This chapter will describe the process to reach settlement, define the ways to calculate proration, and detail the settlement statement.

Transcription

1 Principles of Real Estate Chapter 15-Real Estate Settlements This chapter will describe the process to reach settlement, define the ways to calculate proration, and detail the settlement statement. Overview Objectives At the end of this chapter, the student will be able to: Cite the terms used to refer to a real estate closing Describe and contrast the "closing meeting" and "escrow closing" Define "proration," "debt," and "credit" Discuss the settlement statement Calculate prorations 15.1 P a g e

2 Real Estate Settlements Numerous details must be handled between the time a buyer and seller sign a sales contract and the day title is conveyed to the buyer. Such as: Title must be searched A decision made as to how to take title A deed prepared Loan arrangements made Property tax records checked In this section we will look at the final steps in the process, in particular, the buyer's walk-through, the closing meeting or escrow, prorations, and the settlement statement. Real Estate Settlements-Walk-Through To protect both the buyer and the seller, it is good practice for a buyer to make a walk-through. This is a final inspection of the property just prior to the settlement date. It is quite possible the buyer has not been on the parcel or inside the structure since the initial offer and acceptance. Now, several weeks later, the buyer wants to make certain that the premises has been vacated, that no damage has occurred, that the seller has left behind personal property agreed upon and that the seller has not removed and taken 15.2 P a g e

3 any real property. If the sales contract requires all mechanical items to be in normal working order, then the buyer will want to test the heating and air-conditioning systems, dishwasher, disposal, stove, garage door opener, etc., and the refrigerator, washer and dryer, if included. The buyer will also want to test all of the plumbing to be certain the hot water heater works, faucets and showers run, toilets flush, and sinks drain. A final inspection of the structure should also be made, including walls, roof, gutters, driveway, decks, patios, etc., as well as the land and landscaping. Real Estate Settlements-Title Closing Title closing refers to the completion of a real estate transaction. This is when the buyer pays for the property and the seller delivers the deed. The day on which this occurs is called the closing date. Depending on where one resides in the United States, the title closing process is referred to as a closing, settlement, or escrow. All of these accomplish the same basic goal, but the method of reaching that goal can follow one of two paths. In some parts of the United States, particularly in the East, and to a certain extent in the Mountain states, the Midwest and the South, the title closing process is concluded at a meeting of all parties to the transaction or their representatives. Elsewhere, title closing is conducted by an escrow agent who is a neutral third party mutually selected by the buyer and seller to carry out the closing P a g e

4 Real Estate Settlements- Closing Meeting With an escrow, there is no closing meeting; in fact, most of the closing process is conducted by mail. When a meeting is used to close a real estate transaction, the seller meets in person with the buyer and delivers the deed. At the same time, the buyer pays the seller for the property. To ascertain that everything promised in the sales contract has been properly carried out, it is customary for the buyer and seller each to have an attorney present. The real estate agents who brought the buyer and seller together are also present. The location of the meeting and the selection of the person responsible for conducting the closing will depend on local custom and the nature of the closing. It is customary in some states to conduct the closing at the real estate agent's office. In other localities it is conducted in the office of the seller's attorney. An alternative is to have the title company responsible for the title search and title policy conduct the closing at its office. Real Estate Settlements-Escrow The use of an escrow to close a real estate transaction involves a neutral third party, called an escrow agent, escrow holder, or escrowee who acts as a trusted stakeholder for all the parties to the transaction. Instead of delivering a deed directly to the buyer at the closing meeting, the seller gives the deed to the escrow agent with instructions that it be delivered only after the buyer has completed all of the buyer's promises in the sales contract. Similarly, the buyer hands the escrow agent the money for the purchase price plus instructions that it be given to the seller only after fulfillment of the seller's promises. A typical real estate escrow closing starts when a sales contract is signed by the buyer and seller. They select a neutral escrow agent to 15.4 P a g e

5 handle the closing. This may be the escrow department of a bank or savings and loan or other lending agency, an independent escrow company, an attorney or the escrow department of a title insurance company. Sometimes real estate brokers offer escrow services. However, if the broker is earning a sales commission in the transaction, the broker cannot be classified as neutral and disinterested. Because escrow agents are entrusted with valuable documents and large sums of money, most states have licensing and bonding requirements that escrow agents must meet. Real Estate Settlements-Prorating at Closing Ongoing expenses and income items must be prorated between the seller and buyer when property ownership changes hands. Typically, items that have been paid ahead of time -- for example, a water bill paid for the quarter when closing occurred mid-quarter - - would be credited to the seller during the proration process. The 360-day calendar is a method of measuring durations used in financial markets and in computer models. It is based on a simplification to a 360-day year, consisting of 12 months of 30 days each. Use the 360 calendar when computing debits and credits. Items subject to proration include: Property insurance premiums Property taxes Accrued interest on assumed loans Rents and operating expenses if the property produces income If heating is done by oil and the oil tank is partially filled when title transfers, that oil can be prorated, as can utility bills when service is not shut off between owners 15.5 P a g e

6 Real Estate Settlements-Closing Statement The completion of a closing statement involves an accounting of the parties' debits and credits. A debit is a charge the party being debited owes and must pay at the closing. A credit is an amount entered in a person's favor -- either an amount that the party being credited has already paid, an amount for which he or she must be reimbursed, or an amount the buyer promises to pay in the form of a loan. To determine the amount the buyer needs at the closing, the buyer's debits are totaled -- any expenses and prorated amounts for items prepaid by the seller are added to the purchase price. Then the buyer's credits are also totaled. These would include the earnest money (already paid), the balance of the loan the buyer is obtaining or assuming, and the seller's share of any prorated items that the buyer will pay in the future. Finally, the total of the buyer's credits is subtracted from the total amount the buyer owes (debits) to arrive at the actual amount of cash the buyer must bring to the closing. Usually the buyer brings a bank cashier's check or a certified personal check. A similar procedure is followed to determine how much money the seller will actually receive. The seller's debits and credits are each totaled. The credits would include the purchase price, plus the buyer's share of any prorated items that the seller has prepaid. The seller's debits would include expenses, the seller's share of prorated items to be paid later by the buyer, and the balance of any mortgage loan or other lien that the seller is paying off. Finally, the total of the seller's charges is subtracted from the total credits to arrive at the amount the seller will receive. Real Estate Settlements-Form 1099-S The sale of real property must be reported to the Internal Revenue Service. The seller's name and Social Security number and the gross proceeds from the sale are disclosed through Form 1099-S 15.6 P a g e

7 The closing agent is responsible for completing Form 1099-S, but cannot charge an extra fee. If the closing agent fails to report the sale to the IRS, the mortgage lender is required to do so. If the mortgage lender fails to report the sale, the real estate brokers must assume that responsibility. In Review A walk-through is a final inspection of a property made by a buyer before the closing. All parts of the property should be checked. Title closing is the completion of a real estate transaction. With an escrow, there is no closing meeting; in fact, most of the closing process is conducted by mail. A typical real estate escrow closing starts when a sales contract is signed by the buyer and seller. The use of an escrow to close a real estate transaction involves a neutral third party, called an escrow agent, who acts as a trusted stakeholder for all the parties to the transaction. Ongoing expenses and income items must be prorated between the seller and buyer when the property ownership changes hands. The completion of a closing statement involves an accounting of the parties' debits and credits P a g e