The Real Estate Closing

Closing a Sale or Purchase

You have decided to buy your first property, now what?

The following is a brief description of the closing process and what to expect. Each state has slightly different procedures and requirements. Closings, are designed to serve the interest of all the parties equally. A title company or attorney most often handle the real estate closing. Title companies follow the laws of the state, the instructions as given in the sales contract, and the instructions given in the loan documents. The goal of the title company is to conduct the closing as instructed, complete the paper work in a manner that protects the interest of all parties, handle the disbursement of funds, and recording of the documents.

The following is a brief description of the process and some of the paperwork. It is not all-inclusive as state requirements vary and each transaction is different. I suggest you stop by a title company and ask for a copy of a blank closing statement, and an copy of an offer to purchase contract. If they will not give you copies, pick up a copy of Modern Real Estate Practices at a book store or college text book store.

You can get an estimate of the closing cost from the Title Company or closing agent at any time by asking the closing agent or the real estate sales person.

Title to the property and possession transfers at closing.

The Offer To Purchase?

The offer to purchase is made in writing. It might be called a Residential earnest money contract, Contract of sale, or similar name. Each real estate sales contract may be different, read it, the closing agent will follow the contract instructions. The signed contract, along with a check for the earnest money, is placed with a title company, or closing agent who will handle the closing. The agent will deposit the money into an escrow account.

Real Estate Settlement Act

The real estate settlement act, and your state real estate settlement laws, dictate the general procedures and disclosure practices. These laws are designed to protect the buyers and sellers, and assure that the settlement costs are disclosed.

The Closing Agent?

The closing agent conducts the proceedings, and calculates the settlement and division of charges between the parties as provided for in the sales contract.

Real Estate Agent
The real estate agent, (if there is one), is paid at the closing by the disbursements of funds as agreed to in the contracts between the parties. The real estate agent will work with the closing agent and the parties involved to handle any practical matters such as termite inspections, surveys, needed repairs, etc. to insure the closing goes smoothly.

Lender

The buyer is responsible to provide financing for the purchase. The financing is, or can be, handled by the seller, a lending institution, and or the real estate agent if they are assisting in the loan procurement. Or, you can secure the loan directly yourself. The lender will work with the closing agent for proper documentation on the disbursement of funds and recording of the loan documents and property liens. The application for the mortgage is given to the lending institution, not the closing or escrow agent.

The Title

The sales contract usually requires that a title search, and removal of any objections to the title, be completed by a certain time frame. The seller is required to show he or she owns the property by securing a title commitment, or abstract of title, from the title company. You should request title insurance to protect yourself when buying property.

Survey

A survey of the property will provide assurances of the legal description, location and size of the property, and any easements or right of ways granted. It is important to re-inspect the property just before the closing to assure that there has been no adverse changes to the premises.

Escrow

An escrow is a method of closing a real estate transaction. Documents, real estate, money, and securities deposited are handled by a disinterested third party, (escrow agent) this is often the title company, who is authorized to coordinate the closing activities. In most states, the escrow agent is licensed and bonded. Once the sales contract is executed, the contract and earnest money are handed over to the escrow agent who deposits it into an escrow account.

The buyer and seller provide the escrow agent with all needed documents prior to the closing.

The Seller will provide:
The deed.
Title evidence (title policy).
Letter showing Mortgage pay offs.
Plus anything else required by the real estate sale contract.

The Buyer will provide:
The balance of the cash down payment.
Mortgage papers - unless a cash deal.
An insurance policy on the property.
Plus anything else required by the real estate sale contract, or required by the lender.

Expenses

In addition to the payment of the purchase price, proration of taxes, and interest, other charges are involved.

These may include:

Brokers sales commission: A sellers expense
Attorney's fees: Either party's expense
Appraisal Fees: Either party can pay for a property appraisal
Survey fees: Traditionally a buyers expense if a new mortgage is being issued.
Recording fees: (filing fees) Usually a sellers expense.
Transfer tax: Most states have this
Title expense: Usually a sellers expense
Loan fees: Usually a buyers expense, sometimes called points. Sellers are sometimes charged points and may have other fees, as shown in their mortgage, such as prepayment fees.
Tax and insurance reserves: A mortgage company may require a reserve be set up to collect future taxes and insurance premiums in advance to assure they are available to pay the bills when due.

Who is charged (pays for) for what expenses is governed by the agreement made between the parties in the real estate purchase contract.

Proration

Proration is the dividing up, (balancing), of the financial responsibility between the buyer and seller. Proration may include, taxes, interest on assumed loans, rents, deposits, utilities, insurance, and items particular to the property being purchased. For example: If you buy a rent house with an tenet living in it, the rent paid by the tenet to the seller would be credited to the buyers account for the remainder of the month from the closing date to the renter's next due date.

Closing Statement

The closing statement is the document that spells out the charges and disbursements as they were actually made. The closing statement shows a summary of the buyer's transaction, and a summary of the sellers transaction. It also shows the cash to and from the parties. All of the settlement charges will be listed. You will use the settlement statement in preparing your income tax reports, The settlement statements (when you buy and sell) and all closing documents should be saved for at least five years after you dispose of a property.