After successfully completing this topic, you will be able to
• define settlement and title closing, and
• list the preliminary steps to a closing.
One of the most important functions of real estate brokers and sales associates is preparing a plan for closing the transaction after the contract is signed. Much of the work will be done by the lender and the title closing agent, but the real estate licensee can’t be a passive bystander. This section will describe the duties that must be performed to ensure a smooth closing.
The sales associate must deliver the earnest money to the broker by the end of the next business day, and the broker must deposit the funds into the escrow account within three business days. If a title insurance company will hold the deposit, the broker must deliver the deposit to the title-closing agent within the same periods. The broker should get a receipt for the funds.
Occasionally, a buyer might give a small deposit when making the offer, followed by a more substantial amount at some point in the future. It is the broker’s responsibility to monitor the transaction and to make sure the additional earnest money is received on time, and deposited according to FREC rules. If the buyer fails to make the deposit by the required date, the broker must notify the seller about the default and follow the seller’s instructions.
Contracts are specific about time periods allowed for the buyer completing a loan application. If a buyer fails to make a complete application by the required date, the broker must notify the seller about the default.
The buyer and seller should diligently work to ensure that contingencies are resolved quickly. For example, a buyer may have ten days to complete the home inspection process and notify the seller of any unacceptable conditions.
Most real estate lenders will require that the property value be adequate collateral for the loan. The lender orders the appraisal from an appraisal management company that appoints the appraiser on a rotating basis. Buyers have a right to a copy of the appraisal at least three days before closing.
A major transaction contingency is the buyer’s approval for financing. When the loan is approved, things begin to move more quickly.
The lender or the buyer will order title insurance. The title insurance company will make a search of the public records to ensure there are no liens or encumbrances that would prevent the lender from being in first priority position. Very often, the buyer will purchase an owner’s title insurance policy to protect the equity.
The property will be inspected for wood-destroying organisms and a report will be given to the buyer and to the lender. The contract is contingent on a clear WDO inspection.
Many buyers insert a contingency in the contract that a home inspection be completed, and that the buyer be satisfied with the result. The buyer can cancel the contract based on the home inspection for any reason.
Any repairs required in the contract should be completed and inspected by the buyer.
The title closing agent will normally order a survey of the property to locate the boundaries. The survey will show any encroachments or unrecorded easements. The title insurance company will consider an encroachment as a “cloud” on the title that must be cleared before closing.
The buyer should pay for the first year’s insurance policy at least 30 days in advance if the transaction is expected to close during hurricane season. If a hurricane or tropical storm enters the area enclosed by the hurricane “box,” shown in Figure 1, insurance companies will stop writing policies until the box is clear again. During hurricane season, there may be several storms developing in the area, delaying closings for a week or more.
After the buyer purchases a hazard insurance policy, the buyer, or the insurance agent should deliver the policy to the title closing agent.
If the survey shows that the property is in a flood zone, the lender will require that the borrower purchase a flood insurance policy.
The agents notify their buyer or seller about the time and place set for closing to be sure the parties can attend, or request that a mail away package be prepared by the title closing agent.
The buyer makes a preclosing inspection to ensure that repairs have been completed and the property is in good condition. The sales associate for the buyer should avoid making the inspection because of liability if the sales associate misses something important.
The lender must give the buyer the Closing Disclosure at least three days before the closing so the buyer can review the documents. Sales associates for both parties should request all the documents that the buyer and the seller will have to sign at closing. Each sales associate should arrange a time to go over the documents with their respective party.
The sales associate should inform the buyer about the amount needed for the closing. Most contracts require that the buyer wire the funds to the closing agent so that the closing agent can disburse the same day.
If the broker is holding the earnest money, the broker should prepare a check made payable to the title insurance company. The sales associate will bring the check to closing.
There are several more steps in a closing. For example
• the buyer should arrange to have the utilities changed over effective on the day of closing. If effect the seller’s utilities are turned off and the buyer’s turned on.
• the sales associate should have a list for either the buyer or the seller to help avoid slipups that cause an inconvenience. For example, remind the buyer to apply for utility service, change addresses for newspaper, send change of address forms to the postal service, arrange for cable TV/Wi-Fi installation, and to contact yard service companies.
• the listing sales associate should pick up signs and lockbox.
• the selling sales associate might follow up with the buyer with a courtesy visit to ensure everything went well during the move.