the broker’s fee, an amount due to discharge the seller’s mortgage or other liens, recording and attorney’s fees, closing costs and the balance due to the seller. Any additional cash due from the buyer to close is paid by cash or certified check to the seller.

The deed is signed, notarized and delivered to the buyer for recording. If the seller has to pay off an existing mortgage, all documents and money are held in escrow by one of the attorneys pending discharge of the seller’s mortgage. This may take a few hours, or a day at most. When the old mortgage has been discharged, the bank issues a release, which is recorded with the new deed and new mortgage. The escrow money is delivered to the proper parties. Prior to the recording, the bank or the buyer's attorney up-dates the title search by doing a last minute check of the record to make certain that the seller’s title remains clear since the initial title examination. Figure 17:1 shows the flow of money and documents in a typical closing.

DOCUMENTS REQUIRED AT CLOSING. The following is a list of closing documents:

1. Deed. The seller must deliver a signed deed to the buyer or to the buyer’s representative. The seller pays for the deed preparation and for the tax stamps. The buyer pays for recording the deed. After recording, the deed is returned to either the buyer or the buyer’s attorney.

2. Land Court Certificate. If title is registered under the Torrens’s System, the seller must deliver a Certificate of Title to the buyer, as well as a deed. The deed and certificate are presented to the Land Court, which issues a new Certificate of Title to the buyer.

3. Promissory Note. The borrower (buyer) executes a promissory note to the bank as evidence of the debt.

4. Mortgage. The mortgage is signed by the buyer and delivered to the bank attorney as security for the loan. The buyer pays for the cost of mortgage preparation and recording fee. No stamps are required on the mortgage.

5. Release or Discharge of Existing Liens. The seller before delivery of title must discharge all outstanding encumbrances, except those agreed to be included in the sale. This may be done by lien waivers, discharges, receipts or other legal documents, which will dissolve or cure the defects.

6. Attorney’s Affidavit of Title. The attorney who performs the title search for the lender must deliver an affidavit of title to the buyer, as well as to the lender. The affidavit certifies the validity of title except for items specifically accepted or noted.

7. Hazard Insurance. The lender will require evidence of hazard insurance coverage before completing the mortgage transaction. In lieu of a policy, the bank will accept a binder, covering the property for a temporary time period until a policy is issued.

8. Uniform HUD Settlement/Disclosure Statement. The Uniform statement is required by the Real Estate Settlement Procedures Act (RESPA) when the purchase is financed by a federally related mortgage loan.

9. Hazardous Waste Affidavit - 21E. The buyer and seller sign an affidavit certifying to the lender that the premises have not been contaminated by the storage or dumping of hazardous wastes or substances. An example would be a leaky underground oil storage tank.

10. UFFI Certification. Buyer and seller are required to sign an affidavit certifying to the bank that Urea Formaldehyde Foam insulation was never installed in the building, or if so, that it has been removed.

11. Lead Paint Notification Certificate. This document is required to be given to the purchaser prior to the signing of an offer. However, many lenders routinely have another certificate signed at the closing.

12. Various Other Documents. The following documents are required by the lender.

Tax Reporting Form 1099-B

Lien Certificate.

Seller’s affidavit of no mechanic's liens.

Plot Plan.

Affidavit of Domestic Ownership.

Smoke Detector Certificate.

6-D certificate for condos.

CLOSING SETTLEMENT STATEMENT EXPLANATION

Closing settlement statements are designed to show clearly the financial obligations of the parties to a real estate transaction. They can be put in any form. In some cases, a single closing statement is used; in others, separate statements are prepared for both buyer and seller. While brokers are not required to prepare closing statements, they should be familiar with the procedure in order to give the seller an accurate estimate of closing costs. Also, the broker should be able to provide the buyer with an accurate estimate of the amount of money needed to complete the purchase. Note: A copy of the "settlement statement" or "closing statement" is always provided to each party upon closing.

FINANCIAL OBLIGATIONS. Financial obligations of the parties are of three types:

1. Items Related to the Actual Purchase of the Property. These include the sale price, earnest money deposit and financing.

2. Costs Related to Transferring Title. These include the broker’s commission, preparation of the deed, mortgage and other documents, title examination, title insurance, loan service fees, appraisal, survey, tax stamps, tax escrow deposits and attorney’s closing fees. These expenses are not adjusted between buyer and seller, since they are individual charges.

3. Adjustments Between the Seller and the Buyer. These include apportionment of taxes, insurance premiums, fuel, utilities and rents.

DEBITS and CREDITS.

A closing statement involves an accounting of the parties' debits and credits. A debit is a charge owed by the party and must be paid at the closing. A credit is an amount that the party credited has already paid, or must be reimbursed for, or is receiving as a loan.

ITEMS RELATED TO THE PURCHASE OF THE PROPERTY (Not Prorated).

1. Purchase Price. Credit seller, debit buyer.

2. Earnest Money Deposit. Credit buyer. Debit seller only if not held in escrow.

3. Seller Financing (purchase money mortgage, second mortgage or unpaid balance on assumed mortgage assumption). Credit buyer, debit seller.

4. Tenant Security deposits. Credit buyer, debit seller.

5. Buyer's financing. Credit buyer only.

COSTS RELATED TO TRANSFERRING TITLE

These are items not adjusted between buyer and seller, but are costs paid to third parties. They are always debits and are listed only on the statement of the party who owes the money.

Seller’s closing costs:

1. Broker’s Commission.

2. Attorney Fee for Deed Preparation and Closing.

3. Amount to Pay off Seller’s Mortgage and Liens.

4. Recording Fee for Discharge of Liens and Mortgages.

5. Deed Tax Stamps.

Buyer’s closing costs:

1. Attorney Fees for Closing, Title Examination, and Document, Preparation.

2. Fees for Survey, Lien Certificate, and Plot Plan.

3. Premium for Lender’s Title Insurance Policy.

4. Loan Fees, i.e. Discount Points.

5. Recording Fees for the Deed and Mortgage.

6. Appraisal Fee and Credit Report Fee.

7. Property Tax Reserves.

8. Pre-paid Interest.

PRORATIONS AND ADJUSTMENTS BETWEEN BUYER AND SELLER

The cost of certain items, such as taxes, insurance premiums (if a policy is to be transferred), fuel, interest on a take-over mortgage, rents, security deposits and utilities are apportioned between buyer and seller. These will appear as debits or credits depending upon whether the item has been paid in advance (prepaid) by the seller or is owed (accrued) by the seller.

Prepaid Items. Prepaid items include fuel oil, utilities and taxes, which the seller has prepaid but which have not been fully used up. These are credited to the seller and debited to the buyer. For example, at a closing on October 1, the seller has prepaid the real estate taxes through December 31. The seller would be credited for three months taxes and the buyer debited for it.

Accrued Items. Accrued items are what the seller owes at the closing and which will eventually have to be paid by the buyer. They are debited to the seller and are credited to the buyer. For example, if a closing takes place on September 1, and the real estate taxes have only been paid through June 30, the seller will be debited for three month’s taxes and the buyer credited for it.

Prorated Items credited to seller and debited to buyer:

1. Fuel oil.

2. Prepaid property taxes or utilities.

3. Prepaid premiums if the insurance policy is assigned to buyer.

Prorated Items credited to buyer and debited to seller:

1. Interest due on a take-over mortgage.

2. Unearned portion of current rent collected in advance.

3. Unpaid water and utility bills.

4. Unpaid real estate taxes.

BASIC RULES FOR PRORATING.

Prorations are based upon a 360-day year or twelve months of thirty days each. Carry out math answers to three places and round off to two places in the final answer. Perform the following steps:

Determine the date and the time period for which the item is being prorated.

Determine whether the item has been prepaid and how much refund is due the seller.

Determine whether the item is accrued and how much will be due the buyer.

Proration examples:

1. The annual real estate tax of $1,200 is due at the end of the calendar year and has not been paid. At the closing on July 1, seller will owe the buyer $600 for six months taxes from January 1 to July 1. This is an accrued expense and is debited to seller and credited to buyer.

2. A sale is closed on November 15, and the seller through December 31 has prepaid the annual real estate tax of $1,200. Buyer will owe seller $150 for one and a half months. This is a prepaid item, which is credited to seller and debited to buyer.

3. A closing takes place on September 12. The seller assigns his hazard insurance policy to the buyer. The annual premium of $900 is prepaid to February 1 of the following year. Buyer will owe the seller $345. The unearned portion of the premium covers four months and eighteen days. Solution: $900 divided by 12 = $75 per month X 4 = $300. $75 divided by 30 ~ $2.50 per day X 18 days « $45. $300 plus $45 = $345.00. This is a prepaid item, which is credited to seller and debited to buyer.

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA). RESPA regulates loan transactions on sales of one to four family homes, cooperatives and condominiums when the purchase is financed by a federally related mortgage loan. Federally related mortgage loans include all loans made by lenders whose deposits are insured by FDIC. They also include FHA and VA loans, HUD loans, and loans intended to be sold by the lender to Fannie Mae, Ginnie Mae or Freddie Mac, The purpose of the law is to provide buyers and sellers of residential property full knowledge of all settlement costs. The regulations apply to new first mortgage loans only, and not to transactions financed solely by seller financing, such as an installment sale or mortgage assumption.

RESPA requires the lender to give the borrower the HUD booklet, "Settlement Costs and You," which provides general information about closings and explains the Uniform Closing Settlement form. The lender must also give the borrower a good faith estimates of settlement costs at the time of the loan application or within three days. The loan closing information must be prepared on the HUD Uniform Settlement Statement.

In addition to the RESPA regulations, the lender is required by the Truth-in-Lending Act to fully inform the borrower of the total finance charges, as well as the true annual interest rate.

KEY WORDS AND PHRASES