Chapter 46
Contract to Closing
INTRODUCTION
The closing (also called the settlement) of a real estate transaction is the final step in the real estate purchase process. It is the time when the seller transfers title to the buyer and the buyer pays the seller the agreed upon purchase price. Along with the transfer of title, there are other procedures that must occur and many documents that must be signed. The licensee’s thorough understanding of the procedures and the documents necessary to complete a closing, and his or her assistance to both the buyer and seller in the process leading up to the closing, can make it a smoother experience for all.
Between contract and closing, there are several duties for the licensee to fulfill and other opportunities to assist the seller and buyer. By custom and to the extent required by law, the licensee continues working with or for the seller and the buyer through the day of closing. Whether the sale is of a property listed by one licensee and sold by another licensee of the same firm, or a property listed with one firm and sold by another, the licensees involved must coordinate their efforts. While it is possible for a contract to close without the licensees’ diligent assistance, knowledge of the information and attention to the responsibilities and opportunities outlined in this chapter will help in avoiding delays, misunderstandings, and a feeling on the part of the seller and buyer that the licensees did not provide an appropriate level of service.
AFTER THE CONTRACT IS SIGNED
The licensee’s involvement in a sales transaction falls into three phases: listing and marketing the property, assisting in the contract negotiations, and helping the parties complete the sale. Immediately upon the acceptance of the sales contract by all parties, the third phase begins.
| (a) | DELIVERING COPIES OF THE CONTRACT TO ALL PARTIES – When the parties have accepted and signed an offer to purchase, the licensee’s first obligation is to deliver a complete signed copy of the purchase agreement to the buyer, the seller, and the broker(s). Neglecting this step is a violation of the license law. | ||
| (b) | COMPLIANCE WITH CONTINGENCIES – Contingencies in a sales contract mean that the parties do not have a binding contract until and unless the contingencies are met. For example, a sales contract may be contingent upon the buyer’s ability to obtain financing to purchase the property, to sell other property, or to obtain a favorable appraisal. Contingencies tie up a property since it cannot be sold to anyone else while the contract is pending (although the seller and a new buyer can sign a backup contract contingent upon the first contract not closing). Therefore, contingencies require the immediate and thorough attention of the licensee in attempting to secure the appropriate action of the seller or buyer (or both) within the specified amount of time. | ||
| (1) | FINANCING THE PURCHASE – Since the majority of sales require that the buyer obtain a new loan in order to purchase, the financing contingency is probably the most common. Since this contingency usually obligates the buyer to apply for the loan within a specified length of time or at least promptly, the licensee can serve the interests of all the parties by urging the buyer to apply immediately and by offering information and assistance as appropriate within the constraints of BRRETA.
The contract may be contingent upon the buyer’s ability to assume the existing loan rather than on his or her ability to obtain a new loan. Since most lenders now require that the buyer make application to assume a loan, the appropriate time for the licensee to determine the lender’s requirements for such application is immediately after getting the listing. By having this information in advance, the licensee can inform any prospective buyer of the required application at the time an offer is made. |
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| (2) | INSPECTION OF THE PROPERTY – The contract may be contingent upon a timely inspection of the property by a qualified home or building inspector. The licensee can assist the buyer in satisfying this contingency by supplying a list of several qualified inspectors and by accompanying the buyer(s) to the property during the inspection. | ||
| (3) | APPRAISALS – Lenders usually require appraisals as a condition of loan approval. Moreover, contracts with no financing contingency or owner financing (purchase money mortgage) contracts may also contain an appraisal contingency since the buyer may want an independent opinion that he or she is not paying more than market value for the property. The licensee can facilitate the process of fulfilling the appraisal contingency by cooperating with the appraiser. That cooperation may be nothing more than unlocking the house for the appraiser, or it could involve the licensee’s supplying information on comparable sales to the appraiser. | ||
| (4) | SALE OF THE BUYER’S PROPERTY – If the seller has accepted a contract from a buyer that is contingent upon the sale of the buyer’s property, it is the licensee’s responsibility to do all he or she can to assist the buyer in selling the property within the time specified in the contract. This assistance may involve listing the buyer’s property for sale if it is not already listed or referring the buyer to another broker if the licensee does not work in the area of buyer’s existing property. However, if the licensee lists the buyer’s home, he or she must advise the seller in writing since such action may create conflicts of interest or even a dual agency. | ||
WORKING WITH THE BUYER WHILE REPRESENTING THE SELLER
It is never wrong for a listing agent to develop a good rapport with the buyer. It establishes a relationship of trust and demonstrates a high level of professional competency. However, while working with the buyer, the licensee MUST remember that he or she is legally responsible (through the broker) as an agent for the seller. BRRETA allows a licensee who represents one party to perform ministerial acts for the other party without becoming the other party’s agent. Yet, if the licensee chooses a lender or an inspector for the buyer or recommends only one lender, inspector, or attorney, he or she may have exceeded the scope of “ministerial acts.” Such action can create a conflict of interest with the seller and may result in a violation of the license law if the licensee acts as an agent for both parties without their knowledge and consent.
In helping the buyer obtain financing, Federal law under the Real Estate Settlement Procedures Act (RESPA) limits the broker’s role to making recommendations to the buyer. The following paragraph addressed to buyers from the booklet “Settlement Costs: A HUD Guide” makes this point clearly:
| A broker may recommend that you deal with a particular lender, title company, attorney, or other provider of settlement services. Ask brokers why they recommend a particular company or firm in preference to others. Advise them that while you welcome their suggestions (and, indeed, they probably have good contacts), you reserve the right to pick your own providers of services. |
Thus, the buyer has the ultimate choice of what mortgage company to use. The licensee may assist him or her by supplying a list of several recommended mortgage companies. At the same time, the licensee should remind the buyer that the lender he or she selects should not require terms or fees that violate the terms of the contract. Three possible areas of concern are the following:
| (a) | discount points and closing costs when the contract requires the seller to pay some or all of the points and/or closing costs; | |
| (b) | contractual obligations a seller (usually a builder or developer) may have with a construction lender regarding permanent financing of the property; and | |
| (c) | a prepayment penalty on the seller’s existing loan which the lender may waive if the new loan is placed with the same lender. |
REPRESENTING THE BUYER WHILE WORKING WITH THE SELLER
Under buyer’s agency, a licensee may be representing the buyer, but must work closely with the seller to close the transaction. The seller may be separately represented by a listing agent or the seller may be unrepresented in a FSBO (for sale by owner) sale. BRRETA requires certain duties from the licensee toward the party that the licensee does not represent. If the licensee represents the buyer, the licensee must treat the seller fairly and may not knowingly give him or her false information. Also, the licensee must disclose to the seller all material adverse facts known to the licensee. See Chapter 8 the hyperlink for more information on BRRETA.
If the seller is unrepresented in a FSBO sale, the licensee must be careful neither to imply to the seller that he or she is the seller’s agent, nor act publically as if he or she represents the seller. An unwanted “accidental agency” could result.
THE LISTING AGENT’S DUTIES TO THE SELLER PRIOR TO CLOSING
Under the listing agreement, a licensee does not complete his or her obligations to the seller when the seller accepts an offer to purchase. The responsibility of keeping the seller informed and assisting the seller to fulfill the terms of the contract continues until the transaction is closed.
| (a) | KEEPING THE SELLER INFORMED – Primarily of concern to the seller is information about the progress of the buyer’s loan application and approval. Specifically, the seller will need information about four major issues of the loan process. | ||
| (1) | Has the buyer made a loan application according to the terms of the contract? The contract may require the buyer to apply with a certain lender or to apply for the loan within a certain amount of time, or both. | ||
| (2) | Is the buyer making good faith efforts to comply with the terms of the contract? If the lender is unable to obtain the necessary information from the buyer to process the loan, the buyer may not be applying for the loan in good faith. | ||
| (3) | Has the property been appraised for the contract price, and is the lender requiring any repairs to the property? If the property does not appraise for the contract price or if there are unexpected repairs, then the contract negotiations may have to be reopened. | ||
| (4) | Has the lender approved the buyer for the loan? If the lender did not approve the buyer, the reasons for disapproval may be helpful in the renegotiation of the contract. For example, the lender may approve the buyer for an 80% loan but not for 90%. If permitted by the lender, the seller may decide to accept a purchase money mortgage from the buyer for the extra 10% down payment. | ||
| (b) | ASSISTING THE SELLER IN COMPLYING WITH THE CONTRACT – Licensees also have responsibilities under the contract to assist the seller in complying with all terms of the contract and in dealing with additional issues which arise prior to closing. | ||
| (1) | REPAIRS – The licensee may need to assist the seller in locating a carpenter, brick mason, plumber, painter, or any number of other contractors and specialists to make the repairs required by the contract or by the lender. While the licensee can offer assistance, it is most prudent for the seller rather than the broker to order any work done so that the broker does not become obligated to the contractor for payment, nor liable to the seller for defects in the contractor’s workmanship. | ||
| (2) | WOOD INFESTATION INSPECTION – Contracts vary widely in their requirements of certification against damage and infestation from termites and other wood-destroying organisms. Either the buyer, a governmental agency (FHA or VA), or the lender may impose these requirements, and the requirements may include an inspection, a clearance letter, and/or a guarantee. Whatever the requirements are, the licensee should help the seller in understanding and meeting the certification requirements of the contract. However, it is the party who agreed in the contract to provide and pay for the certification who should order it and who should see that the appropriate party receives it. | ||
| (3) | HOME WARRANTY INSURANCE – If as part of the contract, the seller has agreed to furnish the buyer with home warranty insurance, the licensee has the obligation of seeing that the seller complies with all necessary steps before closing. | ||
WORKING WITH THE BUYER PRIOR TO CLOSING
| (a) | FOLLOWING UP ON LOAN APPLICATION – Successful closings require close cooperation between the lending institution and the licensee. After a buyer takes a signed contract to a lender and makes application for a loan, the lender takes over the processing of the loan and will usually keep the buyer informed of the loan progress, and hopefully also make an effort to communicate regularly with the licensee. However, it is always a good business practice to check with the lender at least weekly to keep up with the progress of the loan application. If a problem arises, the lender may often have a good suggestion for dealing with it and may request your help in approaching either the seller or buyer. If the lender is having difficulty getting the buyer’s verification of employment or verification of bank deposits, a call from the licensee to the buyer may help solve the problem. Any time a buyer, an employer, or a bank does not supply requested information promptly, the licensee should limit his or her involvement to calling and reminding the proper party to supply the information and not become involved in obtaining the information for the lender.
Any time a problem arises, the licensee should assist the buyer in dealing with it. If the property does not appraise for the contract price, the licensee may suggest alternatives for the buyer. If comparable sales in the area seem to indicate a higher value, the buyer may wish to ask the lender to reconsider the appraisal of the property. If the buyer decides that despite the appraiser’s opinion, the property is worth the contract price, he or she can pay the amount over the appraised value in cash. Otherwise, the licensee can assist the parties if they wish to renegotiate the contract. |
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| (b) | FOLLOWING UP ON SPECIAL STIPULATIONS – The licensee should remind the buyer of any other contingencies or stipulations that the buyer is responsible for and should monitor the buyer’s progress in complying. Besides the loan application, a matter usually demanding immediate attention after the contract signing is the inspection of the property by the buyer and the buyer’s inspector. The licensee needs to work closely with the buyer in seeing that the inspection takes place within the time required by the contract. The licensee will probably need to contact the seller or the seller’s tenants to set up the inspection appointment, and should accompany the buyer and the inspector to the property as well. | |
| (c) | HELPING THE BUYER PREPARE FOR CLOSING – There are at least two things the closing attorney will expect the buyer to bring to the closing—funds to meet the buyer’s cash obligation and a hazard insurance policy if the purchase involves financing. The licensee should make sure that before the time of closing, the buyer has obtained sufficient funds in the form required by the closing attorney. Depending on the amount of funds needed to close, Georgia law may require either certified funds or a wire transfer, and the closing attorney may require the licensee to bring the earnest money to closing in that form also.
The licensee can also assist the buyer in understanding his or her responsibilities for property insurance. When a loan is involved in the purchase, the buyer must arrange for a homeowner’s hazard insurance policy which includes the lender as a loss payee (the party who receives the insurance proceeds for an insured loss). Some insurance companies require several days to deliver an original policy and may be able to issue only a binder unless someone gives sufficient notice of closing. Sometimes closing attorneys will accept binders, but often they will not, and a delay of the closing results. Therefore, the buyer should be aware of the need to arrange for the policy in time to have an original to bring to closing. |
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| (d) | INFORMING THE BUYER OF ANY CHANGES IN THE PROPERTY – The licensee also has the responsibility of informing the buyer of any substantial changes in the property. For example, if the licensee should learn of a previously unknown defect in the property, such as a leaky basement, the licensee must make the defect known to the buyer even though it may void the contract. Also, if the property should suffer damage beyond normal wear and tear prior to closing, the licensee must make that known to the buyer as well. |
WORKING WITH THE CLOSING ATTORNEY
By law, attorneys must handle real estate closings in Georgia. Depending upon the circumstances and the sales contract, the closing attorney may represent the lender, the buyer, or the seller, and there may be other attorneys present at the closing representing the other parties. Despite the presence of one or more attorneys, there are several unique ways in which the licensee will need to provide assistance.
| (a) | PROVIDING INFORMATION – The attorney handling the closing will need a true copy of the contract. The lender will usually supply a copy except in cash sales and owner-financed sales when there is no lender. If a lending institution is not involved, the buyer should supply a copy to the closing attorney, but it is a better practice for the licensee to do so. The attorney will need the contract to do the title search, to prepare the closing documents, and to calculate the exact amount of money due to the seller and from the buyer. The closing attorney will also need the lender’s copy of the buyer’s hazard insurance policy and, if the buyer is to pay it at closing, the cost of the policy. The same information should be furnished for a termite clearance letter if it is required. | |
| (b) | COORDINATING CLOSING TIME AND DATE – When the lender approves the buyer’s new loan or assumption of a loan, the parties will set a closing time, date, and place according to the terms of the contract and the attorney’s schedule and in cooperation with the buyer, seller, and any cooperating agent. The licensee may need to coordinate this effort and see that all parties are aware of the details. | |
| (c) | FURTHER PREPARING THE BUYER AND SELLER FOR CLOSING – In addition to informing both the buyer and seller prior to closing as to what they will be required to bring to closing, the licensee should also attempt to prepare them for what to expect, especially if they are inexperienced in buying and selling real property. The licensee may want to show each party blank copies of the types of forms they will see at closing. This practice will make the parties feel more comfortable at closing and may alert them to questions they will want to ask the closing attorney. Surprises are the source of most problems that arise at closing. To eliminate possible surprises, the licensee should discuss with both buyer and seller what papers they will be required to sign; inform the seller as to the estimated cash due him or her at closing; and help the buyer to find out the amount and type of funds he or she will need to close the transaction. |
NOTE: The Real Estate Settlement Procedures Act (RESPA) requires the closing attorney to provide the borrower, upon request, one business day before closing, a preliminary draft of the HUD-1 Settlement Statement which itemizes the fees charged to the buyer. In practice, the closing attorney may not have all costs available the day before closing, but he or she must show the buyer, upon request, the information that is available at that time. This estimate allows the licensee to verify his or her estimate of the buyer’s funds needed to close even though the exact figures will not be available until closer to the time set for closing. This requirement applies only to residential mortgage loans (for the purchase of one to four family dwellings).