Description
States take a variety of approaches to attorney involvement in real estate closings, settlements, and refinancing. Whether an attorney must be present at a closing is typically a question of whether a non-attorney conducting a closing would be engaged in the unauthorized practice of law. While there is no universal definition of what constitutes the practice of law, most states define the practice of law to include giving advice in matters relating to clients’ legal rights or responsibilities, drafting legal documents, and representing clients before a court or similar body. This week, first research your state’s closing process and research your state law/bar regulation on this subject. You may complete this research at the Library, online, your local Bar Association, your local Realtor Association or even interview an attorney that is licensed in your state. In your post, please address the following in detail:What are the steps for a real estate closing in your state? Is an attorney required to be a part of the closing? If so, what is their part in the closing? Who do they represent, what are their duties and what types of costs are associated with their participation? Do you agree with your state’s closing process? Is there anything that might be improved upon or changed in your view?Optional: If you have purchased real estate before, please feel free to share your experiences with the class! Don’t forget to tell us where you conducted your research
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5Real Estate Closing Procedures
LEARNING OBJECTIVES
After studying this chapter, you will be able to:
•Understand what occurs at a real estate closing
•Discuss the responsibilities of the purchaser between the time of entering into the contract for the sale of the
property and the closing
Copyright 2019. Aspen Publishing.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
•Explain the provisions of the Real Estate Settlement Procedure Act
•Complete the HUD-1 Uniform Settlement Statement
•Discuss the responsibilities of the seller between the time of entering into the contract for the sale of the
property and the closing
•Explain the importance of a certificate of occupancy
•Understand the nature of all of the documents that must be prepared for the actual real estate closing
•Explain all of the post-closing procedures
•Apply practical tips to assist you in completing a real estate closing
CHAPTER OUTLINE
Between the Contract and the Closing Date
Obligations of the purchaser
Mortgage insurance
Real Estate Settlement Procedure Act
HUD-1 Uniform Settlement Statement
Obligations of the seller
Certificate of occupancy
IRS Form 1099-S
Certificate of non-foreign status
The Closing
Post-closing Procedures
Practical Tips
CHAPTER OVERVIEW
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Chapter 4, “Conveyancing,” provided an introduction to the concept of the real estate closing. The purpose of
this chapter is to detail the formalities of the closing procedure, including aspects of the pre-and post-closing
process. For the legal professional working in a general and real estate practice, the closing is one of the
mainstays of the office.
Prior to the actual closing, the day on which the title to the property passes from the seller to the buyer,
certain information must be gathered to assure that the parties are appropriately protected. Many of these
items have already been addressed in Chapter 4, in the discussion of the real estate sales contract; however,
certain other items must be included as well. Before entering into the sales contract, the buyer must be aware
of all the costs that will be involved in the sale. These costs include not only the actual purchase price of the
property, but also the financing costs and overall fees associated with purchasing the realty. Generally, the
following items are included in the final closing costs:
(a)attorneys’ fees, which include the preparation of all legal documents involved in the sale, as well as
out-of-pocket expenses;
(b)the cost of a title search and the premiums on title insurance if such is deemed advisable with respect to
the property (also, many financial institutions require a borrower to acquire title insurance as a condition of
granting a mortgage);
(c)surveys;
(d)recording costs—the cost of recording the deed in the county recorder’s office;
(e)if the sale involves the purchase of a condominium or cooperative, there may be special assessments that
are paid to the home-owners’ association, but the specifics vary with each such purchase;
(f)inspection fees for examining the property for safety and code provisions; and
(g)certain costs that are involved in obtaining mortgage loan financing, which may include:
•application fee
•credit check
•financing fee
•loan decision fee
•processing fee
•appraisal fee
•inspection fee
•lender’s attorney’s fee
•escrow fee
•document preparation fee
•any other fees, including fees for interim loans.
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As can be seen, the costs involved in the sale of real estate can far exceed the base purchase price, and many
people discover to their chagrin that they can afford the purchase price, but not the additional costs involved
in the closing. Consequently, all of these financial considerations must be addressed prior to the parties’
actually entering into the contract for sale.
This chapter analyzes the procedures involved in three separate time frames: the period between the contract
and the closing date, the actual closing, and the period following the closing.
Between the Contract of Sale and the Closing Date
The responsibilities of the parties between the signing of the contract and the transfer of title at the closing
vary depending on whether one is the purchaser or the seller.
The Purchaser
After the contract has been entered into, it is the responsibility of the buyer to make sure that any
contingencies or conditions in the contract that are her responsibilities are fulfilled. One of the most common
of these preliminary steps is to contract for the services of various experts who are responsible for making the
many inspection reports that are necessary prior to consummating the sale. Generally, before a financial
institution is willing to lend money to the purchaser of realty, it wants to make sure that there are no internal
problems with the property, and the institution uses these experts’ reports to make that decision.
The result of these reports may give rise to a claim that the property contains a defect. A defect can be any
adverse impact of a physical or structural nature that would cause a significant reduction in the value of the
property. If such a condition is discovered as a result of the inspection, the purchaser may be able to seek a
reduction in the purchase price or to require the seller to remedy the defect prior to the closing.
If the property passes the inspection satisfactorily, or any discovered defect is cured, the buyer typically
submits an application to a financial institution to obtain a mortgage loan. As a rule of thumb, if the purchaser
is putting down less than 30 percent of the total purchase price, the lender requires the purchaser to obtain
mortgage insurance. Mortgage insurance operates to discharge the loan obligation if the insured borrower
dies or meets any other condition specified in the contract to trigger the obligation of the insurer. This
insurance protects both the lender who is guaranteed repayment of the loan and the borrower who is protected
from having the property foreclosed on (see Chapter 4).
Once financing has been arranged, the buyer and the seller agree on the date for the closing, which typically
occurs between 30 and 90 days after the signing of the contract or the buyer obtains financing, whichever
occurs first.
Many sellers of realty who have covenanted for title will acquire title insurance to protect them against
claims of ownership to the property. To acquire the insurance, a title search must be conducted to determine
the current status of the title, and the cost of the insurance may be borne by either party to the sale, depending
on the terms of the sales contract. The title search alerts the purchaser to any encumbrances on the property
that might render it unmarketable, and if it is unmarketable, the buyer may avoid the contract (see Chapter 4)
if the encumbrance is not removed by the seller by the closing date. As discussed in previous chapters,
examples of encumbrances would be existing mortgages, judgments on the property, liens for taxes and other
government charges, and mechanics’ liens.
During the period between the contract and the closing, the purchaser will conduct a survey of the property to
make sure that the property being conveyed corresponds to the terms of the contract for sale. Not only could
this have an effect on the sales contract, if the realty turns out to be more or less than described in the
contract, but the financial institution providing the funds for the purchase may require the survey prior to
approving the loan.
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Finally, pursuant to the Real Estate Settlement Procedure Act, the federal statute governing all federally
guaranteed mortgage loans, a settlement statement must be prepared. This form is prepared by the United
States Department of Housing and Urban Development, and is usually referred to as the HUD-1 Uniform
Settlement Statement. This is the standard form used in most real estate transactions, even if no federal
mortgage loans are involved. The HUD-1 specifies all items of closing costs and serves two specific
purposes: to reflect the amount to be paid by the seller and to specify the amount to be paid by the purchaser
to close the sale. (See Exhibit 5.1. This form can also be accessed online at www.hud.gov.)
Exhibit 5.1: HUD-1 Settlement Statement
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The Seller
Between the contract and the closing, the seller has fewer obligations to perform than the purchaser.
Generally, the responsibilities of the seller during this period can be summed up as making sure that he or she
can transfer a marketable title on the closing date.
Certain local governments require that a seller produce a certificate of occupancy if the property has
buildings on it. This certificate is the result of a general inspection of the premises to ascertain that the
building is fit to be occupied. If such certificate is required and not provided, the purchaser may avoid the
sale.
If the seller utilized the services of a real estate broker to make the sale, the seller must make sure that all
commissions owed to the broker are paid prior to the closing, and the seller should obtain a receipt to
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document the payment. As a general rule, the seller’s commission for the seller’s broker is simply deducted
from the purchase price that is received at the closing.
If any cloud appears on the title to the property, it is the seller’s responsibility to see that such cloud is
removed pursuant to the provisions of the deed that has been contracted to be conveyed (see Chapter 4).
Finally, during this period, the seller must prepare all the documents that he is required to present at the
closing. These documents include the following:
•Deed: The deed must conform to the nature of the title that has been agreed to in the sales contract (see
Chapter 4).
•Affidavit of title: This is a separate document made by the seller that specifies his title to the property and
indicates all improvements made on the property since the seller first acquired the title.
•Form 1099-S: This is an IRS form that must be filed for real estate transactions, except for the following:
Gifts
Refinancings
Commercial property
(See Exhibit 5.2.)
•Certificate of non-foreign status: The IRS also requires this form if the parties are U.S. citizens; foreign
nationals are required to make certain payments pursuant to section 1445 of the Internal Revenue Code. (See
Exhibit 5.3.)
•Survey affidavit, if the seller agrees to provide one to the buyer.
•Settlement statement (discussed above).
•All documents relating to the seller’s mortgage.
•Notice to attorn: This document applies to property that has been leased to a tenant that is not a party to the
sale. This notice alerts the tenant of the transfer of ownership of the property.
•The seller is usually required to pay a realty transfer fee mandated by the government.
•Payoff amount: This reflects the amount that is still outstanding on the seller’s mortgage and is used by the
purchaser to make sure that this encumbrance is discharged by the date of the closing (typically, a portion of
the buyer’s loan is used to discharge this obligation).
•The seller should have all utility companies provide a final reading of all charges due by the date of the
closing so that such charges are allocated between the parties.
•Any other documents affecting the right to the property, such as foreclosure papers if the property was
acquired by means of a foreclose sale, or estate papers if the property was inherited.
Exhibit 5.2: Form 1099-S
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Exhibit 5.3: F.I.R.P.T.A. Non-Foreign Certification by Individual Transferor
1.Section 1445 of the Internal Revenue Code provides that a transferee of a United States real property
interest must withhold tax if the transferor is a foreign person.
2.In order to inform the transferee that withholding of tax is not required upon the disposition by [name of
transferor(s)] of the United States real property described as follows:
the undersigned transferor certifies and declares by means of this certification, the following
a.I (we) am (are) not non-resident alien(s) for purposes of United States income taxation and,
b.My United States taxpayer identifying number (Social Security number) is
c.My home address is
d.There are not other persons who have an ownership interest in the above described property other than
those persons set forth above in subparagraph b.
3.The undersigned hereby further certified and declares
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a.I (we) understand that the purchaser of the above described property intends to rely on the foregoing
representations in connection with the United States Foreign Investment in Real Property Tax Act. (94 Stat
2682 as amended)
b.I (we) understand this certification may be disclosed to the Internal Revenue Service by transferee and that
any false statement contained in this certification may be punished by fine, imprisonment or both.
Under penalties of perjury I (we) declare I (we) have examined carefully this certification and it is true,
correct and complete.
Exhibit 5.3: F.I.R.P.T.A. (Foreign Investment in Real Property Tax) Affidavit of Facts Relating to the
Withholding of Tax Upon the Disposition of United States Real Property Interests Pursuant to 26
U.S.C. 1445(B)(2)
The Undersigned, being duly sworn, deposes and says:
1. That the Undersigned are/is the owner(s) of the premises known as______ being conveyed this date
to______
2. That the Undersigned are/is not a foreign person(s) as defined at 26 U.S.C. 1445 (f)(3).
3. That the Undersigned’s United States Taxpayer Identification Number appears following his/her signature
below.
Sworn to before me this_______________________
day of _______________________ 20__________
_______________
Notary Public
__________________________________________________________
The Closing
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The actual closing usually occurs at the office of the buyer’s attorney, but may occur at any mutually
agreed-upon location. Generally, the attorneys for the buyer and the seller attend, along with the parties and a
representative of the financial institution providing the mortgage loan.
The purchaser usually contacts the title company 24 to 48 hours before the day of the closing to make sure
that the title is still free of all clouds and encumbrances. At this point, the purchaser will mark up the title
instrument, meaning that he or she will tick off any item specified in the contract—grantor, grantee, liens,
mortgages, judgments, etc.—to indicate that the title is marketable.
When all of the foregoing has taken place, the buyer and the seller transfer all documents and the deed is
given to the buyer. In many instances, the seller does not appear in person but is represented by an attorney.
The typical closing can be completed in less than two hours.
Post-Closing Procedures
Once the actual closing has taken place, there still remain many items to complete to protect the transferee.
The most important of these is to record all the documents necessary to provide a clear chain of title. This
includes recording the deed and any mortgage with the county recorder’s office.
The financial institution that provides the funds for the purchase will usually create a packet of closing
instruments for the borrower, and all the requirements specified in this packet must be completed by the
mortgagor. If the purchase includes paying off an existing mortgage, the purchaser must make sure that this
encumbrance is discharged and must receive a release from the mortgagee to clear any potential problem
with respect to any encumbrance on the property.
Following the purchase of a newly constructed cooperative or condominium, the purchaser can create a
punch list of items that still require attention (e.g., a problem with the flooring). The developer has a
specified period of time in which to correct these problems.
Finally, all professionals involved in the transaction must be paid.
Practical Tips
•Be sure to make a complete file of all necessary documents, such as title searches, financing papers, and the
parties’ information sheets.
•Make a summary of all of the contract information.
•Make sure all contract contingencies have been met.
•Check local rules to determine what searches may be required.
•It is safer to deliver all title documents by hand to minimize the risk of loss or delay.
•Check local statutes to determine what affidavits may be required.
•Check with the local court to determine if there are any special requirements for completing the closing.
•Prepare a log of all important dates and information.
•Prepare IRS Form 1099-S.
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Chapter Review
The process of closing a real estate transaction is a fairly formalized affair that follows set procedures and
formats. During the period between the contract and the closing date, most of the burden is on the purchaser
to make sure that no problem exists with regard to the property being purchased. No one wants to buy a
potential lawsuit.
For the most part, during the pre-closing period, the seller is merely required to see that he or she is in a
position to provide a marketable title at the closing date.
The closing itself is generally a simple, straightforward, and quick affair in which all documents are signed
and transferred, the purchase price is paid, and any existing encumbrances on the property are discharged.
After the closing, the purchaser must see that all documents are properly recorded to protect his or her title,
and must complete any other documents required by the institution financing the purchase.
Ethical Concern
Once a person is represented by counsel, it is unethical for the opposing side to have direct contact with that
party. All communication must be made through the attorney. In a real estate closing, because so much
information and documents must be gathered, it is tempting to contact the parties directly. Do not do so when
the party is represented by counsel.
Key Terms
Affidavit of title
Certificate of non-foreign status
Certificate of occupancy
Deed
Defect
Form 1099-S
HUD-1 Uniform Settlement Statement
Mark up
Mortgage insurance
Notice to attorn
Payoff amount
Punch list
Real Estate Settlement Procedure Act
Realty transfer fee
Settlement statement
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Title insurance
Exercises
1.What are some of the reasons why a person would acquire mortgage insurance?
2.What is the benefit of title insurance?
3.Prepare a closing packet based on the documents discussed in this chapter.
4.Indicate the problems that would permit a purchaser to avoid a real estate contract.
5.Analyze the provisions of the HUD-1 statement included in this chapter.
Situational Analysis
Your office represents the buyer of a residential house. The day before the closing, you discover that the
seller still has not fulfilled all the contract obligations. What are the steps you would take to protect your
client’s interests?
Edited Cases
The following two cases discuss various problems associated with real estate closings. The first decision,
Rochester Home Equity, Inc., concerns recovering fees for a mortgage application that was never
consummated; and the second opinion, In Re Opinion No. 26 of the Committee on the Unauthorized Practice
of Law, although fairly lengthy, provides an important discussion of the unauthorized practice of law as it
relates to real estate settlements and the details of closing procedures.
Rochester Home Equity, Inc. v. Upton
1 Misc. 3d 412; 767 N.Y.S.2d 201; 2003 N.Y. Misc. LEXIS 1391 (N.Y. Sup. Ct. 2003)
The plaintiff here is suing for application and lock-in fees in a mortgage application that was never
consummated. The defendant, in turn, argues that the plaintiff failed to make a federally-mandated disclosure
at a time when she could cancel the transaction without penalty. This would appear to be a simple question,
and the dispute involves a negligible amount of money—a mere $1,200. Nonetheless, it raises an important
point that, to the court’s knowledge, has never been resolved by any court in the United States. It requires the
court to look at a number of federal and state statutes and regulations that rarely refer to one another and
whose combination into a coherent scheme is left to the judiciary. In the end, the court’s decision must be
based on the evident intent of the legislatures involved, an intent that would be frustrated unless the
defendant’s position is adopted.
The defendant, who lives in a suburb in the Albany area, was seeking to refinance the house she lived in with
her husband. (Although it seems that he was intended to be a party to the mortgage as well, he did not
participate in the negotiations and initial document exchanges and thus is not involved in this lawsuit.) She
dealt with the plaintiff firm, some 200 miles away, by telephone and fax. The record contains documents
signed by the defendant showing receipt of a preapplication disclosure of a $100 application fee and a few
other fees, for appraisals and similar charges. She also signed and faxed back a lock-in agreement in full
compliance with 3 NYCRR 38.6. This document secures an offer of a fixed rate mortgage at 5.75% with no
points, good for one month, in consideration of a payment of $1,100 (one percent of the loan principal). As
the regulations require, this payment would be refunded at the closing of the loan, or if the loan were rejected
because of the results of an appraisal, the failure of a third-party lender to cooperate, or the credit worthiness
of the applicant. The defendant also signed a credit card authorization for these fees.
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After these documents were exchanged the plaintiff took the information needed for a full mortgage
application over the telephone. The application was then faxed to the defendant for her signature. At about
this time (there is some dispute about the timing of these exchanges) plaintiff also sent defendant a
disclosure, in the form required by 12 USC §2605(a), of the number of mortgages routinely assigned or sold
on the secondary mortgage by plaintiff.
This was the deal breaker. The document revealed that plaintiff disposed of most of its mortgages—anywhere
from 76 to 100 percent. The defendant, who has maintained that she repeatedly told plaintiff’s employees she
did not want her mortgage assigned, refused to sign the application once she learned this. She also refused to
pay the fees, and this proceeding followed.
The parties have differing views on the timing of the disclosure and its relation to the delivery of the
application to the defendant. These arguments may be put to one side. The issue, it seems to the court, is
whether the disclosure was made before the transaction was consummated. Because the lock-in agreement
secures all relevant terms of the mortgage, the court holds that the disclosure made after defendant signed the
lock-in agreement was untimely.
There is nothing in the New York regulations concerning lock-in agreements that sets out what disclosures
are required and when they must be made; nor does 3 NYCRR §38.1 et seq. provide any guidance on
questions regarding the interplay between such agreements and the mortgage application. It is necessary,
then, to consult the two federal statutes that control such loans: the Truth in Lending Act (15 USC §1601 et
seq.) and the Real Estate Settlement Procedures Act (12 USC §2601), and the regulations under both these
statutes.
It is only the Real Estate Settlement Procedures Act (RESPA) which requires disclosure of the number of
mortgage loans assigned or sold. To add to the confusion, most other disclosure requirements are found in the
Truth in Lending Act. RESPA regulations require that the disclosure be made “[a]t the time an application for
a mortgage servicing loan is submitted, or within 3 business days after submission of the application” (24
CFR 3500.21[b][1]). They further specify that disclosure must be made at the time of the application when
there is a face-to-face interview (24 CFR 3500.21[c][1]) and is to be mailed within three days if no such
interview takes place (24 CFR 3500.21[c][2]).
The parties have also debated whether a telephone application is one made face-to-face. The court finds no
merit in any claim that a transaction conducted between two parties in different buildings in different cities is
somehow face-to-face because it happens in real time. Surely the letter of these regulations would be met
under these circumstances by mailing the disclosure.
But this does not end the discussion. RESPA does not address lock-in agreements, and in the matter of
disclosures is basically an appendix to the Truth in Lending Act (TILA). The court has to ask what purpose is
to be served by this disclosure, and which party’s arguments in the present case best effectuate that purpose.
Fortunately, the announced purpose of TILA is consistent with the timing requirement in that statute. In
keeping with the trend toward supplying consumers with more information than market forces alone would
provide, TILA is meant to permit a more judicious use of credit by consumers through a “meaningful
disclosure of credit terms” (15 USC §1601 [a]). For that reason the disclosures must be made conspicuously
and in writing, and they must be made “before consummation of the transaction” ( 12 CFR 226.17[b]).
These two provisions clearly support one another. The purpose of a disclosure is frustrated if one could not
act on the information without incurring a penalty. The information required by TILA must be given at a time
when the consumer can back out of the transaction. In any other case they would be useless.
This regulation—disclosure before consummation—was promulgated under TILA. What relevance does it
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have to RESPA? At least one federal court has considered the matter, at least obliquely, holding that RESPA
disclosures must be made “within three days of the application, . . . not at closing when it may be literally or
at least practically too late for the borrower to use the information . . . RESPA (and TILA) require an ‘up
front’ disclosure, at the application stage—not the closing stage—of the loan process.” (Anderson v. Wells
Fargo Home Mtge., 259 F. Supp. 2d 1143, 1147 [WD Wash].) This language suggests that the three-day
requirement was intended to be consistent with the preconsummation standard in TILA.
Applying this principle to the present case is not straightforward. As noted above, the lock-in agreement and
the New York regulations governing them are both silent on the applicability of federal law. Although both
TILA and RESPA preempt any inconsistent state law, neither of these statutes nor the Anderson case deals
with lock-in agreements.
The defendant, no doubt aware of the silence of the statute, has argued that the fees are not enforceable
because the lock-in agreement is not a binding contract, simply an agreement to agree. The court finds this
unpersuasive. The better interpretation, in fact, is that so far from being a mere agreement to agree the lock-in
agreement is the functional equivalent of a mortgage commitment. It sets out all the substantive provisions of
a mortgage: the property secured, the interest rate, the principal and the duration of payments. It is a lock-in
agreement in a double sense. The applicant obtains assurance that she will have the benefit of a particular
interest rate; but once she signs the lock-in agreement she is also “locked in” to a particular mortgage lender.
All that is left is the information-gathering needed to complete a credit check and to conduct the appraisal.
It would clearly violate the purpose behind TILA and RESPA to allow fees to be levied before all disclosures
were made. To do so would be to postpone the disclosure obligation until it was “literally or at least
practically too late for the borrower to use the information.” Reading these statutes together, it is clear that
they aim at providing consumers with all information deemed relevant to a credit decision before the
consumer risks any money. A post-transaction disclosure would be pointless at best and a mockery at worst;
what good would it do to reveal important details of the transaction when it would cost $1,200 for the
borrower to change his mind? For that reason, the court holds that contracts to pay fees such as the lock-in
agreement must be preceded by all the disclosures that federal law requires. In a real sense the lock-in
agreement is more akin to a consummation of the process than it is to a mere preliminary stage.
This is the only way that the disclosures required by TILA and RESPA would be of any use to the consumer.
It would be manifestly improper for the defendant to be penalized for changing her mind on the basis of
information supplied pursuant to that federal law. (She also claims that she had not realized until this
disclosure that she was dealing with a mortgage broker; this is an error, as plaintiff is a mortgage banker
—something of a hybrid, but licensed to act as a bank with respect to mortgages.) She did so in a timely
fashion, as well. Regardless of the timing of the disclosures vis-à-vis the application, the defendant told the
plaintiff that she wished to discontinue the transaction as soon as she received the document. There is no
reason not to honor her decision.
The court therefore orders the complaint dismissed, with costs.
Case Questions
1.What factors resulted in the mortgage loan not going through?
2.Discuss the legal purpose of disclosure, and how that affected this case.
In Re Opinion No. 26 of the Committee on the Unauthorized Practice of Law
139 N.J. 323, 654 A.2d 1344 (1995)
We again confront another long-simmering dispute between realtors and attorneys concerning the
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unauthorized practice of law. See New Jersey State Bar Assn. v. New Jersey Assn. of Realtor Bds., 93 N.J.
470, 461 A.2d 1112 (1983). Title companies are also involved. Our resolution of the dispute turns on the
identification of the public interest. Since our decision today permits sellers and buyers in real estate
transactions involving the sale of a home to proceed without counsel, we find it necessary to state the Court’s
view of the matter at the outset. The Court strongly believes that both parties should retain counsel for their
own protection and that the savings in lawyers fees are not worth the risks involved in proceeding without
counsel. All that we decide is that the public interest does not require that the parties be deprived of the right
to choose to proceed without a lawyer.
The question before us is whether brokers and title company officers, who guide, control and handle all
aspects of res
