Many real estate transactions end in water-cooler conversations. The closing takes place, but not on the date planned, or money requirements require changes, or the seller took the washer and dryer; or dozens of other possibilities.
Ensuring a successful real estate closing is attainable. Many real estate closings take place on time and as agreed. Experience has demonstrated the more information both parties to the transaction gather and absorb throughout the entire process, the less likely there will be issues at closing. Understand each contingency when negotiating the contract so you can better plan ahead. Then, follow up with your agent for delivery of written verification as each requirement is satisfied. Follow-up and trust (but verify) is the best mindset to maintain between acceptance of an offer and the physical closing.
There are a number of unrelated entities involved in a multitude of tasks in most closings. For example; property insurance companies, municipalities and mortgage lenders. Misunderstandings, dropping the ball or unpreventable actions can create delays and added costs and frustration for all parties.
The Title Company
The purchase contract is the most important document in a real estate transaction, as it sets the conditions to transfer title to the property. This transfer occurs when the seller furnishes the buyer with the deed to the property in exchange for the funds upon which the buyer and seller agreed. A local title insurance company creates a title binder from courthouse records. This document details what the title company will insure and what exceptions it will not insure. For example, if the seller has a mortgage it is a cloud on title and must be satisfied prior to closing. The actual closing concludes all the details that were in the offer to purchase and negotiated at some earlier point in time. If the buyer is borrowing funds to pay the seller the purchase price then the buyer must close the mortgage loan “in trust” with their lender to obtain the money beforehand. If the seller has to pay off the mortgage to deliver the property “free and clear”, the seller also has to close “in trust” to obtain a mortgage satisfaction from their lender beforehand.
The pre-closing walk-through inspection
One way many closings begin is with a walk-through inspection. A home buyer should always insist on a pre-closing walk-through inspection. This inspection ascertains that the condition of the home has not changed since the buyer’s last look at the home. The seller or the seller’s agent should also attend to address any last minute questions and observe the property’s condition. This inspection should be initially written as a contingency in the offer to purchase and accepted by the seller. This inspection is not to be confused with a home inspection by an outside home inspector. If the condition of the home has changed, the issues are much easier to deal with prior to the closing.
The walk-through can happen anywhere from a week before to the day prior to the closing. It is normally coordinated very close to the closing because the chances of the home’s condition changing in a matter of a few days is quite small. If the walk-through is the same day as the closing and something has changed, it may be more difficult to correct the problem in a short time frame.
The title company gathers the documents and the funds “in trust” and delivers the documents to the appropriate parties in a trust capacity if all conditions to the transfer have been satisfied. The receipts and disbursements document the process in the seller’s closing statement, buyers closing statement and the HUD statement, which is prepared by the title company. The real estate agents act to help coordinate and insure the parties to the transaction have complied with their contractual obligations. The closing can take place with both parties in the room, or, with one party at a time. The protocol as to the location, who attends and what takes place can vary widely depending on individual circumstances and local customs.
The best defense against a hiccup at closing
Often times, what happens in a transaction is out of our hands. For that reason, it is good strategy for the seller to occupy after closing and pay rent on a daily basis for some short period of time. It will relieve a lot of pressure if something goes wrong.
This rent-back negotiation is a conscious part of the offer to purchase. Many times the transaction will close a few days later, but if it fails to close permanently, it can be costly for both parties unless they somehow protected themselves from costs associated with a failed closing. If someone loses a job, has an accident, becomes seriously ill, omitted significant financial information in applying for a mortgage or other reasons, it can obviously affect the closing.
Here Is how the rent-back works
The seller remains in the home after the closing, and an escrow is established in the purchase agreement specifically to guarantee delivery of the home in the same condition as when the buyer last viewed it. The seller can pay rent to the buyer after the closing as the closing triggers the cessation of the sellers cost of ownership and the beginning of the buyers cost of ownership. Remember to include the exact time of the day the seller will vacate the property. Most often, a penalty is negotiated based on the costs the buyer will incur as the new owner plus a last minute stay at a hotel. Many states have pre-printed clauses in their state approved forms that simply require a fill-in-the-blank approach to the escrow amount. These funds are held by the title company and distributed to the appropriate party as agreed.
What could go wrong?
Our goal is to help navigate consumers around potential problems that can and do occur in real estate transactions. Here are just two of many examples of situations that happen all too often:
- Upon the acceptance of an offer on their home, the seller promptly secures a replacement home with a down payment deposit. In the excitement, believing their old home is sold, they neglect to include a contingency “subject to” the successful closing of the sale of their current home. The sale of their old home evaporates, and they lose their deposit on the home they planned to purchase because they needed the old home funds to close on the new home.
- Three days before the closing on their new home, the buyers purchase a new car. The lender, in a confirmation credit check, discovers this new debt and payment which the borrower incurred which has thrust them over the lender’s loan limits. The lender withdraws the loan commitment.
All Parties Come Away Happy
There is no written guarantee the closing will take place at a time or date established in the contract for all the reasons stated above. However, anticipating future events when negotiating the purchase agreement, keeping your mind on the process, paying attention and regular communication with the agents will reduce or eliminate the chance of frustrating delays. There are more articles on the website about closing errors.