Real Estate Closing Process - PowerPoint Presentation

Slide1

Real Estate Closing Process

from Start to FinishSlide2

CONTRACT

The contract is extremely important because whatever names and other information in the contract controls the closing process and what we do as a settlement agency.Slide3

CONTRACT

The reason the contract is so important is because when people sign a contract, equitable title actually passes to that person, as long as they do everything that the contract states.

The closing passes legal title to the purchaser where they become the owner of record.

This goes for both buyer and sellerSlide4

CONTRACT

Since the contract actually vests title, you can’t just add someone onto the HUD-1 or Deed until the contract is amended to reflect the additional parties.

The first thing we do as a settlement company is plug the EXACT names from the contract into the HUD-1. If these names are not correct, this can become a big issue.

As agents, you should always specifically ask people EXACTLY how they want their names reflected on the contract because this is how the names will also be reflected on title.

Check Driver’s license, ask about middle names and

Jrs

. Slide5

CONTRACT

However the names are listed on the contract, will also be how the names are listed on the HUD-1, Deed and all loan documents from the beginning to the end of the closing process unless corrected.

We run title, bankruptcy checks, judgments, liens; everything for this purchase is associated with this name.

Do not just assume you know how people want their names on the contract. Be sure to

ask.

People don’t always go by their given names that show on their IDs.

Ex.) I go by Steve Norman, but my legal name is Stephen Price Norman.Slide6

CONTRACT

The #2 mistake people make on the contract is not adding all people which is also reflected on title.

Typically title is held as follows:

Tenants by the Entirety (Husband and Wife)

Tenants in Common

Joint Tenants with Right of Survivorship

Sole OwnerSlide7

CONTRACT

Do not just assume you know how people want to hold title, always ask!

Examples:

Now it’s especially complicated with laws in DE because people who are of the same sex can be married and can hold title as tenants by the entireties, not just joint tenants.

T by E provides protection from creditors of one with limited exceptions for IRS tax liens.Slide8

CONTRACT

There is also the

2

nd

marriage dilemma

. You assume people who are married want to hold title as Tenants by the entireties, husband and wife, to get the creditor benefits.

but that isn’t always the case.

People have kids from their 1

st

marriage so they don’t want to hold title as tenants by the entireties because they want their half of the property to go to their kids from their previous marriage when they die.Slide9

CONTRACT

People don't always under the title vesting and say they want it held a certain way, but don't always understand what it actually means.

Ex.) Married couples wants joint tenants but this can be broken up by a creditor of one.

As an agent, if you represent purchaser, and make sure the attorney explains and asks the buyers these questions so they understand exactly what it means. It’s a very important decision and once it's on record it stays that way.Slide10

CONTRACT

Problem of the Estate or Trust

It is common reasoning to think that if you are dealing with a person, then that's how they're taking title or want the property owned, however there are other forms of ownership.Slide11

CONTRACT

Problem of the Estate or Trust

The biggest problem is the Trust.

Trusts can come in all shapes and forms;

Revocable, irrevocable, spend thrift, and qualified trusts are just a few examples.

Can get very complicated for large estates.

These are all basically estate planning tools used to avoid probate, reduce liability, and protection against creditors.Slide12

CONTRACT

Sellers Trust issues

:

Frequently the contract does not let us know that the property is in the name of a trust.

Typically, but not always we are dealing with revocable trusts used to avoid probate taxes.

A Trust has different participants: Trustees or co-trustees (power to implement trust), beneficiaries (people who benefit from trust).

Trustees can also be the beneficiary.

Trustees have fiduciary duties to the beneficiaries.Slide13

CONTRACT

Sellers Trust issues

:

In the trust, the trustees can act alone or there can be requirements that they act together.

Also, successor trustees you need to be concerned with.

Rule of thumb

: The trustees have a fiduciary duty to the beneficiaries of the trust to act in best interest of beneficiaries. Slide14

CONTRACT

Sellers Trust issues

:

Important to us as settlement companies: A Trust is viewed as a separate person. As agents, you need to specifically ask them how the property is titled and if it is in the name of a trust. Slide15

CONTRACT

Sellers Trust issues

:

4 things the attorney MUST review of the trust:

1.) The front page showing the creation of the trust

2.)The clause that shows the power to transfer or sell the real estate

3.)The signature page

4.)The naming of the trustee section

The bottom line, as attorney we need a copy of the trust as soon as possible. Often times trustees aren't local and we need to get seller documents to them and make sure trust has authority to transfer the property. Slide16

Capacity to Contract

Comes up with trusts with elderly trustees.

Not a high standard.

Also, may pop up on individual sales.

The Rule is that persons entering into a contract must have the mental capacity to understand what they are signing.

This is not resolved by signing a Power of Attorney since they do not have the power to sign a POA.

Need to really go slow when the POSSIBILITY of lack of capacity pops up to make sure that there is capacity to sign.Slide17

CONTRACT

Buyer Trust issues:

If it's a cash deal then it's typically not an issue. They can buy in a trust with no issues usually.

The problem with a buyers trust is that not all lenders will loan to a buyers trust. Slide18

CONTRACT

Buyer Trust issues:

We’ve had settlements where it's literally killed a deal in the end.

Others where the entire contract needed to be changed the day of closing.

A way to prevent this is to take it in the individuals name and then transfer it into the name of the trust after settlement as a separate transaction.

Title insurance typically has allowances when it changes into a wholly owned trust, the title insurance is still valid.

Not the same for LLC’s, necessarily.Slide19

CONTRACT

ESTATE

The problem with an estate is usually when someone dies with a will. Typically in probate, a will appoints a personal representative or executor or executrix. This person is similar to a trustee whose obligation is to handle distribution of estate when someone dies. This can be even more problematic than a trust because this person's authority to act needs to have some court action to accept their appointment.Slide20

CONTRACT

Trust and Estates- 1 thing we need to make sure we do is NOT pay an individual when the property is in the name of an estate or trust.

As legal recognition of law, we must issue the check to the trust or estate, NOT the individual. This is on the attorney settlement side of the transaction.Slide21

Artificial Entities

It’s extremely important when dealing with trusts to understand that a trust, like an LLC, is viewed at law as a separate entity.

Trusts and LLC’s need to be in good standing.

Proper authority needs to be provided to trustee and signor for LLC.

All checks and documents need to be issued to the artificial entity, NOT to the individuals.

Fiduciary duties to parties that are not actively represented in the transaction.Slide22

CONTRACT

The next trouble area is the property and tax parcel ID #

The problems we run into as settlement agents:

Parcel ID not listed on contract

Not legible

Not correct

We need the correct parcel ID to obtain the property information from the county website.Slide23

CONTRACT

In Sussex County, the property is not listed by the actual address, but by the parcel ID #.

Another issue is that sometimes someone is selling a property where there is more than 1 lot so there is more than 1 tax parcel ID # associated with the sale.

We need ALL tax parcel ID numbers associated with the sale listed correctly on the contract.Slide24

CONTRACT

We search the seller's name on the county website to confirm this, but that doesn't always help the issue.

It’s very important to get this Parcel ID # correct immediately from the start.

The county and town taxes and water/sewer readings are always read and associated by the tax parcel ID #s.

If it's not correct, there could be taxes left unpaid at settlement which later poses a problem for the new owner. Slide25

CONTRACT

The next thing that’s important is to get the primary addresses of both the buyer and seller because this will be where they want to receive mail after settlement.

This address will be reflected on the HUD-1 and Deed.

This address will also be where the town and county send any bills associated with the purchase property, even if it’s different from the purchase property.Slide26

CONTRACT-Deposit

Payment Terms

: The issue we have is people bringing a deposit to check at closing. If we don't have good funds at closing, by law, the closing cannot go through because all funds must be good and able to clear.

Another issue is also

consideration

: If it says there is a 5G deposit on the contract, we need to make sure that check is received and deposited into the bank immediately.

If you don't have those funds cleared in escrow within a reasonable amount of time, the seller can cancel out of contract.

Make sure as the agent holding the deposit check, you deposit it into escrows as soon as possible to make sure all funds are good and clear.Slide27

CONTRACT

#6 financing contingency

: If you check that box as yes and the buyer doesn't get financing, then they can cancel out of contract and also receive their deposit back.

#7 Settlement and #8 Time is of the Essence:

It is so important that settlement is ready by the date listed because if not, you fall out of contract if there is a time is of the essence clause.

This means that if there is a clause like this included, you must strictly follow these timelines or else whoever is the cause of the hold up can be held in default. Slide28

CONTRACT

Deed Prep issue

: In DE it is customary that the transfer taxes are split, although this can change by contract as it often does for new home purchases with national builders.

Seller usually pays the deed preparation

Buyer usually pays all recording charges Slide29

CONTRACT

#24 Buyer's Default

- gives the seller the right and option to retain any deposit money as liquidated damages or exercise any legal or equitable right that they may be entitled to at the seller’s option.

#25 Seller’s Default

- the buyer gets all money back, including any reasonable costs they've incurred for settlement and they also have the right to seek any remedy and maintaining any action.

Buyer may have equitable right to specific performance because each piece of property is unique.Slide30

CONTRACT

The closing attorney is technically buyer's attorney.

In DE there’s an attorney client relationship between the buyer and the attorney.

It’s not like this in Maryland and most other jurisdictions where there is no attorney client relationship and where non-attorneys can perform settlements.

In a tricky deal, it may make sense for seller to obtain their own attorney to review documents prior to settlement. Slide31

CONTRACT

Signatures

: SO IMPORTANT TO GET ALL SIGNATURES- not effective contract until ALL parties have signed the entire contract.Slide32

CONTRACT

Another issue is the

First Time Home Buyer

: this allows for county transfer taxes to be exempt.

Both buyer and seller benefit from this, but you can change this by contract so the buyer only benefits by making the seller pay the state transfer taxes and buyer can be responsible for county transfer taxes, which they'd be exempt from.

Payment terms can be changed, but there are usual and customary splits if not addressed.Slide33

CONTRACT

Additional terms and conditions

: If you have a few conditions you want completed before settlement, you can list these in #32 on the contract. You can also add additional addendums and check box on line #31.

Ex.) Fix broken window, make sure garage door opener works, fix dish washer, leave paintings on the wall, etc.Slide34

CONTRACT

This is

a form contract

generated and approved by the DE real estate commission.

There is NO legal requirement that this document has to be used.

In order to have valid contract, case essential terms of the contract are: purchase price, closing date, and the specific description of the property.

Statute of Frauds. As long as those 3 things are met in writing, you can have a binding contract so you need to be careful with what writings are going back and forth. Slide35

CONTRACT

Statue of frauds only requires writing in order to have a valid contract, not a specific contract.

Case law is moving further and further away from requiring an actual signature in order for a contract to be binding so be careful.

The trend is toward emails, texts, and other forms of electronic communications to be binding.

Delaware has a Uniform Electronic Signature Act which allows signatures to be digital and don’t need to be an actual signature.

Be aware so you don’t unknowingly enter into an agreement thinking it has to be on this form or have a signature.

You and your Client need to be careful with emails and TEXT MESSAGES.Slide36

Okay, you’re under Contract. You did everything correct, with correct names, addresses, etc.

What's next thing you should be doing?Slide37

Title Company

Right away secure reputable title company.

Make sure you have confirmation in writing that they received a copy of the contract you send over.

Provide the commission

.

There is no place for commission listed on contract so the most important thing for YOU is to have that correct and provided to the settlement company to list on the HUD-1.Slide38

Title Company

Give closing agent the contract and client's contact info.

Today email is key.

Request that the title company contacts your client immediately to at least touch base and introduce themselves whether it be by phone or email. Slide39

Title Company

There is really important information that isn’t listed not on the contract:

#1 commission rate.

MOST IMPORTANT

!!

#2 who's holding deposit

#3 HOA information/contact person

#4 estimated settlement date if it's different from what's in contract

#5 seller/buyer information so we can contact them to get the lender information to begin the whole title process. Especially email addresses.Slide40

Title Company

The settlement company should send out a buyer and seller letter to both parties to fill out and return to them as soon as possible to get any additional information they may need to make sure the settlement process is smooth and completed correctly.

(see buyer and seller letter and go through each of them with everyone)Slide41

Title Company

Make sure you check in with your buyer or seller to see that they got this info back to the attorney or settlement coordinator so there's no last minute issues.

If all this info is provided up front then, you may not hear from us until close to closing.

Periodically we will touch base, but these are all the important items we will need.Slide42

Title Company

Special requirements

: If a person lives out of state and won’t be attending settlement, we'll have to draft POA or obtain the deed early.

The sooner we know, the better we can plan a seamless smooth closing.

Be sure to let us know if the buyer or seller won’t be attending settlement, if they need to schedule a weekend closing, or if they need a power of attorney.

This will make everyone's lives easier so that we can all plan accordingly and there are no surprises.Slide43

Title Company

If you're the sellers agent, ask how the seller wants their funds after settlement and let us know how you want your commission funds.

We can wire seller or commission funds and provide an email confirmation of the wire after closing.

Let us know if the commission check is just one check or multiple checks.

Referral fees- make sure we have everything in writing to cut and disburse checks accordingly.

If the seller wants split checks or wires, we need it in writing from the seller showing how they want it split or wired, and signatures from all parties on the seller's side.

Wire authorization forms protect everyone.Slide44

The Settlement Process from Title Company’s End

Now what we are doing on our end:

The 1st thing we do when we get a contract is open a file and create a preliminary HUD based off the info on the contract.

We check the county website with the parcel ID # listed on the contract for county taxes to list on the settlement statement.

Once settlement is confirmed, we order a title search which takes approx. 5 days to get back.Slide45

The Settlement Process from Title Company’s End

What is a title search

:

Chain of title, confirms

who owns property

and how it's owned, provides us with

any mortgages or liens

on the property that may need to be addressed, tells us if buyer or seller have

judgments or are in bankruptcy

, and tells us what other encumbrances or issues may affect title such as

tax ditches, easements, restrictions

, etc.Slide46

The Settlement Process from Title Company’s End

Letters to Parties.

Send out the buyer and seller letter we discussed earlier. We try to email these to make things more efficient.

The buyer letter informs them there's an attorney client relationship

Informs buyer they may be entitled to a reissue rate on the title insurance.

40% off of their title insurance if within last five years.

Sale or Refinance up to value on lender or owner policy. Slide47

The Settlement Process from Title Company’s End

What is title insurance

:

(pass out brochures)

Covers 4 primary categories: Liens, errors, claims, fraudulent activity. It is Important to stress to your buyer that title insurance is important to obtain at settlement.

Who is covered by title insurance?

Lender's title polices and owner's title polices

1 time charge based off of a percentage of the purchase price.

http://ratecalculator.fnf.com/

This charge should be the same no matter what title company your buyer uses. Slide48

The Settlement Process from Title Company’s End

After title comes back after about 5 days, the attorney will review title to make sure there are no issues that came back on the search.

If there are issues, these will be addressed, if not, we prepare a title binder for the lender summarizing the title condition of the property.

This tells them 4 primary things:

Who owns property now

Who will own the property

What needs to be taken care of now

What exceptions will remain on the property. Slide49

The Settlement Process from Title Company’s End

Now we send the following to the lender

:

Title commitment

Closing protection letter (which is a commitment from title insurance company to insure the property as long as certain conditions are met)

Preliminary HUD-1 which has all information we've received to date from the information we've collected and from what has been returned on the buyer/seller letters, with the exception of lender's fees, escrows, and payoff information.

Wire instructions

Tax information & w/s print outs from the county and townSlide50

The Settlement Process from Title Company’s End

We then will draw up the seller docs which include:

(pass out to everyone)

Deed

Transfer tax affidavits

5403 tax form

1099S form if required

Any powers of attorney

Buyers and sellers affidavits and disclosures –

buyer and seller affirm they have done everything required.

Affirm they have property authority to transfer property

and that they are not aware of any issues on the property.

Both parties understand the contract controls closing process and mistakes made are subject to terms of contract Slide51

The Settlement Process from Title Company’s End

We will confirm the identity of the people if they won't be attending settlement and then send out documents for execution and notarization.

2 forms of identification are required if either party is not attending the settlement table to cover all parties in this transaction. Slide52

The Settlement Process from Title Company’s End

At this point we've done everything we can do, so we typically reach out to agents to find out if there is a preferred date, time and location for settlement.

Also, to let them know everything is complete on our end and has been sent to the lender while we wait for lender's closing instructions.

A settlement time and date is scheduled and confirmed by all parties and once we receive closing instructions from the lender, we can input the additional lender fees and escrows to send back to the lender for HUD approval. Slide53

The Settlement Process from Title Company’s End

Our goal is to get the purchaser an approved settlement statement 72 hours prior to settlement depending on lender approval.

This is a trouble area and funds for closing provided prior to lender’s approval is always an estimate until we have FINAL lender approval.

This needs to be stressed to the buyer since the final numbers are out of our control. Slide54

The Settlement Process from Title Company’s End

Once we receive final approval from the lender, we will contact both buyer and seller and their agents to let them know everything is complete and ready for settlement.

We will email a copy of the settlement statement so if there are any questions or concerns, they can be addressed prior to settlement to ensure a smooth closing.

We will provide wire instructions again, if necessary, to the buyer to wire all funds into our escrow account for quick disbursement to all parties after settlement is complete.Slide55

CLOSING

Things to bring:

Important for all parties to bring 2 forms of ID

A personal check

Agent needs to bring deposit check Slide56

CLOSING

Trouble areas on HUD-1:

Understanding pro-rations. We will provide you with a tax bill to show you what the pro-rations are based off of. Seller vs. Buyer. Mistakes are made periodically.

Make sure charges are on correct side of settlement statement such as survey, termite, HOA, propane, etc.

Double check commission and admin fee if applicable. 

Check transfer taxes and recording fees to make sure captured properly.  

Ask attorney to double check title insurance by providing the rate calculator breakdown.  

Review the escrows to make sure they are properly allocated based on when annual taxes are due.

- Rule of thumb: approx 2 months bufferSlide57

CLOSING

Trouble areas on HUD-1:

Make sure home owner's insurance is reflected properly. If paid, make sure POC. If not, make sure it's on there and for the correct amount. A lot of times this invoice is provided by the lender so make sure it's correct.

Check that the deposit is properly reflected.

Loan terms. Page 3 of HUD1. Check loan terms to make sure it is correct for amount, rate, and amount of monthly payments.

Make sure everything on the settlement statement meets everyone’s expectations.

Assure parties that now is the time to ask questions and to not be shy. No question is a stupid question. Slide58

CLOSING

Critical documents

:

Vesting documents

Deed and affidavits

Mortgage and all riders

Note

TIL

Uniform loan application 1003

The first payment coupon so they know where their first payment is being sent.

Most other documents are standard disclosures and affidavits.Slide59

CLOSING

Make sure that your client knows there is an attorney client relationship and if they have any legal questions outside the documents, that they ask the attorney about any questions they may have regarding the purchase.

Any good attorney will be glad to oblige in answering any legal questions the buyers may have pertaining to the transaction. Slide60

CLOSING

As an agent, you can ask questions:

Make sure titling is correct on deed.

Ask about the recording process and how long it takes before it goes on record.

Purchase money mortgages must be recorded within 10 days from closing to have super priority.

Ask about when the buyer will get their owner's title insurance policy emailed or mailed to them.

Buyer will get copies of all documents they signed including the seller documents (deed and affidavits).

Any deposit checks will be deposited into escrow, and real estate commission checks will be given to agents.Slide61

POST CLOSING

After you leave it's not over:

We scan in all documents so if you ever need copies we will have them in our files

Documents will be emailed to lender and all originals will be sent via UPS to lender

Funds will be wired or sent overnight to payoff mortgages and sellers.

Parties are sent documents if requested.Slide62

POST CLOSING

Checks will be sent to different payees including tax offices, HOI, HOA, etc.

Deed and any mortgages will be delivered to recorder of deeds to be stamped and placed on record.

The original will be returned to the buyer once the county sends it back after recording.

This can take a few months but recorded docs are typically available online for a minimal charge. Slide63

ALTA’S BEST PRACTICES

Best Practices Compliant

:

We are best practices compliant.

We strive to have our documents on record within two days

We have backup and disaster recovery

Accounting practices.

Licensing.

Networking.

We've taken steps to protect against cyber attacks.

Positive Pay

We have insurance to cover against cyber attacks and other modern day threats. Slide64

Alta’s Best Practices

American Land Title Association (ALTA)

Best Practices is the new industry standard for Settlement Companies in the RE Process.

Lenders have begun to endorse and expected to require these standards from those they do business with.

Certain tiers regarding licensing, accounting, timing, financial management, insurance, communications,

etc

meet these new standards.

Bottom line: protects parties better. Accountability.