By Jacquelyn Lynn
You find a property, you complete your due diligence, and you negotiate a deal that both you and the seller are satisfied with—but there’s still one more step in the process: the closing. There is no circumstance where the old saying, “the job’s not finished until the paperwork is done” is more appropriate. A real estate closing is where you complete the transaction, where the buyer pays the money and the seller takes ownership of the property. And though it sounds simple, there’s a lot of paperwork and it needs to be done accurately. What’s more, no two closings will ever be exactly alike. That’s why real estate investors need to understand everything involved in the closing process and what they need to bring to the table whether they are buying or selling.
Most real estate closings are actually finalizing two transactions: the sale of the real estate and the mortgage loan (or loans) if you’re financing the property. As the buyer, you’ll have to prepare for and do the paperwork for both.
Typically, the seller is responsible for obtaining a title search and title insurance for the buyer. Sellers usually pay for this, although it can be negotiated. Sellers are also responsible for making any agreed-on repairs to the property and arranging for the buyer to have a final walk-through.
Buyers are responsible for obtaining title insurance for the lender. They are also responsible for insuring the property to at least the minimum requirements of the lender. Buyers also schedule all property inspections and review the reports.
Of course, just about everything involved in a real estate transaction is negotiable. So even though it’s traditional for a seller to do and pay for certain things and a buyer to do and pay for other things, if you both agree, you don’t have to do what’s customary.
Before the closing
Once a deal is finalized, the next step is to schedule the closing. Be sure you allow enough time to complete all the pre-closing tasks but that you set the closing date before your lender’s commitment or any interest rate lock expires. Also consider how the closing date might affect your cash flow based on issues such as when down payments are paid, prorated items such as property taxes and homeowner’s association fees, and, if you are buying an occupied rental property, the transfer from seller to buyer of the prorated rents and deposits.
Once the closing date is set, review your documents. Make a list of what you need to do to meet the conditions of your loan offer, such as arranging for a termite certificate, following up with the seller to make sure specified repairs are made, having the property inspected, obtaining insurance, and securing title services. Not all lenders require the same things on every deal, so be sure you know exactly what you need to do and how it must be documented so you can get it done before closing.
A few days before the closing, carefully review your HUD-1 or final closing statement. Check all the number: be sure that the interest rate and other fees are accurate, you’re getting all the credits due you, you’re paying only what you agreed to pay and that the seller is paying what he agreed to pay, and all the lender, title, and escrow fees are accurate and what you agreed to. Take the time to check every math calculation—mistakes happen, even with the most conscientious of document preparers.
You should also review the preliminary report or guarantee of title insurance. Check to see if the legal description is accurate and that any liens or encumbrances are properly described. Check with the title agent or attorney handling the closing to be sure that the documents correctly reflect the way you want to take title to the property.
Finally, inspect the property just prior to closing. Be sure it’s in the condition you are expecting and that the seller has met all the conditions of the purchase contract.
At the closing
A well-run closing should take about an hour and will include a lot of documents that need to be signed. Though most will be standard, you should read them all.
The mortgage documents you can expect to see, read, and sign include the truth in lending statement, which lists the interest rate, annual percentage rate, amount financed, and the total cost of the loan over its life (check and double-check these numbers before signing); an itemization of the amount financed; a monthly payment letter, which breaks down your monthly payment into principal, interest, taxes, insurance, and other monthly escrows (check these numbers as carefully); the note itself; and the mortgage. There may be other documents required by either your state or the lender. Read each one and don’t allow yourself to be rushed in to signing anything you haven’t carefully reviewed and completely understand.
The real estate documents you’ll have to sign include the HUD-1 or disclosure/settlement statement (even though you’ve already reviewed this document, do it again); a warranty deed, which is the instrument that transfers the title of the property; proration agreements; tax and utility receipts; a name affidavit certifying that you are who you say you are (bring photo ID); a statement acknowledging that you have seen all the reports regarding the property; and a search or abstract of title, which gives a list of every document that has ever been recorded about the property.
You should be told prior to the closing how much money you’ll need to bring. Don’t bring cash to closing; make it a cashier’s check.
At the end of the closing, you should receive the keys to the property. Congratulations!
|Jacquelyn Lynn (www.jacquelynlynn.com) is a business writer, speaker, and author of The Entrepreneur’s Almanac.