By Matthew A. Quick
Real Estate Closings
A real estate closing (also referred to as a “settlement” or “escrow”) is the culmination of a real estate transfer. The real estate closing is simply the meeting at which the buyer of a piece of property pays the amount promised in the purchase agreement and is deeded the real estate. However, the process leading up to the closing, as well as the events that occur at the closing, tend to complicate the process.
The purchase agreement initiates the closing process. It is the document that outlines the understanding between the buyer and the seller that typically regards the following items, some of which are explained in further detail below: the date of the closing; the fixtures and personal property that will be sold with the real estate; the purchase price of the real estate; a schedule for depositing earnest money; a mortgage contingency (if not a cash sale); inspection of the real estate and modification of the purchase agreement; how proration of taxes and assessments will be handled; the time allowed to complete a title inspection and the party that is obligated to pay for title insurance; the time allowed to provide a survey and the party that is obligated to pay for the survey; the payment of transfer taxes; and any required disclosures.
Closing Date. The closing date is chosen by the buyer and seller approximately four to six weeks from the date of the purchase agreement with the understanding that the date may be changed if the parties so wish. The period between the execution of the purchase agreement and the date set for closing is intended to allow enough time for the parties to complete the items that comprise the balance of this article.
Fixtures and Personal Property. Fixtures are best understood by first considering the difference between real property and personal property. Generally speaking, real property is land and all of the rights, privileges and improvements to the land, such as buildings, crops and underlying mineral rights. On the other hand, any movable, tangible object is considered personal property, such as a wooden board, a chandelier or a kitchen appliance. A fixture is a piece of personal property that is fixed to real property to a degree that it is intended to become real property. Therefore, if the wooden board is used to make a shelf, the chandelier is attached to the ceiling, or the kitchen appliance is installed, it could become part of the real property as a fixture depending on the extent of the attachment. Rather than debate whether each piece of personal property is a fixture during every real estate sale, the purchase agreement details the items of personal property and the fixtures that will be transferred to the buyer. Typically, the personal property transferred includes kitchen appliances, washer, dryer, lighting fixtures, smoke detectors, window treatments, carpeting and built-in shelving or cabinetry; however, there is no limit to what may be included with the home may it be a stereo system or hot tub. Of most importance is to note in the purchase agreement the items of personal property that will be sold with the real estate so there is no misunderstanding.
Earnest Money. Earnest money is an amount agreed upon by the parties to be deposited by the buyer to bind the parties to the purchase agreement. Earnest money is usually placed in an escrow account and held until the closing date, at which time the funds are used to settle the sale. The deposit of the earnest money may be made all at once or over a period of time, in any instance the initial deposit is required upon the execution of the purchase agreement. If the earnest money deposit is a significant amount, the parties may agree to have the deposit placed in an interest bearing account with the interest paid to the buyer.
Mortgage Contingency. A mortgage contingency is a condition that requires the buyer to secure appropriate financing before the purchase agreement is given effect. It is a critical protection for the buyer, because if the buyer cannot secure appropriate financing the earnest money is returned and the purchase agreement is null and void. What is considered appropriate financing involves an agreement between the parties regarding the amount of financing, the annual percentage rate to be charged by the lender and the period allowed for repayment. By way of example, a mortgage contingency clause may provide “This purchase agreement is contingent upon buyer securing, within 40 days, a firm written mortgage commitment for a fixed rate mortgage in the amount of $300,000, the interest rate not to exceed 5% per year, amortized over 30 years.”
Inspection and Modification of the Purchase Agreement. The purchase agreement will contain an inspection provision that gives the buyer the ability to have the real estate inspected for any defects. The inspection period typically lasts five to seven business days. After the buyer has had the real estate inspected, the inspector will provide an inspection report detailing all of the property’s defects. The buyer and seller may then renegotiate the purchase price or repair of the real estate based upon the inspection report. The time allowed to renegotiate the purchase agreement is called the modification period, or more specifically the attorney modification period, because of an attorney’s role in renegotiating the purchase agreement. The attorney modification period is relatively short, typically no longer than the inspection period.
Title Inspection and Title Insurance. A title inspection is a review of the history of ownership of real estate to ensure that the seller owns and can sell the property he or she is offering. A clear title inspection is required if title insurance is to be purchased. Title insurance is an insurance policy to protect a buyer against loss based upon a seller’s lack of ownership, which could include an encumbrance or lien that was not noticed prior to the sale. In most transactions, the seller purchases the title insurance for the buyer.
Closing and Escrow. Prior to the closing date the parties, or their attorneys, will receive a settlement statement (also called a HUD-1) from the closing agent (who is typically from the title company—the company that issues the title insurance policy). The settlement statement is a balance sheet that details how the funds involved in the transaction will flow. This is an important document to review to ensure that all of the fees, costs and payouts are accurate. In addition, the settlement statement will let the parties know how much money they will need to bring to, or will be getting from, the closing.
On the closing date, the parties meet at the title company. The buyer will need to deliver a cashier’s check or have the funds wired from his or her bank for the balance owed on the purchase price after deducting the deposited earnest money and the amount of the home loan. The seller may also be required to bring funds to the closing to cover costs, fees or liens, such as a loan payoff.
In sum, at the closing, the closing agent will accept and disburse all of the funds pursuant to the settlement statement and the seller will transfer the deed for the home to the buyer. Both the buyer and the seller will be responsible for signing various documents at the closing. All of the documents signed at the closing involve either the transfer of the property being purchased or the funds being borrowed for the purchase.
The typical documents that relate to the transfer of the property are the following:
Warranty Deed. The warranty deed is the conveying document that transfers ownership of the property from the seller to the buyer. This document will immediately be filed with the county recorder of deeds (or register of deeds) to put the world on notice of the conveyance and the rightful owner.
Bill of Sale. The bill of sale is a receipt for purchase of all the personal property and fixtures that were sold with the real estate.
The typical documents that relate to the funds being borrowed for the purchase are the following:
Payoff Letter. The seller will bring a payoff letter for each outstanding loan on the property to give to the closing agent to certify that the funds being paid to the seller’s lender(s) are in an appropriate amount to clear the loans and give the buyer clear title.
Truth in Lending Statement (also known as “Regulation Z” or “TIL”). The TIL discloses to the buyer the interest rate, annual percentage rate, amount financed and the total cost of the loan over its life. It is important to review this document carefully to ensure that the rates are appropriate.
Monthly Payment Letter. The monthly payment letter reveals the break down of the buyer’s monthly payment into principal, interest, taxes, insurance and any other monthly escrows. Again, this document should be carefully reviewed to ensure that all amounts are correct.
Note. The note is the contract with the lender to payback any amounts borrowed.
Mortgage. The mortgage is a lien on the property as security for the loan. This document will be immediately filed with the county recorder of deeds (or register of deeds) to put the world on notice of the security interest in the property.
Although the real estate closing process may seem daunting, with close attention and the help of others the process can be easily managed.
-Real Estate Transfer Taxes-
Real estate transfer taxes are taxes imposed when property is transferred. In Illinois and Michigan the tax is assessed by an ad valorem (according to worth) tax that is based on the value of the property transferred. In some states, however, such as Vermont, a transfer tax is only imposed on gain from the sale; and in other states, such as Indiana, there is no transfer tax.
In Illinois and Michigan, the transfer tax is stated as a fee. For example, in Michigan the state fee for transfer is $3.75 for every $500 of the purchase price, which is equivalent to .75% of the purchase price. Therefore, to calculate the fee, take the purchase price and divide by $500, then multiply the quotient by $3.75 (or simply multiply the purchase price by .0075).
State and local laws may or may not stipulate which party is responsible for paying the tax. In addition, both Illinois and Michigan provide a number of exempted transfers that are not taxed, such as transfers where the consideration is less than $100.
Real estate transfer taxes involve basic mathematics, but the rates and responsibility for such can get confusing and require attention. If any questions arise, please consult a real estate professional.
I hope this issue of The Estate has been helpful. Please feel free to contact me with any questions or concerns, or to schedule a complimentary consultation. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding estate planning are provided free to groups of any size. Please let me know if there is any way I can help.