04 Title and Closing Costs (1)

Certificate of Title

A certificate of title is one method sometimes used to prove ownership, but is important to keep in mind that it does not always guarantee ownership. It is a document prepared by an attorney after performing a title search. The certificate of title is an opinion of the status of the title on the date that the certificate is issued. Similar to an abstract of title, it certifies the title condition based on information present in public records. However, hidden defects may not be detected and unrecorded liens will not turn up in a search of public records. A certificate does not offer defense against these unknown defects.

Lender's Title Policy

A lender's title policy will protect the lender from unknown existing defects on the title. Typically, this policy is part of the lender's loan package (paid for by the buyer) and covers the balance of the mortgage. A lender's title policy assures a lender that it has a valid first lien (or in some cases second lien) against the property. Should a claim arise that voids the title, the policy will repay the mortgage, protecting the lender from loss. Reimbursement on a lender's title policy is limited to the amount remaining on the loan balance, meaning that coverage decreases as the buyer's loan is paid off.

Standard Coverage

A standard coverage owner's policy usually insures against the following: Defects found in a public record search Forged documents Incompetent grantors Improperly delivered deeds Liens and encumbrances recorded, attached, filed, or created prior to the deed's recording

Escrow Accounts

After a transaction closes in escrow, another kind of escrow account might come into play. The borrower will pay monthly into an escrow account held by their loan servicer as part of their mortgage payment. The servicer then uses the money to pay the borrower's home insurance premiums and property taxes. Escrow accounts are mandatory for many loans, including government-insured loans and some conventional loans. Some buyers elect to have an escrow account even if they don't have to have one as a condition of the loan. It divides costly expenses like property taxes into manageable monthly payments.

A Broker's Closing Role

After the contract is signed and the earnest money is delivered to the title company, the loan company, title company, and attorneys take over. So the broker's job is done? No way! An broker's service for their client generally continues all the way through closing. After the contract is signed, it is the broker's job to make sure all the little details are taken care of so the closing can proceed smoothly. This can mean a number of things, but often it takes the form of making arrangements for obtaining title evidence, surveys, appraisals, inspections, repairs, and other items listed in the contract. Maybe the broker is at the closing just to get paid their commission. Before closing, the broker will submit a commission statement to whoever is conducting the closing proceedings. At the closing, a check is made out to the participating brokers in accordance with the previously-agreed-upon commission rates. The brokers are then responsible for distributing the commission payments down to their agents or any cooperating agents.

Real Property Transfer Report

All real property title transfers in New York should be filed with the New York Department of Taxation and Finance using the form RP-5217, the Real Property Transfer Report. In addition, there is a separate form for property transfers located within the five counties of New York City (Bronx, Kings, New York, Queens, and Richmond). This form is RP-5217NYC and will be filed and recorded at the Office of the City Register.

The Seller's Affidavits

Among the seller's affidavits is an affidavit as to debts and liens, a sworn statement in which the seller assures the title company (and the buyer) that there are no liens, unpaid bills for repairs or improvements, or undisclosed defects in the title. Required by the title insurance company before it will issue an owner's policy to the buyer, this affidavit establishes the right for the title company to sue the seller if their statements in the affidavit prove incorrect.

Owner's Title Policy

An owner's policy protects a new owner (the buyer) from claims against the property that existed before it was purchased but are discovered after closing. This type of policy remains effective for as long as the owner or their heirs own the property. The policy covers the purchase price of the house and can be negotiated within the contract, meaning that the seller or buyer could cover the cost of the owner's policy.

Survey

Another throwback from the last level, a survey is the process and physical product of finding and measuring the boundaries of a piece of real estate, including the location of improvements, encroachments, and easements. A survey could be required by the buyer or the buyer's lender to make sure that the property description is accurate.

Deed

As we talked about in the last level, a deed is the legal document that transfers real estate title from one party to another. At closing, the seller provides the buyer with a new signed deed. And once that deed has officially been accepted by the buyer, the property title has been transferred and the buyer is now the owner of the title.

Playing Hooky

Back in the day, closings were always jointly attended by the seller and buyer. That isn't always necessary these days though, thanks to technology, i.e., the internet and wire transfers and such. And for a few other reasons: The buyer's side of closing is a much more involved, paper-laden, drawn-out experience when there's financing involved. The seller doesn't need to sit through that. Separate closings might make for a more pleasant conclusion to what can sometimes be a contentious and strained negotiation process leading up to closing. The order of buyer and seller closing doesn't matter, so individual schedules can be accommodated.

Property Inspection

Before a house is closed on, the buyer and buyer's lender might require a number of different types of inspections of the property. Two inspections that will almost always happen are pest inspections (required by the lender) and home inspection (at the buyer's request). There might be other more specialized inspections. These could be structural inspections, which judge the structural integrity of a property. Or they could be environmental inspections, which can test for radon gas, soil levels, water flow, and more. All performed inspections will have a corresponding report present at closing.

Title Commitment

Before issuing a title policy, a title company will perform an examination of public records. Based on this review, the company will decide whether to insure the title. Usually, a preliminary report or title commitment is issued. The title commitment states the terms and conditions on which the actual policy will be issued. The document includes: The name of the insured party Legal description of the property The estate or interest covered A schedule of expectations including any found encumbrances and defects and any known unrecorded defects Any conditions or stipulations under which the policy is issued

Closing Documents

Besides the sales contract, what other documents will need to be presented at closing? Deed Mortgage documents Survey Property inspection Homeowners insurance Bill of sale (if personal property is being transferred) IRS Form 1099-S New York Real Estate Transfer Tax Return Real Property Transfer Report

What Does a Title Policy Cover?

Both owner's and lender's policies provide coverage if: Someone else owns an interest in the land There's no right of access to and from the land There are liens on the title for labor and material from before the policy effective date that wasn't agreed upon

Buying Title Insurance

Buyers may choose any title agent they want. They don't have to use the company that the real estate agent or lender recommends. As always, the buyer should not use an agent that is unlicensed. If title insurance is bought from an unlicensed company, any claims the buyer might have could go unpaid.

Where Closings are Held and Who Attends

Closings may be held at a number of locations, including a title company, the buyer's lending institution, an attorney's office, a real estate broker's office, or in front of a notary public. Those attending may include any (not necessarily all) of the following interested parties: Buyer Seller Real estate agent (broker and/or sales agent) Attorney(s) for the seller and/or buyer Representatives and/or attorneys for the lending institution(s) involved Representatives for the title company

Roles During Closing

Each attendant at closing has a role: Buyer: pays the seller and receives the title Seller: receives payment and transfers title to buyer Real estate agent (broker and/or sales agent): accounts for all the transacted monies, fulfilling their fiduciary duty of accounting Attorney(s) for the seller and/or buyer: reviews the closing documents to make sure their client's best interest is kept Representatives and/or attorneys for the lending institution(s) involved: reviews documents, prepares settlement statements, and disburses funds Representatives for the title company: reviews documents and delivers evidence that the title is insured

actual notice

Express information or fact; that which is known; direct knowledge.when an individual has explicit knowledge of a fact, they are said to have actual notice Actual notice is direct or first-hand knowledge. It is usually created when constructive notice has been accessed by those seeking it. I say "usually" because information not held in the public record or not visually apparent can also be considered actual notice if it can be shown that a party gained access or possession of the knowledge. Awareness and inspection of an unrecorded deed would be one such example. And in cases like this, it can be said that the party gained actual notice in absence of constructive notice.

Title Policy Coverage

Good question! The particular defects that a title company insures against will depend on policy type and any endorsements that are requested by the lender. However, coverage can generally be broken down into two main categories: standard coverage and extended coverage.

IRS Form 1099-S

I got this info straight from the IRS, so you know its good! An IRS Form 1099-S will need to be filed for any transaction that consists in whole or in part of the sale or exchange for money, indebtedness, property, or services of any present or future ownership interest in any of the following: Improved or unimproved land, including air space. Inherently permanent structures, including any residential, commercial, or industrial building. A condominium unit and its appurtenant fixtures and common elements, including land. Stock in a cooperative housing corporation (as defined in section 216). Any non-contingent interest in standing timber. Basically, this form will need to be filled out in just about every real estate transaction an agent is a part of. Usually the closing agent or the mortgage lender will fill out the Form 1099-S for this type of transaction, but any license holders involved in the transaction could be held liable if the IRS is not properly notified. Various parties can be designated as the person responsible for filing the 1099-S, including the transferor's attorney, the transferee's attorney, or the disbursing title or escrow company. The IRS provides extensive guidelines about who can be held responsible for filing this form, and in what circumstances.

Extended Coverage

If a lender requires it, a borrower will need to have extended coverage. As the name suggests, extended coverage provides protections that extend beyond what is insured under a standard coverage policy. Lenders often require that the lender's policies have extended coverage. But owners have the option to extend the coverage on their owner's policies as well. An owner's policy with extended coverage insures against items such as: Certain unrecorded liens not known by the policyholder Water rights Mining claims Off-record easements Unrecorded claims Defects discoverable through a property inspection and examination of survey

Mortgage Documents

If the property is being financed by a mortgage (it usually is), then mortgage documents will be needed at closing. This is how the property is paid for. Mortgage documents include: Mortgage: The document that puts the property up as security for the loan debt, will be signed by the buyer and given to the lender. The mortgage is recorded at the county recorder's office, which gives the public constructive notice. Promissory note: Document that promises the repayment of the mortgage loan. Satisfaction of mortgage: After the buyer's lender pays off the seller's loan, the seller's lender will issue this document as notice that the seller has paid off their loan and released the lien.

Cloud on the Title

If there is a gap in the chain of title, the chain is said to be broken. A broken chain of title results in a cloud on the title. To remove this cloud, an owner may need to initiate a suit to quiet title. This would serve as a kind of lawsuit against anyone who has a claim on the land. If the property owner wins the suit to quiet title, no further challenges to the title can be brought. In short, a suit to quiet title clears the title record of any unrecorded claims. "Let's say that someone dies and their estate was not probated (the validity of the will was not established). The agent may have to assist the current owner in locating others who should have been a part of an inheritance. The relatives and friends may have to "sign off" on the property indicating that they did not expect anything from the deceased's estate and then the sale can move forward. Asking the right questions at the listing appointment will put the license holder on notice that a problem could arise." An additional cloud on the title could be created by some type of fraud. "For example, there are cases where a land developer sells the same tract of property to more than one person, even though they know that the originator of the subdivision will be long gone when the parties find out that they all think they are rightful owners of the subject lot. This issue can be resolved, but usually to only one person's satisfaction."

Closing in Escrow (NOT IN NY)

In many states, it is common for a real estate transaction to close in escrow. Escrow is the process in which funds and/or financial documents are held by a third party on behalf of the other two parties in the real estate transaction. It ensures that the buyer's money will not be paid to the seller until the seller's title is acceptable. Usually the escrow agent, also known as the escrow holder, is given the responsibility to coordinate and conduct the closing activities. The escrow agent may be an attorney or the representative of a title company, trust company, escrow company, or the escrow department of a lending institution. In New York State, transactions are not closed in escrow.

Homeowners Insurance

Like title insurance, homeowners insurance will typically be required by the lender. At closing, the buyer will provide proof of a new homeowners insurance policy that is sufficient enough to cover the cost of the mortgage in the event of a disaster (ex: house fire, satellite falling on and squishing home). Flood insurance is a separate policy that will or will not be required based on the location of the property.

Title Plants

Many title companies these days use extensive databases of information (known as "title plants") that make the title search easier. So what in the past might have required a person to visit dozens of government offices for some serious snooping can be done now with a few clicks of a mouse. But regardless of what the search actually looks like, a buyer will rarely get a glimpse into all the behind-the-scenes work that is being done by the title company.

Scheduling the Closing

Most of the time the sales contract will include the closing date, so the parties need to choose a date. When helping a client choose a closing date, you should make sure to consider the following questions: Does the purchase contract specify a particular deadline for closing? Is there a specific date when they have to vacate their current housing? When does the rate lock expire? Will the lender be able to complete their loan approval process in time for the closing?

New York State Required Forms

New York State has some state-specific forms that are required at closing. Those documents are: New York Real Estate Transfer Tax Return Real Property Transfer Report

Avoiding Final Walkthrough Issues

Often these issues result from a seller not paying enough attention when moving out. So, when representing a seller, make sure that they are fulfilling all of their contractual obligations. Finding issues during the final walkthrough can create quite a headache.

Closing Agent

Okay, we've talked about a broker's role before closing happens, now let's get back to the actual closing. A closing will usually be conducted by the closing agent. In New York, the closing agent is usually an attorney hired by the lender, and often is also the attorney for the buyer. The closing agent's duties are to: Assemble all the documents necessary to finalize the purchaser's loan and the seller's transfer of title Prepare the Closing Disclosure (more on that later) following the provisions of the contract and the lender's instructions Arrange the time and place of closing with all parties Conduct the closing (in most cases)

The Seller's Deposits

Prior to closing, the buyer and seller deposit all pertinent documents with the closing agent. The seller usually deposits: The deed conveying the property to the buyer Title evidence (abstract or title insurance policy) The payoff letter (a letter from the mortgagee of the existing mortgage, setting forth the amount needed to pay the loan in full) or an estoppel certificate (a statement showing the exact amount the buyer will assume) Affidavits of title Other instruments or documents necessary to clear the title or complete the transaction

The Buyer's Deposits

Prior to closing, the buyer deposits: The balance of the cash needed to complete the purchase, usually in the form of a certified check Loan documents (if the buyer is securing a new loan) A hazard insurance policy, including flood insurance (where required) A survey, if requested in the contract or required by the lender Other documents needed to complete the transaction (such as an appraisal)

Recording Acts

Recording is the process of placing documents into the public record per state law. Documents affecting any interest, right, or title to a parcel of real estate must be recorded as a public notice — usually at the county level. There are two reasons this is done: Those wishing to discover existing interests in the property can know where and how to access that information Priority of legal interests tend to be established by virtue of a first-in-time-first-in-line convention* *Exceptions to this priority principle include property tax liens, special assessments, and IRS debts. Additionally, quitclaim deeds are not subject to the chronological priority view since they convey only the interest of the grantor at the time of conveyance — which may be no interest at all.

Giving Notice

Remember when you were just a squirt and would go around yelling "Dibs!" to claim something of value before your friends or siblings got to it? Or, perhaps, when you were a little older and you would shout "Shotgun!" to claim the front passenger seat of the car you and your buddies were piling into? Well, giving notice is the real estate equivalent of that. In fact, it's an even stronger claim because it can be enforced by law. The owner of real estate has a duty to make publicly accessible their claim or interest on the subject property — and it's in their best interest to do so. The process of making that interest known is what we call the concept of "giving notice," which breaks down further into what is known as constructive notice and actual notice.

Bill of Sale

Sometimes a real property transfer will include the transfer of personal property. Take for example a transaction where a buyer really wants to buy the seller's couch. The refrigerator is technically personal property (since it's not affixed to the property). But during negotiations, the seller agrees to sell the couch to the buyer for an additional $300. If so, a bill of sale will be required to transfer the couch. A bill of sale is a written agreement used to sell, reassign, or transfer one's right to or interest in personal property, like furniture or appliances.

At closing, the transfer tax will be filed using Form???

TP-584 This form also goes by the catchy name of Combined Real Estate Transfer Tax Return, Credit Line Mortgage Certificate, and Certification of Exemption from the Payment of Estimated Personal Income Tax.

New York Real Estate Transfer Tax Return

The New York real estate transfer tax applies to real property sale or transfer of more than $25,000. The tax is computed at a rate of two dollars for each $500 of consideration. Or, to make things easier, $4 of each $1,000. And there is an additional real estate transfer tax (sometimes referred to as the "mansion tax") of 1% of the sale price that applies to residences where consideration is $1 million or more. According to the New York City Department of Finance: You must pay the Real Property Transfer Tax (RPTT) on sales, grants, assignments, transfers or surrenders of real property in New York City. You must also pay RPTT for the sale or transfer of at least 50% of ownership in a corporation, partnership, trust, or other entity that owns/leases property and transfers of cooperative housing stock shares.

The Abstractor

The abstractor searches the public record and summarizes the events that affected the title throughout its history, beginning, if possible, with the original grant and continuing on to the present day. All recorded instruments, liens, and encumbrances are included — noting their current status — in chronological order. Additionally, a bibliography of sorts is attached to the report to reflect the scope of the research done in the compilation of the report.

Disbursing the Sales Funds

The closing agent has the authority to examine the title evidence. When title is shown in the name of the buyer and all other conditions of the agreement have been met, the agent generally is authorized to disburse the purchase price to the seller, minus all the seller's expenses and lien payoffs.

A Quick Note on Paying for Property

The purchaser of a property will normally pay the balance of the purchase price through a combination of funds obtained through a mortgage and the purchaser's own funds (a down payment). A property could be bought entirely with a purchaser's funds, but it's rare in the residential market. Later in this course we get into all the details of mortgages. But for closing's sake, know that the money that the buyer is using to pay the seller is most likely coming primarily from the buyer's lender. And its likely that a lot of that money is used by the seller to pay off the remaining balance of the seller's mortgage.

The Sales Contract

There is one document that you could argue is the most important closing document. I'm talking about the sales contract. The sales contract will include all the most necessary information about the transaction: the purchase price, how the buyer is paying for the property, the closing date, and the terms of the sale.

Types of Insurance Policies

Title companies issue several types of insurance policies, the two most common being the owner's title insurance policy and the lender's title insurance policy (sometimes called mortgagee's title policy).

What DOESN'T a Title Policy Cover?

Title insurance doesn't insure against fire, flood, theft, or any other type of property damage or loss. But a homeowners insurance policy covers these types of losses.

Lender's Interest in Closing

When a lender is funding the purchase of a property, they want to to protect their security interest in the property. The lender wants its mortgage lien to have priority over other liens. It wants to ensure that the taxes are paid and that insurance is kept up to date in case the property is damaged or destroyed. For this reason, the lender usually requires a title insurance policy, a fire and hazard insurance policy (along with a receipt for the premium), and a reserve escrow account for tax and insurance payments. In addition, a lender may require other documentation, including a survey, termite or other inspection reports, or a certificate of occupancy and building permit (for a newly constructed building).

The Exchange

When all parties are satisfied that everything is in order, the exchange is made and the closing agent collects all funds. After the closing, the closing agent writes all disbursement checks arising from the closing, prepares the final disbursement sheet to prove that money paid in equals money paid out, and transmits the appropriate documents to the county clerk for recording. Buyer possession of the property happens upon closing, when the loan is funded and the seller gets the balance of the purchase price. This is the case unless the parties have agreed to the buyer taking possession on an earlier or later date.

Time Constraints

When choosing a closing date, it is important to make sure there is a proper amount of time allowed for performance (the fulfillment of contractual obligations). If there isn't a reasonable or adequate amount of time to do due diligence, the existing contract could very well end up terminated, with both parties having to decide to start over from scratch or go their separate ways.

escrow

a process in which funds and/or financial documents are held by a disinterested third party on behalf of the other two parties in the real estate transaction until specific conditions are satisfied

marketable title

a title that is free from significant encumbrances or defects that might otherwise prevent a purchaser from enjoying or eventually selling the property A marketable title is one that is: Free from serious defect Free from legal exposure Reasonably thought to be marketable should the buyer become a seller at some point in the future

abstract of title

an abbreviated history of a property, including info on any transfers, grants, wills, conveyances, liens, and encumbrances When the title company performs the title search, analyzing the chain of title, clouds, and all that jazz, the result is an abstract of title. As opposed to a thorough and exhaustive chain of title, an abstract of title is an abbreviated history of a property, including info on any transfers, grants, wills, conveyances, liens, or encumbrances. It's a report detailing what was discovered in the title search. The person responsible for preparing this report is called an abstractor. (Sounds like the title character of a Jean Claude Van Damme movie, am I right?)

title search

an examination of public records to check for clouds on a title A title search includes the examination of many public records, including: Wills Judicial proceedings Tax records Special assessments Recorded liens Encumbrances that may affect title So how are we to know if a title is marketable? Well, a title search is performed (usually by a title company). A title search is a thorough examination of available public records in the county to determine who has rights to the property and whether any defects exist in the chain of title (more on that in a second). In a title search, the records of the conveyances of ownership are examined, beginning with the present-day owner and going back in time — potentially to its origin (which in New York might date back to a grant from the King Charles II of England). State statutes ultimately determine the minimum required length of search time to be covered.

title insurance

policy that protects homeowners (and likewise, lenders) from certain financial losses due to title issues, such as defects, encumbrances, and liens A title policy, also known as title insurance or title insurance policy, protects lenders (and buyers, depending on the policy) from financial losses related to title issues. In contrast to other types of insurance that protect against events that may happen in the future, a title policy insures against problems that occurred before the time of purchase but are discovered after closing. Instead of being recurring like other insurance policies, title insurance is non-recurring and paid for up-front in one lump sum. Note: A property that has a title insurance policy is often accepted as the best evidence of marketable title.

title

the actual ownership of a real property that includes the bundle of rights in which a party may own a legal or equitable interest; not an actual document

chain of title

the entire chronological record of a property's ownership The chain of title is the entire record of a property's ownership... the genealogy of real estate, you might say. A search of the grantor-grantee indexes can reveal a complete line of fee title owners, starting with the present-day owner and going backwards to the original grant (from the sovereignty of the soil) — linking each owner to the next in a recorded chain.

closing

the last step in the transaction, the transfer of actual real property ownership from seller to buyer The consummation of the real estate transaction is known as the closing (also known as settlement). At the closing, the title to the real estate is transferred from the seller to the buyer in exchange for the already-agreed-upon purchase price. In many transactions, the closing is also when the buyer's mortgage funds are disbursed to cover the cost of the property.

constructive notice

when a property's ownership is recorded publicly, so everyone can know the contents of recorded documents, constructive notice is said to have been given The legal principle behind the concept of constructive notice presumes that a diligent individual can search the public record to gain a sufficient understanding of the property, including those with present and past interests in that property. Likewise, literal possession and occupation of property can serve as constructive notice to the world in the sense that the possession makes publicly and visually evident one's interest or claim on the property. In summary, constructive notice means that the property owner's interest has been made available to the world — whether or not the world has taken notice.

Final Walkthrough

🎶 It's the final walkthrough! Badababa bada-ba-ba-ba! 🎶 In addition to the things I just mentioned, the buyer's broker is also responsible for leading the buyer on a final walkthrough of the property. This could take place anytime from a week before closing to the actual closing day. The purpose of this walkthrough is to make sure the property's condition hasn't changed and that the agreed-upon terms have been met by the selling party. There are a number of things that the broker and buyer should be looking for during a final walkthrough. You can find plenty of examples of checklists online. Among other things, you should: Bring the contract with you for reference Check to make sure all major appliances are in working order Make sure no unwanted items have been left behind Test all faucets, check for leaks Make sure all agreed-upon repairs have been made if there are issues Terminate the contract: Because the seller is in breach of contract, Barbara has every right to terminate the contract and seek a remedy for the breach of contract. Delay the closing: Barbara can delay the closing and give the seller more time to fix the issues. Negotiate a concession: Barbara could negotiate a deal with the seller where the seller pays Barbara an agreed-upon amount of money in lieu of making the repairs and returning the chandelier.