Common Steps to Closing a Real Estate Transaction
KEY TAKEAWAYS
Real estate deals generally take weeks to complete and have many moving parts.
The complexity of these deals is a good reason to hire an attorney and a realtor to guide you through the process.
Don't be tempted to skip steps: It’s risky and could cost you more than any potential savings in the end.
Set up an Escrow Account
A home sale can involve multiple stages over many weeks. The best way to reduce risk for the seller and buyer is to have a neutral third party hold all the money and documents related to the transaction until the details have been settled. So, an escrow account is opened and held by a third party on behalf of the buyer and seller. Once the formalities have been completed, money and documents are moved from the custody of the escrow account to the seller and buyer, guaranteeing a secure transaction.
Conduct Title Search and Obtain Title Insurance
A title search is an examination of public records to determine and confirm a property’s legal ownership and find out which claims, if any, are on the property. If there are any claims, they may need to be resolved before the buyer receives the property, so no one else can try to claim the property later.
Title insurance protects the holder from any financial loss that occurs from defects in a title to a property. It protects both owners and lenders against loss or damage occurring from liens, encumbrances, or defects in the title or actual ownership of a property.
Hire a Realtor
Realtors play an integral role in the process of protecting the best interests of both buyers and sellers. They are legally obligated to put their clients' interests first. A realtor’s experience, attention to detail and negotiating skills can be invaluable and typically provide financial return and protection that stretches far beyond their commission.
Hire an Attorney
While this step is technically optional, getting a professional legal opinion on your closing documents is highly recommended. The complex language in documents can be difficult to understand even for the savviest individuals. And in some states, an attorney’s involvement may be required by law to handle the closing.
Negotiate Procedural Costs
Virtually every service throughout the closing process can cost money – from opening an escrow account to hiring a real estate attorney. Some services take advantage of consumers’ ignorance by charging high fees, so it’s always a good idea to review these fees in detail and ask detailed questions to gain an understanding of what’s truly needed. Keep an eye out for administrative fees, application review fees, appraisal review fees, ancillary fees, processing fees, and settlement fees. Even fees for legitimate closing services can sometimes be inflated.
Complete the Home Inspection
An examination of the condition of a real estate property is a necessary step to uncover any problems with the property and surroundings. If a serious problem with the home is found during the inspection, the buyer will have an opportunity to back out of the deal, ask the seller to fix it, or have the seller pay to have it fixed (as long as the purchase offer included a home-inspection contingency).
Complete the Pest Inspection
A pest inspection is different from a home inspection. A specialist will make sure that the home does not have any wood-destroying insects, such as termites or carpenter ants. Pests can be devastating for properties made primarily of wooden material, and many mortgage companies mandate that even minor pest issues be fixed before a deal is closed. Pest inspections are legally required in some states and optional in others.
Renegotiate the Offer
Even when your purchase offer has already been accepted, if inspections reveal any problems, the buyer may want to renegotiate the home’s purchase price to reflect the cost of any necessary repairs. Or, purchase price may remain the same, but the buyer may look to the seller to pay for repairs. Even if the buyer is purchasing a property “as is,” there is no harm in requesting new terms if a major issue is uncovered during inspection.
Lock in Interest Rate
Interest rates can fluctuate greatly and are always subject to change based on multiple factors, such as geographic region, property type, loan type, and the applicant’s credit score. If possible, locking in the interest rate for the loan in advance is preferred.
Remove Contingencies
The real estate offer should be contingent upon a few things:
Obtaining financing at an interest rate not to exceed what’s affordable
The home inspection not revealing any major problems with the home or property
The seller fully disclosing any known problems with the home or property
The pest inspection not revealing any major infestations or damage to the home
The seller completing any agreed-upon repairs
Such contingencies must be removed in writing by certain dates stated in the purchase offer, a process known as active approval. However, in some purchase agreements contingencies are subject to passive approval (also known as constructive approval), meaning that if you don’t protest them by their specified deadlines, they are considered approved. It is crucial for buyers to understand their approval process and take the necessary actions by the required dates.
Timed Funding Requirements
The purchaser most likely deposited earnest money when the purchase agreement was signed, which is a deposit made to a seller indicating the buyer’s good faith, seriousness, and genuine interest in the property transaction. If the buyer backs out, the earnest money goes to the seller as compensation. If the seller backs out, the money is returned to the buyer.
To complete purchase, the purchase will have to deposit additional funds into escrow. The original earnest money is generally applied to the down payment, and it is important to arrange for the various additional payments, required at different times, before the deal is closed. Failure to do so can lead to the deal getting canceled, earnest money going to the seller, and the purchaser still being charged for the various services used before the deal fell apart.
Final Walkthrough
One of the last steps before a purchaser signs closing papers should be to walk through the property one last time, to make sure that no damage has occurred since the last home inspection, required fixes have been executed by the seller, no new problems are found, and nothing has been removed that is included in the purchase agreement.
Understand the Papers
Paperwork is critical to closing a property deal. The purchaser should absolutely read through every piece of paperwork. If something isn’t understood, a real estate attorney or agent will help to make sense of any complex language.
A couple of items that purchasers should check: is the interest rate correct? Are all other agreed terms, such as no prepayment penalty, clearly mentioned? Are closing costs reasonably in line with the good faith estimate given at the beginning of the process?
The Bottom Line
It may seem like the closing process is a lot of work…but it’s worth the time and effort. Be wary of any pressure to close the deal fast, what’s most important is to get things right and prevent any long-term issues.
Still have questions or are you ready to get started? Call us at 406-222-3037 or email our team at info@gtiliv.net
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