Hitting a home run in real estate deals requires a working knowledge of many things. One of the most critical to your success is closing the deal. For those who’ve never closed a deal before, or have perhaps closed one or two, this can be a daunting process. However, with the right information, it can be relatively simple. In this post, we’ll explore the basics, so you have a firm foundation on which to build.
Questions Common to Real Estate Deals
Closing the deal is not a single, one-and-done thing. It’s a combination of several steps, all of which bear on the outcome. You must know what those steps are and how they dovetail together to create what we call “closing”. Some of the most common questions you must answer include the following:
- When does the process go to escrow?
- Who sends the money to escrow, the buyer the seller, or someone else?
- What’s the process from that point to setting a closing date?
Now, let’s delve into the answers to those questions, as well as supporting information to help you master the basics of closing a real estate deal.
Contracts and Escrow Companies
Typically, a real estate contract is entered into by two parties: a buyer and a seller. Either of these parties or even a broker may contract an escrow company and alert them that a contract must be signed and that the company must open up the title and escrow.
Whoever initiates the contract will then send a copy of the contract to the company, which will then enter it into the system and create a file number. The escrow company will then return a receipt and a copy of the contract to the sender. Many other people may need notice that the contract has been filed, including:
- Brokers
- Other attorneys
- Buyers
- Sellers
The escrow company will then provide important information to interested/invested parties, including:
- The relevant file number
- Contract receipt
- Instructions on sending earnest money
What Is Earnest Money?
Earnest money is exactly what it sounds like – funds that prove the buyer’s intent and goodwill in the situation. Earnest money must usually be sent in within a couple of days of the contract being initiated for it to be valid. Once the earnest money has been paid, the escrow company lets the involved parties know they’ve ordered the title. Then comes the title examination, which is an involved process.
What’s a Title Investigation?
The buyer wants the title to be “free and clear of all encumbrances” when a property is sold. This is usually a stipulation from any lender involved in the process. To ensure that the title is free and clear, the escrow company will initiate a title investigation, which is the beginning of the title and escrow portion of the process. In most cases, the contract stipulates seven to 10 business days for a title commitment to be delivered, and it will list:
- Property Owner: This is a legal description of the property being sold. It will describe who’s being insured and the purchase price.
- Schedule B: Schedule B is an exception to the title. It will include any easements, restrictive covenants, mineral interests, etc., recorded against the property. Any liens against the property, such as mortgages, tax liens, and judgment liens, will be listed in specific schedules.
Once the investigation is concluded and the commitment created, the parties have a specific number of days to review it and file objections to those exceptions, if there are any.
In most cases, an examiner will look at information going back a minimum of 40 years. This includes the entire chain of titles to determine what affects the current situation and what does not. The objection process consists of back-and-forth responses between the seller and the title company. In some cases, an underwriter may also be involved in the process as an arbiter and will side with either the seller or the title company (which is representing the buyer).
It’s not just about what affects the buyer and seller, either. The title company also incurs risks in the process and those need to be weighed and understood. Once all objections have been resolved, it’s time for the due diligence period. During this time, all the non-title-related aspects of the property must be considered, such as zoning, property surveys, and environmental issues.
A Note on Surveys
Before we move on, let’s touch quickly on the topic of surveys. Do they matter to the actual closing process? Is it something strictly between the buyer and seller?
You’ll find several different types of surveys used today. For instance, boundary surveys define where the property begins and ends and are important for defining the legal description of what’s being insured. Surveys can also identify and mark many other things beyond boundaries, including:
- Improvements
- Easements
- Encroachment issues
- Improvements that extend beyond boundary lines
However, not all surveys identify all these items. Many of them are important to the title insurance process, including any excluded encroachments and violations of restrictive covenants. The title company will want to see survey results before offering certain types of coverage, including:
- The property’s footprint
- Improvements that extend beyond boundaries
- Easement encroachments
- Boundary encroachments
Ultimately, the humble survey is one of the most valuable tools in any commercial real estate transaction and is almost always necessary with these types of deals.
Lender Policy vs. Buyer Policy
It’s also important to understand the different types of policies. For instance, does a lender’s policy cover everything? Is it only the loan? What’s the process for choosing the type of coverage you get for the transaction?
Lender and buyer policies have two separate parts.
1. The loan policy only covers the lender’s priority and right of their loan versus any other liens or matters except those accepted on their policy. It only exists for the life of the loan. Once the loan is paid off, the policy is no longer valid.
2. The owner’s policy, on the other hand, exists for the lifetime of ownership, whether that’s 10 years or 100 years. It protects all the owner’s rights to the property, subject to exceptions.
Recourse Against Issues in the Wholesale Process
Given the rise of wholesaling, it’s important to understand what recourse buyers have against defects related to that process. For instance, suppose a wholesaler closes a deal and then the buyer comes back sometime later and claims that they were never provided with a good title to the property. As a result, the buyer wants a refund.
In this situation, the buyer’s claim will be against the title company that closed the transaction. This allows the title company to go back through the entire chain and determine where and when the original transaction occurred.
Dealing with Lenders
At this point, you understand a bit more about getting a title commitment, doing your due diligence, and objecting to exceptions. Now we need to talk about lenders. As we move closer to closing, it’s important to answer questions like:
- Where does the lender come into play?
- What matters when dealing with the lender?
- What are the important things to think about when dealing with lenders?
One thing that might come as surprise is that, just like buyers and sellers, lenders also have an opportunity to get the title commitment at that time. As soon as the lender becomes involved, they will provide the title or escrow company notice that they’re interested and want a loan policy for this amount.
Lenders also receive a title commitment and will provide an objection letter just like the buyer and seller. And, just like the other two entities, those objections must be answered, and the lender must be satisfied before the process can move forward.
However, that is usually the extent of it. In most cases, if the buyer and seller are both satisfied, the lender will be, too.
Roughly two weeks before closing, you should see draft closing documents come through. The lender will send the buyer their draft loan documents based on the term they agreed to under the loan. Then the deed and title and title affidavits and other documents will start circulating.
If anyone sees an objection or issue on those documents, there is time to have revisions completed. Then, once everything has been handled to everyone’s satisfaction, the title escrow company will coordinate with the buyer, seller, and lender to have the documents signed. That usually occurs a couple of days before closing.
Depending on the situation, signing may occur at the title company’s location. In other cases, it may be a branch location, or it could even involve mobile notary services if you’re dealing with remote parties or a deal on a national level.
Once all the documents are signed, dated, and notarized, and in the hands of the title company, they’re merged and collated. About a day before closing, a full set of signed closing documents will be shared with all invested parties. The lender will receive loan documents, and the buyer and seller will receive conveyance documents.
At this point, the original documents and the money should be in escrow. The title company will ask for permission to close the transaction and, once all parties approve, the deal closes. Within a couple of weeks of that date, the company will issue a title policy and send out the recorded documents.
In Conclusion
There you have the closing process in a nutshell. We’ve outlined the major points along the way for all invested parties – the buyer, seller, and lender. However, the escrow and title company is also an important component in the process and will play a role in your overall experience.
With this information, you should be better prepared to close deals fast but correctly, while minimizing surprises. However, some challenges can crop up, particularly on closing day. Make sure that you’re prepared for those.
With a little luck, some hard work, and a firm understanding of the real estate transaction process, there’s no reason you shouldn’t be able to hit a home run in real estate deals.