SouthCoast Title and Escrow Services, Inc.

Closing & Recording

Real estate closing is 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.

Pre-closing Procedures

Right before the closing, the buyer will want to be sure that everything is in order. The 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.

Most sales contracts allow the buyer to make a final inspection, or walk-through, 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 significant alterations of the realty that were not planned.

So that the buyer will know the exact boundaries of the property, a survey is usually done, which also shows the placement of buildings, driveways, fences, and other significant landmarks, and will also show any encroachments from or to adjoining property. Sometimes the buyer relies on old surveys of the property, but usually the lender or title company may require a new survey. The sales contract may specify who pays for the survey—buyer or seller.

Both buyer and seller will want to inspect the closing statement to ensure that everything is in order. The seller will also want to be assured that the buyer has the money to close the transaction.

If the seller has a mortgage or other liens, then he will have to obtain a payoff statement for each lien that lists the exact amount of money needed to pay off the mortgage or lien on the property as of the date of the closing. The payoff statement will usually include not only the remaining principal and interest, but also any prepayment penalties and the fee for issuing a certificate of satisfaction (aka satisfaction piece). The seller will receive credit for any reserves in escrow to pay for future taxes and insurance.

If the buyer is assuming the seller’s mortgage, then the buyer should get a mortgage reduction certificate from the mortgagee, which will list the exact amount of the balance as of the closing date, the interest rate, and the date of the last payment.

The main purpose of preclosing procedures is to ensure that everything is in order: surveys, property insurance, title insurance, title certificate, and the mortgage. The lender may also require that the buyer deposit money in an escrow account to pay for insurance and taxes for the property, to protect its collateral.

Title Procedures

To be sure that the buyer is receiving good title, the buyer and the lender require that the seller delivers either a current abstract of title, which will list most encumbrances, or a title commitment from a title insurance company. The seller generally pays for this title search.

If a title abstract is delivered, the buyer’s attorney should examine it to write an opinion of title, which will list all encumbrances—which includes liens, easements, and deed restrictions—that are in the title record, and whether the title is good. It is not, however, a guarantee of good title.

Since the seller’s title search is generally done weeks or months before the closing, the buyer should do a 2^nd search of the title record right before closing to ensure that no new encumbrances have been added to the record.

Because it takes time to record new encumbrances, the seller is generally required to sign an affidavit of title, in which the 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 subject it to a mechanic’s lien.

If anything on the affidavit of title proves to be false, then the title insurance company or buyer can sue the seller for damages.

Closing

Closing is the actual settlement and transfer of the real estate. It can either be face to face, where all parties and their representatives meet in a room to exchange documents, or it can be done through an escrow agent, who, as a disinterested party, receives all of the documents and finalizes the settlement and transfer.

Most real estate closings must be reported to the Internal Revenue Service using Form 1099-S, listing the seller’s social security number, the sales price, and any reimbursements to the seller of prepaid property taxes.

Typically, the closing agent reports to the IRS, or, in some cases, the lender.

Real Estate Settlement Procedures Act (RESPA)

The Real Estate Settlement Procedures Act was designed to inform the buyer of real estate about closing costs and to prevent abusive practices that inflate the costs of closing for the buyer.

This federal Act, administered by the Housing Urban and Development (HUD) agency, applies to any closing using first-lien federally related loans, which includes most mortgages, for residences, condominiums, and cooperatives consisting of 1 to 4 units.

It 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.

RESPA also prohibits referral fees, such as kickbacks, for directing the buyer to other services when no services are actually performed.

Some brokerages have a controlled business arrangement (CBA) that allows it to offer several related home-buying services, such as for title insurance, home inspections, and even moving. These business relationships must be disclosed. The brokerage may also offer computerized loan origination (CLO) services that allow a potential buyer to easily shop for a loan. However, RESPA 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 CBA or the CLO.

RESPA has the following specific requirements:

within 3 days of the loan application,
- the borrower must receive a special HUD settlement cost information booklet that provides an explanation of closing and its costs;
- the borrower must receive a good-faith estimate of the settlement costs;
the buyer has a right to review a filled-in Uniform Settlement Statement (HUD-1 Form) at least 1 business day before closing.

The HUD-1 form itemizes all charges that are paid by either the buyer or the seller at closing. Items 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 (POC).

Face-to-Face Closing

A face-to-face closing is where all parties and their representatives meet at a specific place and time, usually at an office 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.

One person—the broker, an attorney, or a lender’s or title company’s representative—conducts the meeting.

When the documents are exchanged, they are recorded in the proper order so that the chain of title is not interrupted. For instance, the certificate of satisfaction must be recorded before the seller’s deed to the buyer. And 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 3^rd party, with no relationship to either the buyer or the seller or their representatives. The main benefit of closing in escrow is that the parties and their representative do not have to meet—they just send the required documents to the escrow agent, who then examines to make sure everything is in order, then effects the settlement and transfer.

The escrow agent has the right to examine the title to ensure that there are no defects and that all conditions are satisfied. If 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.

If the title has defects, the escrow agent will deduct the amount necessary to remove the liens from the seller’s money. If the title cannot be cured, then the agent will return everything to the senders of the material, effectively cancelling the sale.

Closing Statements

At closing, there are expenses that either the buyer or seller is wholly liable for and is expected to pay. Most of these costs are closing costs, which pay for closing itself rather than for the property or bills associated with the property. Some of these expenses include the following:

Buyer usually, if applicable, pays for:
- Loan costs
  - origination fee
  - discount points
  - appraisal fee required by lender
  - credit report
  - lender's inspection fee
  - mortgage insurance application fee
  - assumption fee
- Other payments required by lender
  - mortgage insurance premiums
  - hazard insurance premiums
  - title insurance
  - survey fees
- Government Recording and Transfer Charges
  - recording fees and releases
  - municipal taxes or stamps
  - state tax or stamps
- Other Settlement Expenses, if applicable:
  - commission for buyer's agent
  - buyer's attorney fees
Seller usually pays for: