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Lecture Notes: Closings

 

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The Closing:


Buyer's funds: When all pre-calculations are done and exact numbers are available, the buyer can be told how much additional funds will be required, over and above the loan and any earnest money the buyer has already put down. The buyer will make the funds available in the form of a cashiers or certified check. Frequently the buyer's check is payable to two parties; the buyer and and closing agent. If for any reason the closing cannot take place, the buyer would have the option of getting the closing agent's endorsement, and then re-depositing the check into the buyer's own account. (If the check were payable to the seller or closing agent only, the check would have to be deposited into their account, and a new check made payable to the buyer, after clearance.)

 

Sellers' Funds: Typically, there a number of pay-offs to be made from the sales price, to pay off claims and debts against the seller.

 

-First, there will probably be payments for the balance of the seller's mortgage, any liens, judgments, unpaid taxes, and the like. These are pre-calculated, and the seller needs to make certain the amounts are correct, as they are being paid with "seller's money." Some closing agents make these payoffs two party checks, payable to the seller and the claimant, for example, just to leave not doubt that the seller knew they were paying the seller's bills with the seller's money.

 

-Likewise, the real estate broker's commission is paid out of the seller's funds, and the broker may have retained the buyer's downpayment "in escrow" to be applied to the commission. There may also be a commission split if there were a listing agent and a "buyer's" agent.

 

-In addition, there may be unpaid charges which will be presented later for payment, as tax or utility,bills on the property which will come later to the new buyer, who will pay the bills for services partly incurred by the seller. These will be apportioned and an appropriate amount deducted from the money going to the seller, which the buyer will retain to pay these bills in the future.

 

For example, if real estate taxes are going to be $1000 every six months, and closing takes place on the 90th day of the 182 day period, then the seller should pay 90/182 times $1000. The buyer will owe 92/182 times $1000, but the buyer is going to get a bill for the entire $1000. Deduct 90/182*$1000, or $494.51, from the money the buyer has to give to the seller. The buyer will use the money retained to pay the seller's part of the real estate taxes.

 

Final close out: Checks are made payable to various parties out of the purchase price. These must be delivered to the various parties, getting receipts or appropriate release documents, as for example, release of lien documents to be recorded, mortgage releases to be recorded. Frequently large funds will be transferred by wire transfer and all proper accounting is made into the various ledgers. Any amounts being sent by mail should have transmittal letter accompanying the checks, and if the payee is to return an acknowledgement or release document, supply return envelopes with postage. All original documents requiring public record filing should be taken to the court house and filed as soon as possible.

 

Closing documents:

 

Affidavits:

 

- Title: The owners state, under oath, that they still own the real estate being tranferred. The affidavit could be come valuable if the seller had, in fact, sold the same property the day before, and that deed had not been recorded yet.

 

- No change: The borrower certifies that their financial condition hasn't changed since the time the loan committment was made to the date of the closing.

 

-Names: Perhaps a "same name," affidavit, e.g., "I am William, also known as Billy." or, "I am Betty White formerly known by my maiden name, Betty Black."

 

-Foreign person: If the seller is a foreign person, the buyer must withhold 10% of the price for taxes. Buyers want an affidavit from the seller to the effect that the seller is not a "foreign person," so the buyer need not withhold the 10%, and pay it to IRS. And the seller wants their money.

 

-No liens: The seller swears they have done nothing to result in any unrecorded liens or encumbrances since the date of the real estate contract.


Sale and Transfer documents:

 

-Deed.

 

- Bill of sale: for any personal property also being transferred. (curtains, refrigerators, growing crops, etc.)

 

- Assignment of leases: If the property has tenants.


-Loan documents: The promissory note, and the security documents, that is, mortgage, or deed of trust, or security deed.

 

Miscellaneous documents:

 

-1099-B: Settlement agents must report the real estate transaction to IRS, identifying the seller and the amount of the sale price. This is to permit IRS to track capital gains reporting and taxes.

 

- HUD-1 Settlement statement: The federal government requires that all federally related loans (residential and 1 to 4 family residences) must use a HUD-1 settlement form, which summarizes the loan and closing transaction showing the source of funds and various settlement costs and disbursements. If there aren't federal funds involved, the closing agent can use their own forms, which accomplish much the same thing. There needs to be a detailed summary of the transaction.

Words and Phrases to Know:
Promissory note, HUD-1, 1099-B