Real Estate Course Level 21

Closing Documents

Besides the Settlement Statement, what documents will need to be presented at closing? . The sales contract . Deed . Mortgage documents . Survey . Property inspection . Homeowners insurance . Bill of sale (if personal property is being transferred) . IRS Form 1099-S 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. 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. 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. Survey: Remember surveys? 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. Property Inspection: You remember the level on property condition? Well, 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. 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. 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 couch 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 might be used 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. In other scenarios, the transfer of the couch could be included in the actual real estate sales contract. 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: 1. Improved or unimproved land, including air space. 2. Inherently permanent structures, including any residential, commercial, or industrial building. 3. A condominium unit and its appurtenant fixtures and common elements, including land. 4. Stock in a cooperative housing corporation (as defined in section 216). 5. 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.

Emily's Closing: Closing Documents

Bob, Emily's broker, attended the closing but didn't sign any papers and hardly said a word. Perry, Emily's attorney, on the other hand, was there and was very active in the proceedings. Additionally, a lender representative sat in on the meeting.

Level Assessment d) earnest money. In almost all instances, a buyer pays an earnest money deposit at the time the purchase contract is negotiated. At closing, the buyer receives a credit for the money that they have prepaid.

Buyers may get a credit at closing based on the money they prepaid at the time the purchase contract was negotiated. This money is known as: a) a down payment. b) partial payment credit. c) an approval credit. d) earnest money.

Allocating Expenses

There are a variety of expenses associated with any real estate transaction. For example, brokers' commissions must be paid, and loans often come with significant fees. These expenses can be divided in various ways between the principals involved in the transaction. Many expenses can be negotiated between the principals. These variables mean that there is no single set of general guidelines that can teach a license holder how these expenses are divided between principals. The title company will use the sales contract to determine how the parties have agreed to allocate the expenses. Buyer's Closing Costs: Nonetheless, there are conventions that often determine the way these expenses are allocated in a typical real estate transaction. The following are costs that the buyer typically incurs at closing. Appraisal fees: The party that ordered the appraisal usually pays the fees associated with that appraisal. Normally, this is paid by the buyer because it is required by the lender in order to get loan approval. Their attorney's fees: If a buyer is paying their attorney out of their own pockets, then the attorney's fees are often omitted from the closing statement. However, if one or more attorney's fees are to be deducted from the proceeds from the closing, then the buyer will generally be debited for the attorney's fees. Condo or co-op fees: These are assessments that are used to help pay for maintenance of common areas and other co-op- or condo-related items. The buyer might owe the seller an adjusted amount based on the time the buyer uses the services. Intangible Recording Tax: There is an intangible recording tax that is due and payable on each instrument (security deed) securing one or more long-term notes. Since the buyer is the one taking out the loan, they will pay for the intangible tax. Loan fees: A buyer is usually responsible for paying loan origination fees for a new loan, and for paying assumption fees if they assume the seller's existing loan. If a seller is paying off a mortgage before its due date, they may be required to pay a prepayment fee. Survey fees: A buyer usually pays property survey fees, especially if they obtain a new mortgage. If all parties agree, then a previous survey may be used as long as the seller can produce the old survey and signs a statement that, to the best of their knowledge, nothing has changed since the survey was done. The buyer's attorney and the lender do not have to accept the old survey. But, the parties might call for a recertification of the old survey by the surveyor, which is a common procedure. Tax and insurance reserves: A buyer is often required to open an escrow account to cover real estate taxes that are assessed during the time the transaction is taking place. In this case, they generally deposit at least enough in the account to pay for the taxes through the end of the month of closing. However, a seller is debited and a buyer is credited for any of the seller's unpaid taxes. A buyer often also pays at least the first year's premium on fire or hazard insurance at closing. Title expenses: There are two types of title insurance policies: lender's (mortgage loan) policies, and owner's (fee or purchase) policies. The homebuyer is generally responsible for paying for both policies. Seller's Closing Costs: A seller will typically be responsible for these costs: Their attorney's fees: Just like the buyer, if a seller is paying their attorney out of their own pockets, then the attorney's fees are often omitted from the closing statement. However, if one or more attorney's fees are to be deducted from the proceeds from the closing, then the seller will generally be debited for the attorney's fees. Broker's commission: A commission is usually paid out as a percentage of the property's sales price, meaning it is a seller's cost. The agreed-upon commission percentage will be explicitly stated in the sales contract. Condo or co-op fees: These are assessments that are used to help pay for maintenance of common areas and other co-op- or condo-related items. Before the closing, a seller must bring their account up to date. We'll talk more about these fees in our later level on condos and co-ops. Recording expenses: A seller is generally responsible for recording expenses (i.e., filing fees and other similar costs) related to clearing defects from the property's title, such as recording satisfactions of liens, affidavits, and quitclaim deeds. A buyer is usually responsible for the recording expenses associated with the title transfer, such as the costs associated with publicly recording the deed that gives them title. Satisfying existing liens: A seller will need to take on the expense of satisfying any existing lien on the property. In most cases, there is at least a mortgage lien that the seller will pay off with a portion of the buyer's lender's funds. Title expenses: Generally, a seller is required to pay for the title search. However, if a buyer conducts another search of their own, then they usually pay for that additional research. In some transactions, the seller pays for the owner's policy while the buyer pays for the mortgagee's policy. But, remember this is always negotiable between the buyer and seller and is addressed in the sales contract. Transfer tax: Transfer taxes are usually a seller's responsibility, but the parties might agree in the contract that the buyer will pay for them.

Quiz Level 21 a) through the sales contract. The title company will use the sales contract to determine how the parties have agreed to allocate the expenses.

How will closing cost expenses be determined? a) through the sales contract. b) state guidelines. c) through an amendment to the sales contract. d) NAR standards.

A Closing Story

Let's walk through a typical real estate closing. I'll present you with a little bit of information at a time, and ask you questions about the scenario. Emily's Closing: After a series of offers and counteroffers, Emily the buyer and Seth the seller have signed a purchase agreement, contingent on her ability to get financing. A March 28th closing date was set.

Emily's Closing: Sign on the Dotted Line

Nellie, the closing agent, who pretty much ran the show, plopped a big stack of papers on the table, and jokingly told Emily she might want to loosen up the wrist on her writing hand. And, as a sign that there was some truth to that jest, Nellie handed Emily not one but two black ballpoint pens.

Level 21: Finance and Closing

Objectives: By the end of this level, you will be able to: . Explain the significance of closing, and describe the roles of the parties involved . Describe the logistics of the closing process and the documentation required for a closing . Identify which closing costs a buyer or seller will bear and calculate closing debits, credits, and prorations Overview: This level is approximately two hours long, which is longer than an actual closing usually lasts! There are only two chapters: Chapter 1: The Closing Process Chapter 2: Closing Costs

Answer 3: Why was a bill of sale needed in this transaction?

Question 3: A bill of sale is needed when there is a transfer of personal property (as opposed to real property), so the purchase of Seth's lawn mower needed to be handled with a bill of sale, separate from the documents used in the conveyance of Seth's home.

Level Assessment b) at least three days prior to closing. The Closing Disclosure must be presented to the borrower at least three days prior to closing.

When must the Closing Disclosure be presented to a borrower? a) 24 hours before closing. b) at least three days prior to closing. c) less than 2 days prior to closing. d) on the day of closing.

Level Assessment $413. To find the monthly tax amount, just divide $4,956 by 12. This gives you $413.

A tax bill cost $4,956. For proration purposes, what is the monthly tax expense? a) $248.75. b) $134. $413. $495.60.

Emily's Closing: Transfer of Title

At the end of closing, the funds were distributed appropriately, the deed to Seth's house was transferred to Emily, and she was handed the keys to her new home. Now, Emily and Nibbles have a lot of unpacking to do. Good luck, you two!

Answer 2: A sampling of the kinds of papers and forms the closing agent would gather for the meeting include: the deed, mortgage documents, surveys, property inspection reports, proof of homeowners insurance, and the IRS Form 1099-S.

Question 2: Can you recall what some of the papers and forms were that the closing agent might have gathered for the meeting? (Not that all of them would require Emily's signature.)

Quiz Level 21 d) the home-purchase process. Non-recurring closing costs can be divided into two categories. Title and inspection fees are examples of non-recurring closing costs that are associated with the home-purchase process. Non-recurring closing costs, like the loan origination fee, may also be associated with the lender. Next Page

Title and inspection fees are examples of non-recurring closing costs that are associated with: a) Title and inspection fees are NOT examples of non recurring closing costs. b) the lender. c) neither the lender nor the home-purchase process. d) the home-purchase process.

Answer: Emily would likely be concerned that the closing date allowed her time to do inspections, order a survey, arrange financing, and preserve a locked-in rate, if she has one. She would also be thinking about timing issues having to do with plans to leave her current residence. Seth's concern would primarily have to do with getting the house sold in a timely fashion, not wasting time if this deal falls through, and coordinating closing with any plans he's made regarding his next place of residence.

When Emily and Seth settled on a closing date, what might have been her concerns regarding the timing? How about Seth? What might have been his motivations?

Level Assessment c) credit report. A credit report is handled by the lender when originating the mortgage, not during closing.

Which of these is NOT a document commonly presented at closing? a) sales contract. b) mortgage documents. c) credit report. d) property inspection.

Level Assessment a) appraiser. The appraiser who appraised the property is NOT likely to attend the closing.

Who is NOT likely to attend the closing of a real estate transaction? a) appraiser. b) seller. c) lender's representative. d) buyer's agent.

Quiz Level 21 b) appraiser. The appraiser who appraised the property is NOT likely to attend the closing.

Who is NOT likely to attend the closing of a real estate transaction? a) lender's representative. b) appraiser. c) seller. d) buyer's agent.

Level Assessment a) the brokers. Brokers are responsible for distributing commission payments to their agents or any cooperating agents.

Who is responsible for distributing commission payments to agents or any cooperating agents? a) the brokers. b) the buyer. c) the closing agent. d) the listing agent.

Quiz Level 21 Factoring the debits and credits from the purchase price to determine how much money the buyer must bring to closing and how much the buyer and seller will be receiving at closing is known as reconciliation.

What is reconciliation? a) the sum of a buyer's closing costs. b) factoring the debits and credits from the purchase price to determine how much money the buyer and seller must bring to closing. c) another term for the exchange, where the buyer receives the keys to the property. d) the process of figuring out proration amounts.

Lender's Interest in Closing

When a lender is funding the purchase of a property, they want 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 documents to be presented at closing, including 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).

Chapter 2: Closing Costs

After completing this chapter, you will be able to: . Compare typical buyer closing costs with typical seller closing costs . Describe how credits and debits are applied to closing costs . Demonstrate how prorations are calculated Why It Matters: How much does it cost to sell a home? There are so many different professionals involved in a real estate transaction. Real estate agents, brokers, appraisers, inspectors, lenders, attorneys, and more! It's no wonder that closing on a home isn't free. But who pays for what? And how does that money get split up? Key Terms: . prorations . non-prorated expenses . credits . debits . transfer tax

Emily's Closing: Final Walkthrough

After keeping the process on track with respect to title work, surveys, appraisals, and inspections, Emily's representative, Broker Bob, set up a final walkthrough of Seth's home five days before closing. Emily would use the opportunity to make note of possible furniture placement, consider which walls would best display her collection of vintage travel posters, and find a discreet place for her rabbit cage.

A Broker's Closing Role

After the contract is signed and the closing date is set, 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. Commission Payments: Maybe the broker is at the closing just to get paid their commission. Before closing, the broker will submit a commission statement to whomever 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.

Emily's Closing: Bill of Sale

Amongst the many papers to be reviewed and/or signed, was a bill of sale for Seth's riding lawnmower. Emily didn't have one, and Seth wouldn't need it on the private island he bought off the coast of Georgia. No need to mow sand, right Seth?

Quiz Level 21 a) $270. Dividing the annual fee into a monthly fee, we get $90. So, for 3 months, the prorated item will cost $270.

An HOA has an annual, prepaid fee of $1,080. A new buyer closes on a home in the neighborhood with exactly 3 months left in the year. How much will the buyer's prorated fee cost? a) $270. b) $145. c) $300. d) $90.

Level Assessment c) $852. To find the monthly expense, you just need to divide the annual expense by 12. In this case, the answer is $852.

Annual taxes of a property totaled $10,224. For the purposes of prorating, what is the monthly expense of the property taxes? a) $1,024. b) $2,004. c) $852. d) $288.

Transfer Tax

In the last page, I mentioned two different types of transfer taxes, the deed transfer taxes, and the grantor taxes. You might recall from earlier in this course that a transfer tax is a one-time tax issued by the state that must be paid when a property is transferred from one owner to another. The transfer tax is paid when the deed transfer is recorded. In Georgia, the buyer pays the state and county deed transfer tax, sometimes referred to as the recordation tax. The state deed transfer tax is the same no matter where in the state you transfer a property. The rate is $1 per $1000 of the sales price. Calculating Transfer Taxes: Buyer Brené is buying a home from Seller Steve. The home was sold for $200,000. How much will the transfer taxes associated with the sale be? Step 1: Divide the sales price by 1,000 Since this is a simple rate ($1 per $1,000 of the sales price), all we need to know is how many thousands of dollars of value are in the sales price. $200,000 / 1,000 = $200 Answer: Buyer Brené will pay $200 in transfer tax. Note: this tax is always rounded to the nearest $0.10 - so it always ends in 0.

Non-Recurring Closing Costs

Closing costs can be classified as either recurring or non-recurring. Recurring costs are costs that will be paid for again, even after closing, usually annually. These include things like property taxes, flood insurance, and property insurance. Non-recurring closing costs, on the other hand, are paid for only once. Non-recurring costs make up the bulk of closing costs, and they may be divided into two categories: 1. Those that are associated with the home-purchase process, such as title and inspection fees 2. Those that are associated with the lender, such as the loan origination fee Home-Purchase-Process Closing Costs: Non-recurring closing costs associated with the home purchase process (and NOT the lender) include: . Closing/escrow/settlement fee: Fee paid to the settlement agent or escrow holder. . Courier fee: The costs associated with delivering documents to the buyer, seller, lender, title company, law firm, county recorder, and so on to facilitate the closing process. . Home inspection fee: Fee a home buyer must pay if they did not pay it at the time the home was inspected. . Homeowners' association transfer fee: Fee charged by a homeowners' association for transferring all of their ownership documents to the new owner. . Home warranty: Optional fee paid for an insurance policy covering items such as major appliances; not to be confused with a warranty provided by the builder of a new home that would cover the structure itself. . Legal or document preparation fee: Fee paid to a lawyer or law firm for preparation of legal documents for transaction and lender-required forms. May also be paid to the lender for documents prepared in-house. . Notary fees: Fee for forms that must be attested to, or notarized. . Option fee: A negotiated fee paid by the potential purchaser at the time of contracting for an option to terminate the contract for so many days, as spelled out in the earnest money contract. . Pest inspection/treatment: Fee for inspection or treatment and repairs of pest infestations, wood rot, and water damage (as a lender may require as a precondition of procuring the loan). . Recording fees: Fee for recording legal documents with a local county recorder. . Title insurance: Assurance to the potential homeowner that they are receiving clear title to the property being purchased — free of liens and encumbrances, as well as discrepancies in boundaries and area, if a survey was done. It is a one-time payment. Lender-Related Closing Costs: The non-recurring closing costs associated with the lender are collected only at closing and do not continue to be collected during the loan period. The exact amount of each fee should appear on the Closing Disclosure at closing. Non-recurring closing costs associated with lender include: . Administration fee: Additional fee sometimes charged by a lender to establish the loan. . Appraisal review fee: Fee sometimes charged by a lender for a second appraiser to review the original appraisal when findings are considered questionable. . Appraisal fee: Fee paid to a licensed/certified real estate appraiser, usually by the lender, to appraise the value of the property. The appraisal fee varies, depending upon the value of the home and the difficulty involved in justifying value. Appraisal fees on VA and FHA loans are higher than on conventional loans because they require the appraiser to inspect items not strictly associated with value (but such inspections are not for the borrower and should not be substituted for an independent inspection done for a borrower before purchase, if the borrower so chooses). This fee is usually negotiated directly with the lender, who orders the appraisal. . Assumption fee: Fee charged by the lender for allowing the assumption of a loan by another party and forgiving the original borrower's obligation. . Credit report fee: Fee paid to a credit reporting service for reviewing the borrower's credit history. . Escrow waiver fee: Fee paid when an escrow account is not being established. Some states (including Illinois, New York, Oregon, and the District of Columbia) have barred lenders from charging this fee, as it may violate the RESPA section disallowing parties from charging a fee for services that are not actually performed. . Flood certification fee: Fee for a service hired to determine whether a property is located in a federally designated flood zone. . Flood monitoring: Fee paid to a service to maintain monitoring on whether flood remapping affects a property. . Loan origination fee: A point is equal to one percent of the loan amount. This amount is paid directly to the lender as a fee to set up the loan. . Mortgage broker fee: Broker processing fees. Sometimes there are several of these under different names since some brokers have other "fees" listed that are beyond the scope of this course. The fees are sometimes referred to as "junk fees" since the fee covers nothing but netting more money for the mortgage broker. Agents need to have their borrowers ask questions about this fee (or fees) to the broker directly since some of these are negotiable and can be reduced or eliminated. . Tax service fee: Fee for a service that checks to make sure property tax payments are made or have been made. . Underwriting fee: Fee sometimes charged by lender if reselling the loan in the secondary market. . Wire transfer fee: Fee charged if funds are wire transferred at closing for a buyer or seller. . Warehousing fee: Fee charged by the lender as an additional amount for establishing the loan.

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. In Georgia, an attorney is required to complete all aspects of the closing, so closings will often take place in the attorney's office. Those attending may include any (not necessarily all) of the following interested parties: . Buyer: pays the seller and receives the title. . Seller: receives payment and transfers title to the buyer. . Real estate agent (broker and/or sales agent): accounts for all their client's 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. . Closing attorney: reviews documents, prepares settlement statements, and disburses funds . Representatives for the title company: reviews documents and delivers evidence that the title is insured.

Level Assessment a) $600. To find the amount of transfer taxes owed, just multiply the sales price by the tax rate (1/1,000). So, $600,000 x 0.0001 = $600.

In Georgia, the transfer tax rate is currently $1 per each $1000 of sales price. How much would the taxes be on a $600,000 home purchase? a) $600. b) $800. c) $1,000. d) $1,200.

Level Assessment d) an attorney. In Georgia, an attorney is required to complete all aspects of the closing.

In Georgia, who is required to complete closing duties? a) the parties to a transaction (buyer and seller). b) a broker. c) the title agent. d) an attorney.

Credits and Debits

In general, what the Closing Disclosure does is provide a detailed accounting of each party's debits and credits. Credits: A credit is a positive balance or a positive amount. For our purposes, it is a figure entered in a party's favor when determining the overall costs associated with a transaction. On the Closing Disclosure, credits reflect expenses that have been paid by a particular individual or expenses that are owed to that individual. Debits: A debit is a negative balance or a negative amount. For the purposes of our discussion, a debit is an amount due from or owed by a particular individual when determining the overall costs associated with a transaction. On the Closing Disclosure, debits reflect charges made to the parties involved in the transaction. The actual amount that a buyer is to pay at closing is calculated by subtracting the buyer's total credits (such as prepaid earnest money or the balance of a loan that the buyer will assume from the seller) from the buyer's total debits (such as the purchase price). The remaining total is the amount that the buyer must bring to the closing to complete the transaction. Put simply: A debit to the buyer increases the amount due from the buyer at closing. A credit to the buyer decreases the amount due from the buyer at closing. A debit to the seller decreases the amount the seller receives at closing. A credit to the seller increases the amount the seller receives at closing. An Earnest Example An easy example of a credit would be a buyer who prepays earnest money. Earnest money is a deposit made to a seller showing the buyer's good faith in regards to the future performance of a sales contract. In almost all instances, a buyer pays an earnest money deposit at the time the purchase contract is negotiated. So, at closing, the buyer receives a credit for the money that they already have prepaid. Net to Seller To determine how much money a seller will receive from a transaction, the net to seller, we subtract the seller's total debits (such as the balance of a mortgage loan and closing costs) from the seller's total credits (such as the purchase price). The remaining total is the amount that the seller will receive. seller's credits - seller's debits = net to seller EXAMPLE Susie is selling her home. At closing, she has some debits, including paying for a title search, a transfer tax, and paying of the remaining amount of her loan. All together, her debits equal $100,000. She also has a number of credits, including prorated HOA fees and taxes, and most importantly, the buyer's purchase price. Her credits equal $250,000. If you subtract her credits of $250,000 by the debits of $100,000, you get the net to seller. In this case, Susie's net profit on the transaction is $150,000. In most cases, when we are tallying up credits and debits, it will be clear which party is responsible for a given transaction expense. However, some expenses cannot be allocated so easily. Many items that are prepaid or paid for at the end of the year, such as taxes, need to be divided proportionately between a buyer and a seller. The process of making this proportional division is called proration.

Closing in Escrow

In many states, a real estate transaction can 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. Escrow agents can also serve as closing agents. The Seller's Deposits: When closing in escrow, the buyer and seller deposit all pertinent documents prior to closing: 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 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. 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).

Additional Guidelines for Calculating Prorated Expenses

In many states, the seller is held responsible for any expenses incurred on the closing date. However, some states specify that the buyer owns the property as of the closing date, and they are, therefore, held responsible for any expenses incurred on that date. Estimates of utility charges and other similar expenses are often based on the most recent bill. Rents are usually prorated using a 365-day year, which reflects the actual number of days for which rent is collected. The seller generally receives rents that are due as of the closing date. But again, you should check your local laws to be certain of the regulations in your area. Security deposits are usually transferred from the seller to the buyer; these funds are held in trust for tenants and are not properly understood to be either the seller's or the buyer's property. Expenses like water and utilities, mortgage interest, and real estate taxes are frequently prorated using the 360-day banking year. However, some areas require that the 365-day year be used. Familiarize yourself with local laws, and contact local lenders to determine the standards they use when calculating prorated expenses. Some special assessments are billed in installments (such as assessments for sewer improvements). When a transaction involves expenses of this sort, the buyer often assumes all future payments with interest. This amount is not generally prorated at closing.

Answer 1: Broker Bob was there to fulfill his fiduciary duty of accounting to Emily. In that role, he just wanted to be present to make sure all funds were properly exchanged and accounted for. Although important, this did not require Bob to do anything more than observe the proceedings. Emily's attorney, on the other hand, was actively examining all legal documents that were being passed around the table, making sure his client's best interests were looked after. The lender representative had 200,000 reasons to be present. (Can you guess the size of Emily's loan?) The lender rep was involved in such things as reviewing documents, preparing settlement statements, and disbursing funds.

Question 1: Bob, Emily's broker attended the closing but was pretty much silent. Why did he bother to be there? Emily's attorney attended the closing and was much more active in the meeting. What was he doing there? And, finally, what motivated the lender representative to be there?

The Takeaway

So, now you know more about closing costs than you did at the beginning of this chapter! As an agent, you'll be able to prepare your clients for costs they might otherwise not know to expect. Closing can be a stressful, confusing time for a buyer or seller. Your future clients will be lucky to have you on their side, Yoni . In Chapter 2, you learned: ✅ To compare typical buyer's closing costs with typical seller's closing costs. ✅ How credits and debits are applied to closing costs. ✅ To demonstrate how prorations are calculated. Great work, Yoni ! This was the last chapter of the level. Let's close this thing out now.

The Takeaway

Sometimes you'll be a little sad to part ways with your client, sometimes you'll breathe a big sigh of relief. But you know what else happens at closing? Commission payments! So, even when you have less than ideal clients, there's always a silver lining. In Chapter 1, you learned: ✅ The duties of the closing agent and broker during the closing process. ✅ How to identify the necessary documents needed for closing. ✅ Which important activities happen before, during, and after closing. Nice work, Yoni ! Next, we'll learn about closing costs.

Level Assessment a) credits and debits. The positive and negative amounts due at closing are known as credits and debits.

The positive and negative amounts due at closing are known as: a) credits and debits. b) home-purchase costs and loan-costs. c) recurring and non-recurring costs. d) seller fees and buyer fees.

Quiz Level 21 b) as a credit to the seller. Since the seller is owed money, it is counted as a credit to the seller.

The seller of a home paid the current year's HOA fees at the start of the year. The cost will be prorated at closing. How will the cost be counted at closing? a) as a debit to the seller. b) as a credit to the seller.

Level Assessment d) the seller. A commission is usually paid out as a percentage of the property's sales price, meaning the seller with take on the cost.

Which party normally pays for the broker commission fee? a) the lender. b) the buyer. c) the state. d) the seller.

Quiz Level 21 d) the lender. Like title insurance, homeowners insurance will typically be required by the lender. Because the home serves as collateral for the loan, the lender wants it to be protected in the event of damage.

Which party typically requires homeowners insurance? a) the seller. b) the buyer's agent. c) the insurance company. d) the lender.

Level Assessment d) the seller. A seller will need to take on the expense of satisfying any existing lien on the property. In most cases, there is at least a mortgage lien that the seller will pay off with a portion of the buyer's lender's funds.

Which party will be responsible for satisfying existing liens before closing? a) the lender. b) the buyer. c) the appraiser. d) the seller.

Answer 2: While it's still common for the parties to attend closing together, it's not usually necessary. And, because the buyer's side of closing is so much more involved than the seller's side, Seth, like a lot of sellers, might have opted out of the joint closing proceedings. Additionally, if the negotiations weren't particularly smooth or pleasant, Seth and Emily both might prefer separate closing meetings.

While Emily busied herself with nesting fantasies, what would Broker Bob likely be focused on during the final walkthrough? Question 2: Seller Seth did not attend closing. Is this unusual? Why might he have chosen not to attend?

Quiz Level 21 d) the title company. The title company will use the sales contract to determine how the parties have agreed to allocate the expenses.

Who uses the sales contract to determine how the expenses in a real estate transaction will be allocated? a) the buyer's attorney. b) the listing broker. c) the lender. d) the title company.

Closing Disclosure

As I explained in the last chapter, a closing statement is a document that provides a detailed list of each party's expenses as well as how much they have already contributed to the transaction thus far. The specific document that will be used for mortgage loans is known as a Closing Disclosure. The closing statement also provides an accounting of the final amount that the buyer must bring to the closing. To complete a closing or settlement statement properly, one must know which principal is responsible for each transaction expense. Most closing cost expenses are agreed to in the sales contract. A license holder must also have a clear understanding of credits and debits and should know how to prorate expenses that must be divided between the principals. Closing Disclosure Form: Below is the Consumer Financial Protection Bureau's Closing Disclosure form. Feel free to familiarize yourself with its contents. Lenders are required to provide the Closing Disclosure to the borrower three business days before the scheduled closing. The borrower should use the time before closing to make sure all the costs align with their expectations. You, as the agent, should help guide your client through the form if needed. In File: (ClosingDisclosureForm)

Playing Hooky

Back in the day, closings were always jointly attended by the seller and buyer. While it's still common for the parties to all sit at one table, that isn't always necessary these days, thanks to technology, i.e., the internet and wire transfers and such. Buyers and sellers may handle the closing separately for a few other reasons: 1. 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. 2. Separate closings might make for a more pleasant conclusion to what can sometimes be a contentious and strained negotiation process leading up to closing. 3. The order of buyer and seller closing doesn't matter, so individual schedules can be accommodated. 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? 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.

Prorating an Accrued Item

Let's walk through the math together using an example: A sale is to be closed on the second of July. The property's water bill for the entire year has been estimated at $300. Assuming that the seller is responsible for expenses on the day of closing, the accrued period is six months (January through June) and two days (July first and second). This is the amount of time for which the seller should be held responsible for the property's water bills, because the seller occupied or was otherwise responsible for the property during this time. Let's calculate the prorated cost for the water bill, using a 360-day year. Step 1: Find the monthly expense for water. Take the annual bill ($300) and divide it by 12 months. This should give us a total of $25 per month for water. Annual bill / 12 months = Monthly property taxes $300 / 12 months = $25 per month Step 2: Find the daily expense for water. Take the monthly expense ($25) and divide it by 30 days. This should give us a total of $0.833 per day for water. Monthly property taxes / days in month = daily property taxes $25 / 30 days = $0.833 per day Step 3: Multiply the monthly expense by the number of months in the period. $25 x 6 months = $150 This gives us a total of $150 for six months' of water. Step 4: Multiply the daily charge by the number of days in the period. $0.83 x 2 days = $1.666 We should get a total of $1.666. Step 5: Add the monthly and daily amounts (above) together. This gives us a total of $151.666, which would be rounded to $151.67 for the prorated water bill. $150 + $1.666 = $151.67 The Final Prorated Amount: We can then round the prorated water bill to the second decimal place, giving us a total of $151.67. This is the amount that should be credited to the buyer and debited to the seller as we calculate the various settlement expenses associated with the transaction.

Chapter 1: The Closing Process

Objectives: . Identify the necessary documents needed for closing . Recall important activities that happen before, during, and after closing . Describe the duties of the closing agent and broker during the closing process Why It Matters: Closing is going to be a major (and perhaps heavily anticipated) milestone in each of your sales transactions. Picture this: Your clients finally found a home to buy! This is great news! You've been shuttling this couple around town for the last three months and they haven't liked a single thing until now. They've been accusing you of holding out on them. "But where are the good homes, Yoni ?" they kept asking you. Plus, one of them left pizza stains in your backseat. This is to say, you were very happy when the seller accepted their first offer. Well, what more do you have to do to usher your clients into their new home and out of your life? Key Terms: . escrow

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 is conducted by the closing agent. The closing agent is usually an attorney, or a representative from the title company. The closing agent's duties are to: 1. Assemble all the documents necessary to finalize the purchaser's loan and the seller's transfer of title 2. Prepare the Closing Disclosure (more on that later) following the provisions of the contract and the lender's instructions. 3. Ensure all documentation is accurate and recorded 4. Conduct the closing, including the distribution of funds. Closing Agents in Georgia: Different states have different laws about who can serve as a closing agent. In Georgia, the closing duties must always be performed by a real estate attorney, known as the closing attorney. The closing attorney represents the lender in the transaction. But even though their ultimate duty is to the lender, it is the closing attorney's job to make sure all parties are on the same page and complete the transaction in an efficient manner. Both the buyer and seller might also have legal representation at the closing ceremony, but the closing duties themselves must be handled alone by the closing attorney.

Level Assessment c) credit to the buyer. On the Closing Disclosure, the earnest money will be recorded as a credit to the buyer because it is money the buyer already paid toward the purchase price.

On the Closing Disclosure, how will the earnest money be recorded? a) debit to the buyer. b) debit to the seller. c) credit to the buyer. d) credit to the seller.

Reconciliation

Once all prorations, debits, and credits are known, they will be factored from the purchase price to determine how much money the buyer must bring to closing and how much the seller will be receiving at closing. This process of verifying that the Closing Disclosure correctly assesses these costs is known as reconciliation.

The Closing Disclosure

The Real Estate Settlement Procedures Act (RESPA) was created in 1974 as a way to regulate the lending process around federally related loans. There are a number of RESPA laws that must be followed during a real estate transaction. You'll learn more about these rules in the following levels. In this level we are going to talk about one specific RESPA requirement. The Settlement Statement (No Longer Used): RESPA used to require that both the borrower (the buyer) and the seller receive something called the Settlement Statement (HUD-1 form) at closing. It was a standard form that showed all of the borrower's and seller's charges arising from the settlement of their real estate transaction (for example, the buyers' and sellers' closing costs). In 2015, the HUD-1 Settlement Statement was replaced by a document called the Closing Disclosure that consolidates the HUD-1, Good Faith Estimate, and Truth in Lending Act (TILA) disclosures. The Closing Disclosure: If you remember a few levels ago, you learned about the Loan Estimate form. The Loan Estimate is a preliminary estimate of loan costs. The Closing Disclosure (also called the closing statement) is the final itemization of all services and fees charged to the borrower by the lender when applying for a real estate loan. For loans that require a Loan Estimate and that proceed to closing, creditors must provide the Closing Disclosure reflecting the actual terms of the transaction. The creditor is generally required to ensure that the consumer receives the Closing Disclosure no later than three business days before consummation of the loan. The Closing Disclosure should contain the actual terms and costs of the transaction. If the actual terms or costs of the transaction change prior to consummation, the creditor must provide a corrected disclosure that contains the actual terms, which results in a new three-day waiting period before consummation. To be clear: the Closing Disclosure is the official name of the RESPA/TILA form that serves as the closing statement, which is still sometimes called the settlement statement. No Fees Allowed!: For loans subject to RESPA, no fee may be charged for preparing the Closing Disclosure, Loan Estimate, escrow account statement, or any other disclosures required by the Truth in Lending Act.

Closing

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. The Georgian Closing Process: The following is a rough outline of the closing process. Things might be handled slightly differently based on your local laws and lender policies. 1. If a title search hasn't already happened, a title search is run just prior to closing to determine if there are any liens or assessments on the title. If the title is clear, then the closing proceeds. 2. The buyer's attorney prepares the paperwork for changing the title. Title insurance is purchased if the lender requires it, and a final closing date and location is chosen. 3. The buyer receives the Closing Disclosure at least 3 days before closing. This lets the buyer know exactly how much money they should be bringing to the table at closing. 4. A final walkthrough is performed on the day of or the day before closing to verify that the seller has upheld their end of the contract. 5. The buyer and seller meet on closing day and sign all closing documents, including the Closing Disclosure and the final loan documents. 6. The buyer pays their loan's down payment via cashier's check. The loan funds are disbursed. 7. The closing attorney records the transaction and deed with the appropriate municipality. 8. Ownership of the property is officially transferred from the seller to the buyer. The buyer receives the keys.

Level Assessment c) check for foundation issues. The final walkthrough provides an opportunity for the buyer to make sure nothing has changed since they were in the home last. Foundation issues should be have been checked for before the final walkthrough. A licensed surveyor would have checked the foundation during their survey.

The final walkthrough would be a good time to do all of these actions, EXCEPT: a) test all the faucets. b) make sure no unwanted items have been left behind. c) check for foundation issues. d) check that all previously agreed upon repairs have been made.

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. This is the case unless the parties have agreed to the buyer taking possession on an earlier or later date. 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. The money that the buyer is using to pay the seller is most likely coming primarily from the buyer's lender. And it's likely that a lot of the purchase price money is used by the seller to pay off the remaining balance of the seller's mortgage. 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. 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.

Prorating a Prepaid Item

When calculating prorated expenses for a prepaid item, it is first necessary to determine the period of time for which the expense has been prepaid. For example, let's assume that a seller lives in a state in which real estate taxes are prepaid. They have prepaid all real estate taxes for the year 2017, up to and including December 31st. The total amount of prepaid taxes is $2,000. The sale's closing date is October 5, 2017. Using a 360-day year, we can calculate the number of prepaid months and days beyond the closing date as follows: As we noted, the total paid was $2,000. Now that we know the number of prepaid months and days beyond the closing date, we can calculate the amount that will be credited to the seller and debited to the buyer. Step 1: Find the monthly tax bill by dividing the total tax bill by 12 months. Here's what the formula looks like: Annual bill / Months in year = monthly tax bill And here's the formula with this scenario's numbers plugged in: $2,000 / 12 months = 166.666 We should get a total of $166.67 for the monthly bill Step 2: Find the daily tax bill by dividing the monthly bill by 30 days. Here's what the formula looks like: Monthly tax bill / Days in month = Daily tax bill And here is the formula with this scenario's numbers plugged in: $166.666 / 30 days = $5.555 per days This gives us a total of $5.56 for the daily bill. Step 3: Multiply the monthly bill by the number of months in the period and the daily bill by the number of days in the period. This is just like it sounds. For this scenario, you'll multiply the monthly rate by 2 months and the daily rate by 25. Here's what the equation looks like: (Monthly bill x 2 months) + (Daily bill x 25 days) = Prorated tax bill And here's what it looks like with the numbers plugged in: ($166.666 x 2 months) + ($5.555 x 25 days) = Prorated tax bill If you do those calculations, you get a monthly total of $333.332 and a daily total of $138.875. Step 4: Add the total monthly bill and total daily bill together. $333.332 + $138.875 = $472.21 So, our total bill for the prorated period is $472.207. The Final Prorated Amount: We can then round this figure to the second decimal place giving us a total of $472.21. This is the total amount that the seller has prepaid beyond the closing date - that is, the seller has paid $472.21 in taxes for a period during which the buyer should be held responsible for these charges. This amount will be credited to the seller and debited to the buyer as we calculate the various settlement expenses associated with the transaction.

Calculating Prorated Expenses

When calculating prorated expenses, the first step is determining an annual charge for the item being prorated. This amount is then divided by 12 to calculate the monthly charge for the item. It may be necessary to go further and calculate a daily charge for the item. In this case, there are two methods commonly used to calculate daily charges: A 360-day year: The 360-day year is known as a "banker's year"; it is commonly used in banking to make calculations easier. That way, the year is cleanly divided into 12 months of 30 days each. To figure daily charges using a 360-day year, you can divide the yearly charge by 360 or divide the monthly charge by 30. A 365-day year: The 365-day year is sometimes also called the "conventional calendar year," because its divisions reflect the actual months of the calendar that most of us use. To calculate the daily charge for an item using the conventional calendar year, divide the yearly charge by 365 (366 in a leap year). The actual number of days or months in the period for which you are calculating the prorated expense is then multiplied by the monthly or daily charge (whichever is appropriate) to determine the accrued amount or prepaid amount for the item. What You Need to Know: Before you begin calculating prorations, then, you will need to answer the following questions: 1. What kind of item is being prorated? Is the charge for the item assessed daily, monthly, annually, or according to some other schedule? 2. Is this item accrued or prepaid? 3. Which calculation method should be used? 4. Where is my calculator? 😮 The 360-Day Year: Quick note: Throughout this section of the course, we will use the 360-day year. However, regulations in your area may require that you use the 365-day year. Also, in our calculations we will assume that the seller is responsible for expenses incurred on the closing date. However, local laws determine whether the seller is in fact legally responsible for charges incurred on this date; these laws vary and you should confirm the standard used in your area before finalizing your calculations.

Quiz Level 21 a) The cooperating brokers do not always cooperate like they should. The idea that cooperating brokers do not always cooperate like they should is NOT a good reason for closings to be separately attended by the seller and buyer.

Which of the following is NOT a good reason for closings to be separately attended by the seller and buyer? a) The cooperating brokers do not always cooperate like they should. b) Individual closings might make for a more pleasant conclusion if earlier negotiations were contentious or strained. c) The order of buyer and seller closing doesn't matter, so individual schedules can be accommodated. d) The seller doesn't need to sit through the buyer's side of closing, which is usually a much more drawn-out experience than the seller's side.

Quiz Level 21 a) a survey. A seller should give the deed conveying the property to the buyer, as well as the title evidence, the payoff letter or estoppel certificate, affidavits of title, and other documents needed to clear the title or complete the transaction.

Which of the following items should a seller NOT put into escrow by closing? a) a survey. b) any payoff letters from lenders. c) affidavits of title. d) title evidence.

Quiz Level 21 a) ensuring agreed-upon repairs have been completed. The agent and buyer should use the final walkthrough to make sure agreed-upon repairs have been completed.

Which of these actions should be taken during a final walkthrough? a) ensuring agreed-upon repairs have been completed. b) the signing of the agency agreement. c) the negotiation of the purchase price. d) the signing of the contract.

Level Assessment b) property ownership transfers from seller to buyer. The last step in the transaction, the transfer of actual real property ownership from seller to buyer is the closing.

Which of these happens at closing? a) an offer is submitted and accepted. b) property ownership transfers from seller to buyer. c) the survey is conducted. d) the buyer gets pre-approved for the mortgage.

Level Assessment a) 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 is escrow.

Which of these is 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? a) escrow. b) kickback. c) fund remission. d) commingling.

Level Assessment a) closing statement. A closing statement is the form used to itemize services and fees charged to the borrower by the lender when applying for a real estate loan. The form put out by RESPA/TILA is the Closing Disclosure.

Which of these is a term for the form used to itemize services and fees charged to the borrower by the lender? a) closing statement. b) marketable title. c) title search. d) abstract of title.

Level Assessment b) a debit. An amount due from or owed by a particular individual when determining the overall costs associated with a transaction is a debit.

Which of these is an amount due from or owed by a particular individual when determining the overall costs associated with a transaction? a) a proration. b) a debit. c) a credit. d) a reconciliation.

Proration

You probably remember the concept of proration from back in the math level. But let's review it now that you know more about closing costs. In an exchange of the ownership of a property, proper division of ongoing expenses should be addressed. Some expenses, like HOA dues, are paid at the first of the year. Others, like mortgage interest, might be paid at the end of the year (in arrears). In every case, these expenses need to be split fairly between the buyer and seller of the property. This is done through a process known as proration. Proration is the act of dividing or allocating expenses between buyers and sellers based on the actual period of usage of the item or service. Accrued Items: Accrued items are costs that have been incurred, but have not been paid for yet. Accrued costs are owed by a seller (such as some recurring special assessments and mortgage interest), but which will ultimately be paid by a buyer after they receive title to a property. That is to say, these expenses have been (or are being) incurred at the time of sale, but need not be paid at the time the sale closes. In an effort to ensure that these expenses are handled fairly, the seller generally pays the buyer for these items through credits at closing. For example, a seller might credit a buyer for the proportion of a special assessment that was charged during the part of the year that the seller occupied the property. Prepaid Items: A prepaid item is an item that has been paid for ahead of time, generally by the seller. For example, a seller might have prepaid an insurance policy that is required by the local homeowner's association. A buyer must then generally "purchase" this item from the seller at the time of the sale, either with cash, credits, or in some other way that the principals have negotiated. . Accrued items are generally debited to the seller and credited to the buyer. . Prepaid items are credited to the seller and debited to the buyer. Prorated Expenses: There are many different expenses that might need to be prorated at closing. These can include: . Real estate taxes . Special assessments (a government-levied charge to a geographic area to fund a public project) . HOA dues . Fuel . Water and sewer charges . Rent (if a rental property is being sold) . Security deposits Homeowners insurance will not be prorated, as a new policy will most likely be taken out by the buyer. Example Scenario: Let's take a look at an example. Question: Suppose a sale closes on July 14 and prorations are carried through the day of closing. There are accrued items which the seller owes at closing. Is the seller responsible for expenses in July? Answer: Yes! But only for those 14 days in July. Remember that prorations are calculated through the closing date, which means that the seller is responsible for accrued items through that date.

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. How to Remedy Issues: What happens if the buyer finds issues during the final walkthrough? There are a few different ways to deal with that: 1. Terminate the contract: Because the seller is in breach of contract, the buyer has every right to terminate the contract and seek a remedy for the breach of contract. 2. Delay the closing: The buyer can delay the closing and give the seller more time to fix the issues. 3. Negotiate a concession: The buyer could negotiate a deal with the seller in which the seller pays the buyer an agreed-upon amount of money in lieu of fixing the issues. 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.