Overveiw of Closings

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Closing Overview:A real estate contract is typically a “bilateral executory contract”.

1.)each party is making a promise to perform at a date in the future. 2.)Many aspects of the closing – clearing contingencies, for example - take time to set up.

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Closing Overview:A real estate contract is typically a “bilateral executory contract”.Part II

3.)The Closing (or Settlement) Date is the time for final performance of the contract’s obligations.

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What is the aim of a closing?

is to draw all of a real estate transaction’s issues to a conclusion at one time. <<Don’t leave strings hanging, if you can avoid it.>>

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A Closing can take place with all of the parties physically present in one place by....?

using escrow arrangements, however, parties don’t actually have to get together to close.

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RESPA ( Federal Real Estate Settlement Procedures Act) applies to transations involving....

“federally related mortgage loans” – first mortgage loans on a one- to four-family residence made by a lender whose deposits are federally insured (like banks and S&L’s).

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Many transactions thar are subject to RESPA.

But, because of the volume of transactions that are subject to RESPA, the real estate industry has gravitated toward use of the HUD Uniform Settlement Statement for most transactions, even non-RESPA.

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RESPA: Preliminary Issues for Residential Lender:

1.)Settlement Costs Booklet2.)Good Faith Estimate of Closing Costs3.)Abusive Practices – RESPA forbids kickbacks and payment of phantom charges.

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The terms of the contracts involved in the transaction will govern most aspects of the Closing:

1. When and where the closing will be held2. What financial issues will be prorated between the parties and the methods for prorating3.)The type of deed to be given and the condition of title at the time of transfer.

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The terms of the contracts involved in the transaction will govern most aspects of the Closing: Part II

4.When title evidence must be delivered and who pays for it.

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Title insurers are key players, both because they assure clear title for the buyer’s and lender’s interests in a transaction, and because their employees frequently act as settlement clerk.

Where escrow instructions are used to settle transactions, many of the conditions for completion of the closing relate directly to the state of title - a merger of title assuring and closing functions.

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The Key Question for Closings: Which cam first , the Chicken or the Egg? Part I

1.)I can only buy a property if I get a mortgage loan. BUT, the lender won’t loan me any money until I can lawfully convey a first mortgage interest in the property.

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The Key Question for Closings: Which cam first , the Chicken or the Egg? Part II

BUT, I can’t own the property and provide a first lien mortgage on it until I have paid for it. Return to the top.2.)This is repeated for every lien payoff and every other action required for closing.

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The Key Question for Closings: Which cam first , the Chicken or the Egg? Part III

3.)How much do you trust others? How much should you trust others?4.)The mechanics can be a real problem, unless everyone is present for Closing, actually or virtually.

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Escrow Arrangements for Entire Transactions – “Western Style Closings”. Part I

1.)It is common, in some areas, for participants in a closing to never see each other face-to-face.

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Escrow Arrangements for Entire Transactions – “Western Style Closings”. Part II

2.)An “escrow agent”, often a title company employee, closes a transaction by acting as the hub of a wheel, with each spoke connecting a separate participant to the transaction.

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Each party connects to the escrow agent (and the closing) by an individual or joint Escrow Agreement (or “Escrow Instructions”).

The instructions detail the conditions that must be met before the escrow agent can release the money, documents or other items delivered by that party .

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An escrow closing is completed by the occurrence of all of the conditions that trigger every action under all of the Escrow Instructions.

It can happen quietly, but the closing occurs with the force of a steel trap shutting.]

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The simultaneous transfer of value for value is aided by delivery of funds in an immediately available form:

1. Certified or cashier’s check2. Wired funds – essentially an “e-transfer” of collected funds3. Cash (rare) – receiving large amounts of cash can be a difficult way to go.

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Contrary to the table on page 304 {5th Ed. 298}, even a conventional face-to-face (“Eastern Style”) closing can involve aspects of an escrow closing. What would an example be? Part I

Example: Lenders often participate in transactions by escrow – even where the buyer and seller appear personally.

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Contrary to the table on page 304 {5th Ed. 298}, even a conventional face-to-face (“Eastern Style”) closing can involve aspects of an escrow closing. What would an example be? Part II

The lender’s funds are wired into the closing agent with instructions governing the steps that must be completed before the funds are released for the deal.

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Odds and Ends Leading Up to Closing:Part I

1.)The “inspection” referred to near the bottom of page 444 {433} is not the same as an “inspection contingency”. This one is a pre-closing “walk-through” aimed at assuring that the property is in the condition called for in the contract.

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Odds and Ends Leading Up to Closing: Part II

2.)What should happen if the property burns down between the time a contract is made and the Closing is scheduled to take place? Who loses?3.)Note the importance of utility readings .

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Title and Title Assurance:

Usually, the seller’s primary obligation is to transfer title to the property in the state called for in the contract (usually “marketable title” ).

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Exclusions from title policies- See RM 6008 Part I

1.)No assurance the property was legally divided.2.)No assurance the property is zoned for the buyer’s use..

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Exclusions from title policies- See RM 6008 Part II

3.)No insurance can be given to protect against a later exercise of eminent domain or against liens that attach to the property after the policy date.

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Exclusions from title policies- See RM 6008 Part III

4.)No insurance against liens or other claims that the insured assumes or agrees to accept, that the insured knows of but fails to tell the insurer about, or which affect the insured only because the insured did not pay value for the property interest.

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Generally, title insurance deals only with issues that can be discovered in public records (that is, they are known “constructively”). This leads to certain “standard exceptions” in the commitment and title policy.

1.)Things like potential (but not yet filed) mechanics liens, unrecorded leases affecting the property, and claims of adverse possession or prescriptive easements etc. are excepted from title insurance coverage.

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2.)THESE EXCEPTIONS CAN BE REMOVED, by providing outside assurance that the problems do not exist. Consider “Owners’ Affidavits” and lien waivers, etc.

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3.)Removing Exceptions Broadens Coverage – removal of exceptions (or getting insurance “over” an issue) is a good thing for an insured.

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Other “exceptions” to title that are discovered by the insurer’s search must be cleared off in order to provide “free and clear title” (Example – mortgages of record);OR

1.)They might remain attached to title as “permitted exceptions” under the purchase contract (Example – CCR’s).

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Coverage for "Gap"

1.) How does Gap arise?2.)How is it delt with? Buyers can insist that the seller guarantees the gap.

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Closing Process:Preparation - First step

1.)Parties work on perfecting their parts of the closing (Buyer arranges financing, clears other contingencies etc. and Seller orders title and prepares transfer documents.)

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Closing Process:Preparation - Second step

2.)Settlement Clerk collects bills and payoff statements, and analyzes Option/Offer and other contracts to begin calculating the dollar amounts to be collected and disbursed at closing.

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Consider the participants in a closing process:

1.) How many have to provide documents?2.)How many expect to receive money?3.) How many will be presonally present?4.) How will they participate, if they are not personally present?

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Closing Process: Payment may be.... Part I

1.)Required by the Purchase ContractPurchase price or transfer of security deposits.2.)Required for the Buyer to get its financingApplication fees, loan fees (points), credit reports etc.

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Closing Process: Payment may be.... Part II

3.)Required for the Seller to be able to convey clear title as promised Mortgage and other lien payoffs, recording fees for releases, and payment of bills that could lead to claims (contractors’ bills and governmental utility bills).

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Closing Process: Payment may be.... Part III

4.) Due in order to satisfy other contracts that Buyer or Seller have (or are merely convenient to pay at closing)Brokerage commission, attorneys fees, others…

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Closing Process: Asjustments may be required to.. Part I

1.)Move money from one party to the other pursuant to the purchase contract.Example: Earnest Money.

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Closing Process: Asjustments may be required to.. Part II

To deal with the fact that each party’s debts and deposits often have “lives” that do not match the closing date. It is often necessary for one party to compensate the other for these mismatches. Examples: Association Dues and Property Taxes.

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HUD-1 Settlement Statement(closing statment)- A Financial sausage maker....

The ingredients (Buyer’s personal funds and proceeds of loans) go in, the machine runs (all of the bills are paid) and then a completed sausage (the net amount due to the Seller) pops out at the end of the process.

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HUD-1 Settlement Statement(closing statment)- A Financial sausage maker....Part II

1.)Occasionally the Buyer and Seller may have to settle up separately for personal property or other items.2.)There can be closings in which the Seller gets no proceeds and actually has to contribute money to complete the deal.

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You can break the HUD-1 into quadrants:

1.)NW Quarter” – What the Buyer has to pay.2.)“NE Quarter” – What the Seller is entitled to receive.3.)“SW Quarter” – What the Buyer has already paid, will have paid by others (lender), or is entitled to as an adjustment from the Seller.

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You can break the HUD-1 into quadrents: SE Quarter.

4.)SE Quarter” – What the Seller must pay to third parties or give up to the Buyer as an adjustment to get the deal done.5.)Page 2 lists the closing costs each party will pay (and which are brought forward to appropriate lines on page 1 of the form.)

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There are Escrows and then there are Escrows. Here are 2 of 3 types of Escrows:

1.)Entire closings are sometimes handled by an escrow agent, as we have seen.2.)Escrows can be used to assure the availability of funds for the completion of an act which cannot be completed by the time of closing.

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Generally a generous figure (150% of expected total cost – or more or less) is deposited by the responsible party, so those relying on the work’s completion can be sure there are funds to do the job. What is an example of this?

Example: A seller had agreed to make a repair to a property prior to closing, but bad weather made that impossible.

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There must be an escrow agreement dictating deadlines for action, who is supposed to make the action occur, and what happens if the deadlines are not met. Forfeiture of the escrow fund?

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The third type of Escrow is?

Escrows for Assurance of Mortgagor PerformanceEscrows to assure a lender that there will be funds to pay property taxes (or property insurance premiums) when they come due.

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A closing is not just about the money, however...

1.)Documents conveying the property, clearing title and dealing with other closing-related transactions must be collected, .copied and distributed.

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A closing is not just about the money, however... second responce

2.)AND, of course, all of the documents clearing title and putting the new owner into ownership, and evidencing the buyer’s financing must be recorded.

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