What is Closing?
Closing is the process where a buyer and seller come together to exchange funds for the title of a property. Due to the different transactions costs involved with closing, a balance sheet must be kept which is known as a closing statement. It lists out all the debits and credits of the transaction.
Closing costs are negotiable which means your real estate agent can help you out through negotiating with the other party as well as explain to you all of the closing costs you’ll incur.
Here is a recent article series explaining the buyer and seller costs in a real estate transaction:
- The Ultimate Guide to Home Buying Costs in Indiana
- The Ultimate Guide to Home Selling Costs in Indiana
What Happens at Closing?
At the title closing, sellers are paid the balance of the purchase price after existing liens (mortgage) and any closing costs are deducted. Typically, buyers pay the purchase price with a combination of a mortgage loan and down payment.
Before the real estate transaction closes, all conditions and contingencies to the sales contract must be satisfied. Once all parties are satisfied, the deed can be signed and delivered, thus transferring title to the new owners.
Your Broker’s Role at Closing
The real estate broker will be responsible for assisting you throughout the closing process. This includes things like helping you obtain title insurance or helping you apply for a loan. Your broker as mentioned should outline the closing process and steps for you clearly as well as the expected costs. They’ll communicate with the other broker on the other side of the deal and negotiate on your behalf as well.
Your broker should also attend the final walk through with you on the day leading up to closing or on closing day. This final walk through is done to ensure the condition of the property as well as any agreed upon repairs or construction that was supposed to be done prior to closing.
The sales document is the most important document in the settlement. The terms of the sales contract (also called Purchase & Sales Agreement) are what will dictate the requirements of the closing. The P&S includes names, addresses, purchase price, closing date, contingencies, and much much more. Contingencies are what need to be satisfied for a transaction to conclude as discussed above.
Here is a list of the other documents involved in a settlement:
- Evidence of Title
- Settlement statement
- Financial documentation
- Bill of Sale
- Property inspection reports
- Homeowner’s insurance policy
- IRS Form 1099-S
Let’s take a closer look at each of these.
Deed – conveys the grantor’s interest in a property. The grantor will sign the deed and deliver it to the buyer (grantee). Once it’s delivered and accepted, the buyer now holds title to the land.
Title – lawful ownership of property and the bundle of rights that come with property. The seller must prove he has clear title to the property at closing. Read this article on title and title insurance to gather a greater understanding of how clear title is determined.
Settlement statement – the balance sheet showing all the costs and credits applied towards the final amount owed by the buyer or received by the seller in the sale of the property. For example, a seller might be owed $200,000 but after seller expenses are subtracted, the seller may actually receive less.
Financial documents – these can include things like a promissory note and/or mortgage. A promissory note is a written promise to repay money owed and gets secured by the mortgage which is a lien against property as collateral for the money being loaned. The buyer’s lender may bring loan documents to closing to be signed. A seller will also show a payoff statement received from his/her lender indicating the loan balance plus interest that has accrued. Once the loan is paid off, a “discharge of mortgage” will be recorded as evidence that the lien has been released.
Bill of sale – a document that transfers “personal property” from the seller to the buyer. This could include things like furniture, rugs, clothes, etc.
Survey – the process of determining the physical size and boundaries of a property. It shows the area, measurements, and boundaries of a property so the buyer understands what land they are acquiring in the purchase and for legal reasons.
Inspection reports – lenders typically require lots of inspections since they are putting money at risk in a property. Inspection items could include termites, structural, septic, wells, soil, radon gas, lead paint, as well as others.
Homeowner’s insurance policy – a policy that covers loss or damage to the home or property in the event of fire, theft, or other disaster. Lender’s will require it to protect their interest in a home should something bad happen to the property. Policy list summary:
- HO-1 = damage or loss due to fire
- HO-2 = damage from fire, vandalism, malicious mischief, wind, hail, aircraft, riot, explosion, and smoke
- HO-3 = All risk
- HO-4 = tenant’s policy providing coverage similar to HO-2 but covering the tenant’s contents on the leased property
- HO-6 = condominium policy covering a condo owner’s contents on the property.
Form 1099-S – notifies the IRS of the sale of real estate. Capital gains taxes may result if the seller is profiting a substantial amount and exceeds the tax free amount set by the IRS. For now, it is $250,000 for single person and $500,000 for a married couple.
Now that we’ve covered the different documents in a closing, let’s discuss briefly the face to face closing which is most common.
The Face to Face Closing
As mentioned, it’s the most common form of closing and involves the buyer and seller meeting at the title company or in an attorney’s office to settle the sale of the property in front of a closing officer.
It can also take place at one of the following places:
- Broker’s office
- Lending institution
- Local county clerk’s office
- Local recording official’s office
- Escrow company’s office
Roles of Buyer and Seller at Closing:
- Buyers attend to approve the settlement statement, sign all necessary documents, pay the funds required, and receive title to the property.
- Sellers attend to grant their property to the buyer via a signed deed, approve the settlement statement, give the keys to the buyer, and receive payment.
The following parties might attend the closing:
- An attorney
- Real estate agents
- Lender representative
- Title company representative
In the sales contract, there will be a section that indicates the closing date and closing procedures. The closing officer will need to satisfy these instructions. A hard part of face to face closings is getting all of the parties together in the same location at the same time. Usually, closings occur Monday through Friday and tend to avoid weekends or holidays.
The Settlement Statement
Any cost to a buyer or seller should be listed on this statement. The debits column is comprised of expenses you owe. The credits column are amounts you receive. In the case of a buyer, the purchase price owed would be a debit while an inspection the buyer is reimbursed for would be a credit. In the case of a seller, the amount the seller pays for the inspection would be debited as an expense owed to the buyer while the sale price the seller expects to receive would be a credit.
In simple terms: credits are good, debits are bad
- Credits: you got money or money you didn’t have to pay out
- Debits: money you have to pay out or did not get
At the bottom of the settlement statement will be a total for debits and credits. Remember that the payment of different items on this statement may be negotiable between the buyer and seller.
Here are common items that can be found on a settlement statement:
- Appraisal fees
- Attorney fees
- Homeowner’s / condo fees
- Inspection fees
- Loan originators fees
- Recording fees
- Survey fees
- Title insurance
Typical Seller Fees at Closing
- Attorney fees
- Broker’s commission
- Homeowner’s association/condominium fees
- Existing lien payments
- Recording fees
- Closing fee
- Title insurance premiums
Typical Buyer Fees
- Mortgage application fees
- Attorney fees
- Bank fees – discount fees and points on a loan
- Condo fees – if a seller has already prepaid these fees to the condo association
- Lender’s title insurance policy
- Closing fee
Here are two articles you may find helpful if you live in Indiana and/or are thinking about buying or selling your home. These will cover in more detail the different costs associated with buying or selling a home. While they are specific to Indiana, they shouldn’t differ much from other states.
Negotiable Fees & Items in a Contract
There are certain aspects of the purchase contract that are negotiable between the buyer and the seller. For example, time is an important feature to negotiate to ensure the sale moves along by having deadlines but also gives a reasonable amount of time to complete each task in the contract. We’ve broken it down into two categories for you:
Types of Negotiable Fees in a Purchase Agreement for Residential Real Estate
- Escrow Fees
- Transfer Taxes
- Inspection & Reports
- Mandated state disclosures
- HOA transfer fees
- HOA documentation fees
- Owners Title Insurance Policy
Types of Negotiation Items in a Purchase Agreement for Residential Real Estate
- Earnest Money Deposit
- Time period for offer acceptance by the seller
- Time period to complete buyer inspections of the home
- Time period for the buyer to obtain loan approval
- Time period to obtain an appraisal of the home
- Time period for the seller to submit disclosures to the buyer
- Personal property items that remain with the home
- Time period for final walk through
- Time period for closing escrow
- Time period for possession
- Time period for releasing contingencies
- Dispute resolution
- Fixtures that might be excluded from the sale
I would encourage both sides, buyer and seller, to thoroughly read the contracts just as a lawyer would. Analyze the time periods given in the contract and ensure they are doable so their are no delays or hold ups that breach the contract deadlines. Negotiate reasonable deadlines so that the sale doesn’t drag on for months.
Also make sure it’s clear what possessions will be staying with the property and what items are not part of the sale that will be going with the owner.
Understanding Proration of Expenses
Proration is the allocation of an expense between the buyer and seller in proportion to actual usage. A seller may have already prepaid a certain amount towards an expense and then only used so much of it. The seller will get reimbursed the prorated amount he didn’t use yet and the buyer by reimbursing the seller is essentially paying for his share he will be using from this point forward.
It’s also possible that expenses have accrued that haven’t been paid yet. The seller will be responsible for paying the fair share of the accrued expenses by crediting the buyer on the settlement statement.
Example situation: The house sold on June 30, and exactly 6 months remain in the year. The seller already prepaid property taxes on January 1 for the entire year. The buyer will need to reimburse the seller by giving the seller a credit at closing for the 6 months the seller prepaid for that the buyer will end up having ownership of and use of the property.
Contact Kevin Foy, Realtor
Kevin is a real estate broker-associate with RE/MAX Oak Crest Realty in Elkhart, Indiana and has served real estate clients for over 35+ years in Northern Indiana and Southern Michigan.
To get ahold of Kevin for real estate services:
- Phone: 574-536-9218
- Email: Kevin@TeamFoy.com
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