What is Real Estate Closing?
Closing is known by many names. For instance, in some areas, closing is called settlement and transfer. In some parts of the country, the parties in the transaction sit around a table and exchange copies of documents, a process known as passing paper. In other regions, the buyer and the seller never meet; the paperwork is handled by an escrow agent in a process known as closing escrow. The main concerns are that the buyer receives marketable title and that the seller receives the purchase price.
Face-to face closing
Face to face closing may be held at the office of the title company, the lending institution, an attorney for one of the parties, the broker, the country recorder, or the escrow company. Those attending a closing may include
- The buyer
- The seller
- The real estate salespeople or brokers ( both the buyer’s and the seller’s agents)
- The seller’s and the buyer’s attorneys
- Representatives of the lending institutions involved with the buyer’s new mortgage loan, the buyer’s assumption of the seller’s existing loan, or the seller’s payoff of an existing loan and
- A representative of the title insurance company.
Closing agent or closing officer
A closing agent may be a representative of the title company, the lender, the real estate broker, or the buyer’s or seller’s attorney. Some title companies and law firms employ paralegal assistants who conduct closings for their firms.
The closing agent orders and reviews the title insurance policy or title certificate, surveys, property insurance policies, and other items. After reviewing the agreement of sale (purchase agreement), the agent prepares a closing statement indicating the division of income and expenses between the parties. Finally, the time and place of closing must be arranged.
The exchange is made when the parties are satisfied that everything is in order. The seller delivers the signed deed to the buyer, who accepts it. All pertinent documents are then recorded in the correct order to ensure continuity of title. For instance, if the seller pays off an existing loan and the buyer obtains a new loan, the seller’s satisfaction of mortgage must be recorded before the seller’s deed to the buyer. Because the buyer cannot pledge the property as security for the new loan until ownership has been transferred, the buyer’s new mortgage or deed of trust is recorded after the deed.
Closing in Escrow
In an escrow closing, a disinterested third party is authorized to act as escrow agent (escrow holder) and to coordinate the closing activities. The escrow agent may be an attorney, a title company, a trust company, an escrow company, or the escrow department of a lending institution. Although a few states do not permit certain transactions to be closed in escrow, closing are used to some extent in most states.
After the sale contract is signed, the buyer and the seller execute escrow instructions to the escrow agent. The selection of the escrow agent is often determined by negotiation, custom, or state law. The broker turns over the earnest money to the escrow agent, who deposits it in a special trust, or escrow account.
The buyer and the seller deposit all pertinent documents and other items with the escrow agent before the specified date of closing.
The seller usually deposits
- The deed conveying the property to the buyer
- Title evidence (abstract and attorney’s opinion of title, certificate of title, title insurance, or Torrens certificate)
- Existing hazard insurance policies
- A letter or mortgage reduction certificate from the lender stating the exact principal remaining ( if the buyer is assuming the seller’s loan)
- Affidavits of title ( if required)
- A payoff statement( if the seller’s loan is to be paid off
- Other instruments or documents necessary to clear the title or to complete the transaction
The buyer deposits
- The balance of the cash needed to complete the purchase, usually in the form of a certified check
- Loan documents ( if the buyer secures a new loan
- Proof of hazard insurance, including ( where required) flood insurance and
- Other necessary documents, such as inspection reports required by the lender.
The escrow agent’s examination of the title discloses liens; a portion of the purchase price can be withheld form the seller. The withheld portion is used to pay the liens to clear the title. If the seller cannot clear the title, or if for any reason the sale cannot be consummated, the escrow instructions usually provide that the parties be returned to their former status, as if no sale occurred. The escrow agent re-conveys title to the seller and returns the purchase money to the buyer
Internal Revenue Service Reporting Requirements
Certain real estate closings must be reported to the Internal Revenue Service ( IRS) on Form 1099-S. The affected properties include sales or exchanges of
- Land ( improved or unimproved), including air space;
- An inherently permanent structure, including any residential, commercial, or industrial building
- A condominium unit and its appurtenant fixtures and common elements including land
- Shares in a cooperative housing corporation
Information to be reported includes the sales price, the amount of property tax reimbursement credited to the seller, and the seller’s Social Security number. If the closing agent does not notify the IRS, the responsibility for filling the form falls on the mortgage lender, although the brokers or the parties to the transaction ultimately could be held liable.
Broker’s Role at closing
Depending on local practice, the licensee’s role at closing can vary from simply collecting the commission to conducting the proceedings. In states that require an attorney’s participation, a licensee’s responsibility is essentially finished as soon as the real estate contract is signed. Even so, most licensees continue to be involve3d all the way through closing because it is also in their best interest that the transactions move successfully and smoothly to a conclusion. On behalf of their clients, licensees take care of all details so that the closing can proceed smoothly. This may mean actively arranging for title evidence, surveys, appraisals, and inspections or repairs related to structural conditions, water supplies, sewerage facilities, or toxic substances. Although real estate licensees do not always conduct closing proceedings, they usually attend. Often, the parties look to their agents for guidance, assistance, and information during what can be a stressful experience. Licensees must be thoroughly familiar with the process and the procedures involved in preparing a closing statement, which includes the expenses and prorations of costs to close the transaction.
Lender’s Interest in closing
Whether a buyer obtains new financing or assumes the seller’s existing loan, the lender wants to protect its security interest in the property and ensure that its mortgage liens have priority over other liens. Therefore lenders may require a survey, a pest control, or another inspection report, or a certificate of occupancy (for a newly constructed building). In order to ensure that the buyer takes good and marketable title at closing, lenders generally require a mortgagee’s title insurance policy. The buyer must also provide a fire and hazard insurance policy (along with receipt for the premium) .A lender usually requests that a reserve account be established for tax and insurance payments so that these payments are maintained. Lenders sometimes even require representation by their own attorneys at closing.