Real Estate Closing Process from Start to Finish

1. Real Estate Closing Process from Start to Finish

2. CONTRACT The contract is extremely important because whatever names and other information in the contract controls the closing process and what we do as a settlement agency.

3. CONTRACT • The reason the contract is so important is because when people sign a contract, equitable title actually passes to that person, as long as they do everything that the contract states. • The closing passes legal title to the purchaser where they become the owner of record. • This goes for both buyer and seller

4. CONTRACT • Since the contract actually vests title, you can’t just add someone onto the HUD-1 or Deed until the contract is amended to reflect the additional parties. • The first thing we do as a settlement company is plug the EXACT names from the contract into the HUD-1. If these names are not correct, this can become a big issue. • As agents, you should always specifically ask people EXACTLY how they want their names reflected on the contract because this is how the names will also be reflected on title. • Check Driver’s license, ask about middle names and Jrs.

5. CONTRACT • However the names are listed on the contract, will also be how the names are listed on the HUD-1, Deed and all loan documents from the beginning to the end of the closing process unless corrected. • We run title, bankruptcy checks, judgments, liens; everything for this purchase is associated with this name. • Do not just assume you know how people want their names on the contract. Be sure to ask. • People don’t always go by their given names that show on their IDs. • Ex.) I go by Steve Norman, but my legal name is Stephen Price Norman.

6. CONTRACT • The #2 mistake people make on the contract is not adding all people which is also reflected on title. • Typically title is held as follows: • Tenants by the Entirety (Husband and Wife) • Tenants in Common • Joint Tenants with Right of Survivorship • Sole Owner

7. CONTRACT • Do not just assume you know how people want to hold title, always ask! Examples: • Now it’s especially complicated with laws in DE because people who are of the same sex can be married and can hold title as tenants by the entireties, not just joint tenants. • T by E provides protection from creditors of one with limited exceptions for IRS tax liens.

8. CONTRACT • There is also the 2nd marriage dilemma. You assume people who are married want to hold title as Tenants by the entireties, husband and wife, to get the creditor benefits. • but that isn’t always the case. • People have kids from their 1st marriage so they don’t want to hold title as tenants by the entireties because they want their half of the property to go to their kids from their previous marriage when they die.

9. CONTRACT • People don't always under the title vesting and say they want it held a certain way, but don't always understand what it actually means. • Ex.) Married couples wants joint tenants but this can be broken up by a creditor of one. • As an agent, if you represent purchaser, and make sure the attorney explains and asks the buyers these questions so they understand exactly what it means. It’s a very important decision and once it's on record it stays that way.

10. CONTRACT Problem of the Estate or Trust It is common reasoning to think that if you are dealing with a person, then that's how they're taking title or want the property owned, however there are other forms of ownership.

11. CONTRACT Problem of the Estate or Trust The biggest problem is the Trust. • Trusts can come in all shapes and forms; • Revocable, irrevocable, spend thrift, and qualified trusts are just a few examples. • Can get very complicated for large estates. • These are all basically estate planning tools used to avoid probate, reduce liability, and protection against creditors.

12. CONTRACT Sellers Trust issues: • Frequently the contract does not let us know that the property is in the name of a trust. • Typically, but not always we are dealing with revocable trusts used to avoid probate taxes. • A Trust has different participants: Trustees or co-trustees (power to implement trust), beneficiaries (people who benefit from trust). • Trustees can also be the beneficiary. • Trustees have fiduciary duties to the beneficiaries.

13. CONTRACT Sellers Trust issues: • In the trust, the trustees can act alone or there can be requirements that they act together. • Also, successor trustees you need to be concerned with. • Rule of thumb: The trustees have a fiduciary duty to the beneficiaries of the trust to act in best interest of beneficiaries.

14. CONTRACT Sellers Trust issues: Important to us as settlement companies: A Trust is viewed as a separate person. As agents, you need to specifically ask them how the property is titled and if it is in the name of a trust.

15. CONTRACT Sellers Trust issues: • 4 things the attorney MUST review of the trust: 1.) The front page showing the creation of the trust 2.)The clause that shows the power to transfer or sell the real estate 3.)The signature page 4.)The naming of the trustee section The bottom line, as attorney we need a copy of the trust as soon as possible. Often times trustees aren't local and we need to get seller documents to them and make sure trust has authority to transfer the property.

16. Capacity to Contract • Comes up with trusts with elderly trustees. • Not a high standard. • Also, may pop up on individual sales. • The Rule is that persons entering into a contract must have the mental capacity to understand what they are signing. • This is not resolved by signing a Power of Attorney since they do not have the power to sign a POA. • Need to really go slow when the POSSIBILITY of lack of capacity pops up to make sure that there is capacity to sign.

17. CONTRACT Buyer Trust issues: • If it's a cash deal then it's typically not an issue. They can buy in a trust with no issues usually. • The problem with a buyers trust is that not all lenders will loan to a buyers trust.

18. CONTRACT Buyer Trust issues: • We’ve had settlements where it's literally killed a deal in the end. • Others where the entire contract needed to be changed the day of closing. • A way to prevent this is to take it in the individuals name and then transfer it into the name of the trust after settlement as a separate transaction. • Title insurance typically has allowances when it changes into a wholly owned trust, the title insurance is still valid. • Not the same for LLC’s, necessarily.

19. CONTRACT ESTATE The problem with an estate is usually when someone dies with a will. Typically in probate, a will appoints a personal representative or executor or executrix. This person is similar to a trustee whose obligation is to handle distribution of estate when someone dies. This can be even more problematic than a trust because this person's authority to act needs to have some court action to accept their appointment.

20. CONTRACT Trust and Estates- 1 thing we need to make sure we do is NOT pay an individual when the property is in the name of an estate or trust. As legal recognition of law, we must issue the check to the trust or estate, NOT the individual. This is on the attorney settlement side of the transaction.

21. Artificial Entities • It’s extremely important when dealing with trusts to understand that a trust, like an LLC, is viewed at law as a separate entity. • Trusts and LLC’s need to be in good standing. • Proper authority needs to be provided to trustee and signor for LLC. • All checks and documents need to be issued to the artificial entity, NOT to the individuals. • Fiduciary duties to parties that are not actively represented in the transaction.

22. CONTRACT The next trouble area is the property and tax parcel ID # The problems we run into as settlement agents: • Parcel ID not listed on contract • Not legible • Not correct We need the correct parcel ID to obtain the property information from the county website.

23. CONTRACT • In Sussex County, the property is not listed by the actual address, but by the parcel ID #. • Another issue is that sometimes someone is selling a property where there is more than 1 lot so there is more than 1 tax parcel ID # associated with the sale. • We need ALL tax parcel ID numbers associated with the sale listed correctly on the contract.

24. CONTRACT • We search the seller's name on the county website to confirm this, but that doesn't always help the issue. • It’s very important to get this Parcel ID # correct immediately from the start. • The county and town taxes and water/sewer readings are always read and associated by the tax parcel ID #s. • If it's not correct, there could be taxes left unpaid at settlement which later poses a problem for the new owner.

25. CONTRACT • The next thing that’s important is to get the primary addresses of both the buyer and seller because this will be where they want to receive mail after settlement. • This address will be reflected on the HUD-1 and Deed. • This address will also be where the town and county send any bills associated with the purchase property, even if it’s different from the purchase property.

26. CONTRACT-Deposit • Payment Terms: The issue we have is people bringing a deposit to check at closing. If we don't have good funds at closing, by law, the closing cannot go through because all funds must be good and able to clear. • Another issue is also consideration: If it says there is a 5G deposit on the contract, we need to make sure that check is received and deposited into the bank immediately. • If you don't have those funds cleared in escrow within a reasonable amount of time, the seller can cancel out of contract. • Make sure as the agent holding the deposit check, you deposit it into escrows as soon as possible to make sure all funds are good and clear.

27. CONTRACT • #6 financing contingency: If you check that box as yes and the buyer doesn't get financing, then they can cancel out of contract and also receive their deposit back. • #7 Settlement and #8 Time is of the Essence: It is so important that settlement is ready by the date listed because if not, you fall out of contract if there is a time is of the essence clause. • This means that if there is a clause like this included, you must strictly follow these timelines or else whoever is the cause of the hold up can be held in default.

28. CONTRACT • Deed Prep issue: In DE it is customary that the transfer taxes are split, although this can change by contract as it often does for new home purchases with national builders. • Seller usually pays the deed preparation • Buyer usually pays all recording charges

29. CONTRACT • #24 Buyer's Default- gives the seller the right and option to retain any deposit money as liquidated damages or exercise any legal or equitable right that they may be entitled to at the seller’s option. • #25 Seller’s Default- the buyer gets all money back, including any reasonable costs they've incurred for settlement and they also have the right to seek any remedy and maintaining any action. • Buyer may have equitable right to specific performance because each piece of property is unique.

30. CONTRACT The closing attorney is technically buyer's attorney. • In DE there’s an attorney client relationship between the buyer and the attorney. • It’s not like this in Maryland and most other jurisdictions where there is no attorney client relationship and where non-attorneys can perform settlements. • In a tricky deal, it may make sense for seller to obtain their own attorney to review documents prior to settlement.

31. CONTRACT Signatures: SO IMPORTANT TO GET ALL SIGNATURES- not effective contract until ALL parties have signed the entire contract.

32. CONTRACT • Another issue is the First Time Home Buyer: this allows for county transfer taxes to be exempt. • Both buyer and seller benefit from this, but you can change this by contract so the buyer only benefits by making the seller pay the state transfer taxes and buyer can be responsible for county transfer taxes, which they'd be exempt from. • Payment terms can be changed, but there are usual and customary splits if not addressed.

33. CONTRACT • Additional terms and conditions: If you have a few conditions you want completed before settlement, you can list these in #32 on the contract. You can also add additional addendums and check box on line #31. • Ex.) Fix broken window, make sure garage door opener works, fix dish washer, leave paintings on the wall, etc.

34. CONTRACT • This is a form contract generated and approved by the DE real estate commission. • There is NO legal requirement that this document has to be used. • In order to have valid contract, case essential terms of the contract are: purchase price, closing date, and the specific description of the property. • Statute of Frauds. As long as those 3 things are met in writing, you can have a binding contract so you need to be careful with what writings are going back and forth.

35. CONTRACT • Statue of frauds only requires writing in order to have a valid contract, not a specific contract. • Case law is moving further and further away from requiring an actual signature in order for a contract to be binding so be careful. • The trend is toward emails, texts, and other forms of electronic communications to be binding. • Delaware has a Uniform Electronic Signature Act which allows signatures to be digital and don’t need to be an actual signature. • Be aware so you don’t unknowingly enter into an agreement thinking it has to be on this form or have a signature. • You and your Client need to be careful with emails and TEXT MESSAGES.

36. Okay, you’re under Contract. You did everything correct, with correct names, addresses, etc. What's next thing you should be doing?

37. Title Company • Right away secure reputable title company. • Make sure you have confirmation in writing that they received a copy of the contract you send over. • Provide the commission. • There is no place for commission listed on contract so the most important thing for YOU is to have that correct and provided to the settlement company to list on the HUD-1.

38. Title Company • Give closing agent the contract and client's contact info. • Today email is key. • Request that the title company contacts your client immediately to at least touch base and introduce themselves whether it be by phone or email.

39. Title Company • There is really important information that isn’t listed not on the contract: • #1 commission rate. MOST IMPORTANT!! • #2 who's holding deposit • #3 HOA information/contact person • #4 estimated settlement date if it's different from what's in contract • #5 seller/buyer information so we can contact them to get the lender information to begin the whole title process. Especially email addresses.

40. Title Company • The settlement company should send out a buyer and seller letter to both parties to fill out and return to them as soon as possible to get any additional information they may need to make sure the settlement process is smooth and completed correctly. (see buyer and seller letter and go through each of them with everyone)

41. Title Company • Make sure you check in with your buyer or seller to see that they got this info back to the attorney or settlement coordinator so there's no last minute issues. • If all this info is provided up front then, you may not hear from us until close to closing. • Periodically we will touch base, but these are all the important items we will need.

42. Title Company • Special requirements: If a person lives out of state and won’t be attending settlement, we'll have to draft POA or obtain the deed early. • The sooner we know, the better we can plan a seamless smooth closing. • Be sure to let us know if the buyer or seller won’t be attending settlement, if they need to schedule a weekend closing, or if they need a power of attorney. • This will make everyone's lives easier so that we can all plan accordingly and there are no surprises.

43. Title Company • If you're the sellers agent, ask how the seller wants their funds after settlement and let us know how you want your commission funds. • We can wire seller or commission funds and provide an email confirmation of the wire after closing. • Let us know if the commission check is just one check or multiple checks. • Referral fees- make sure we have everything in writing to cut and disburse checks accordingly. • If the seller wants split checks or wires, we need it in writing from the seller showing how they want it split or wired, and signatures from all parties on the seller's side. • Wire authorization forms protect everyone.

44. The Settlement Process from Title Company’s End Now what we are doing on our end: • The 1st thing we do when we get a contract is open a file and create a preliminary HUD based off the info on the contract. • We check the county website with the parcel ID # listed on the contract for county taxes to list on the settlement statement. • Once settlement is confirmed, we order a title search which takes approx. 5 days to get back.

45. The Settlement Process from Title Company’s End What is a title search: Chain of title, confirms who owns property and how it's owned, provides us with any mortgages or liens on the property that may need to be addressed, tells us if buyer or seller have judgments or are in bankruptcy, and tells us what other encumbrances or issues may affect title such as tax ditches, easements, restrictions, etc.

46. The Settlement Process from Title Company’s End • Letters to Parties. • Send out the buyer and seller letter we discussed earlier. We try to email these to make things more efficient. • The buyer letter informs them there's an attorney client relationship • Informs buyer they may be entitled to a reissue rate on the title insurance. • 40% off of their title insurance if within last five years. • Sale or Refinance up to value on lender or owner policy.

47. The Settlement Process from Title Company’s End What is title insurance: (pass out brochures) • Covers 4 primary categories: Liens, errors, claims, fraudulent activity. It is Important to stress to your buyer that title insurance is important to obtain at settlement. • Who is covered by title insurance? • Lender's title polices and owner's title polices • 1 time charge based off of a percentage of the purchase price. http://ratecalculator.fnf.com/ • This charge should be the same no matter what title company your buyer uses.

48. The Settlement Process from Title Company’s End • After title comes back after about 5 days, the attorney will review title to make sure there are no issues that came back on the search. • If there are issues, these will be addressed, if not, we prepare a title binder for the lender summarizing the title condition of the property. • This tells them 4 primary things: • Who owns property now • Who will own the property • What needs to be taken care of now • What exceptions will remain on the property.

49. The Settlement Process from Title Company’s End Now we send the following to the lender: • Title commitment • Closing protection letter (which is a commitment from title insurance company to insure the property as long as certain conditions are met) • Preliminary HUD-1 which has all information we've received to date from the information we've collected and from what has been returned on the buyer/seller letters, with the exception of lender's fees, escrows, and payoff information. • Wire instructions • Tax information & w/s print outs from the county and town

50. The Settlement Process from Title Company’s End • We then will draw up the seller docs which include: (pass out to everyone) • Deed • Transfer tax affidavits • 5403 tax form • 1099S form if required • Any powers of attorney • Buyers and sellers affidavits and disclosures – • buyer and seller affirm they have done everything required. • Affirm they have property authority to transfer property • and that they are not aware of any issues on the property. • Both parties understand the contract controls closing process and mistakes made are subject to terms of contract