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Anatomy of a Real Estate Closing

What occurs during a real estate closing and why should i consult with an attorney?

A closing begins with the contract. A contract consists of an offer and acceptance regarding the material terms of the transaction. Material terms include but are not limited to the price, the closing date, the method and time of payment, and the deposit. For a contract to be valid, there must be a meeting of the minds between the parties on the material terms.

I recommend that both buyers and sellers have an attorney review all contracts for purchase and sale. The most effective way to do this is to make the contract contingent on the attorney’s review within 3 business days. Parties should establish a prior relationship with an attorney to ensure that the attorney will be available to review their contracts within that time frame.

Many residential sellers and buyers use form contracts. It is critical that you understand precisely how to fill in the blanks in these form contracts. Much litigation has been sparked because these forms were not properly filled out. Realtors often fill out these form contracts on behalf of buyers or sellers. Remember, realtors are not attorneys. They may have experience in filling out form contracts, but they are not aware of the legal implications of how the forms are completed. Especially if you are a buyer, you should remember that realtors do not represent you and cannot give you legal advice.

One of the critical terms of an offer is the amount of the deposit. The amount of the deposit should be reasonably related to any anticipated damages the seller might suffer should the buyer breach the contract. If the deposit is too high, it can be challenged as a penalty. Therefore, both buyer and seller should carefully consider what a reasonable deposit should be.

Another provision in the contract relates to the title commitment and title insurance. If you are a buyer, you want to make sure that you obtain a clean title insurance policy. Title is examined before closing and the closing agent issues a commitment to issue a policy after the closing documents are executed. The buyer should have his attorney carefully review this commitment.

Generally, in Florida, the seller pays for the title insurance commitment and policy. The minimum cost for a title insurance policy is governed by law and is called the promulgated rate. Closing agents may charge more, but cannot charge less than the promulgated rate. Often, the buyer or the buyer’s lender chooses the closing agent who issues the policy. Therefore, the seller should include a provision in the contract that limits the cost of the policy to the promulgated rate.

Sellers also should be careful to thoroughly disclose all known defects regarding the property. Prior termite damage treatment, a leaky roof, flooding, sinkhole issues, and water damage are all examples of defects that should be disclosed. In addition, it is important that all information provided by the seller to the buyer be accurate. The correct square footage, and the type of home construction i.e. wood versus concrete block frame, are types of issues that have been litigated because of inaccurate information.

Buyers and sellers should include all contingencies in the contract. Financing contingencies should include specific financing terms. Much litigation has arisen because of unclear financing contingency language. There should be a contingency in all short sale contracts that the short sale is contingent upon approval by the lender. Also, a buyer may want to include due diligence contingencies to insure that the property does not contain any zoning or other restrictions, which would prohibit the buyer’s use of the property as planned.

Contracts shall provide for the following types of inspections and examinations: termite, general home inspection, appraisal, survey, due diligence regarding use of the property, and title review before closing. Buyers may want to make the contract conditioned or contingent upon receiving an appraisal in an amount equal to or greater than the purchase price. There are numerous other contingencies that might be important to a buyer or seller and should be discussed with your attorney before signing the contract.

Once all the contingencies of the contractor met, and the parties have complied with all terms of the contract, then closing occurs. Most of the actual work of a closing should be done before the closing. For example all documents should be reviewed and explained to the client prior to the closing so that the closing runs smoothly.

Some closings are actually two closings in one. If financing is involved, then there is a loan closing. This is a closing where the financial documents are signed such as the note, the mortgage and other documents relating to the loan. The buyer needs to be sure that these documents accurately reflect the terms of the loan.

The second closing is the purchase and sale closing where the property is delivered to the purchaser. The lender comes to the purchase and sale closing with the borrowed funds, which are subsequently delivered to the seller, (often along with funds brought to closing by the buyer) in exchange for title to the property. Cash transactions do not require a loan closing, so the buyer brings the cash to closing. An attorney should review all closing documents and explain them to the client. All parties should understand everything they sign before signing.

I recommend that all buyers be represented by an attorney at closing. I also recommend that all buyers and sellers be represented by attorneys at closing if it is a short sale situation or if the seller has given the Bank a deed in lieu of foreclosure. A seller should have counsel at closing if he is taking back a purchase money note and mortgage or otherwise retains some interest in the property. As a seller, if is less important to be represented by an attorney if you have no continued interest in the property, because your primary concern is simply to receive your money. However, even sellers in that situation should consider the risks of nondisclosure and other potential pitfalls. It is always better to spend a few dollars protecting yourself by having an attorney on your side at closing than having to defend a potentially much more expensive lawsuit down the road.