What is a Real Estate Closing

 

A closing on real estate is the process by which a Seller’s title to real property and any residences or buildings constructed on the property are conveyed to a Buyer. Remarkably, the sale and purchase of real property, the refinancing of mortgages, and the establishment of credit lines secured by real property have become almost common place to the average consumer and homeowner over the last several years. Notwithstanding the mortgage crisis that has affected almost everyone, the purchase, sale and refinancing of real property is still generally portrayed as an easy and straightforward transaction which can be handled by the average consumer without independent professional assistance. This of course depends on the knowledge and sophistication of the parties involved and their understanding the pitfalls of a real property transaction.

The following is a short, and by no means all inclusive, outline and summary of a real property transaction which delineates some of the many areas you should pay special attention to while you are selling or purchasing real property. ***

 

  1. Contract for Purchase and Sale. In Florida the Florida Association of Realtors and the Florida Bar have worked together and developed a uniform contract to be used in the sale of both residential and vacant property regardless of whether the property is purchased with warranties, or in an “as is” condition. Most of the Realtors in Florida use the standard contract, but there are a number of Realtors who have developed a modified version which alters the time periods and fees involved so it is important to be aware of whether you are executing a standard contract or a modified FLABAR/REALTOR Contract. The standard contract contains a number of issues which a Seller or Buyer must be aware of both prior to and during the life of the contract. A few, but not all, of the concerns raised in a standard FLABAR/REALTOR contract are:

     

    1. Time Periods. You will see a phrase that says “time is of the essence” in the standard contract, and this means precisely what it says. If there is a time period for acceptance, inspections, financing, or any type of notice, etc., the time periods are strictly construed, and if you miss the time periods you can lose the right to obtain financing as a condition of closing, object to repairs, object to title defects, or a host of other problems which may arise, including the loss of your deposit.

       

    2. Personalty. Other than the land (real property) and the buildings on the land, what is being bought and sold. What about the drapes, the valences, specialty lighting, the dining room chandeliers or hanging lights? Are the appliances, ceiling fans, and other equipment included? What about the patio or pool furniture or equipment (including the Kreepy Krauly, Navigator or other pool cleaner)? Are racks and shelves in the garage and storage areas going to be removed? You must assume, that if it is not written in the contract that an item is being sold, it will be removed by the Seller.

       

    3. Payment. The Purchase Price for the Real Property to be sold is established by the Seller after negotiation with the Buyer. How this Purchase Price is paid is significant for both parties. The Purchase Price is usually made up of the following:

       

      1. Deposit. This is not merely a sum to affirm the Buyers offer to purchase, but also is the extent of damages the Seller can expect if the Buyer defaults. The Standard Contract calls for the Deposit to be used as “liquidated damages” and thus, the Seller cannot sue for additional damages that may have resulted from the Buyer not closing, but must accept the Deposit or “liquidated damages” as full payment for any damage incurred . Therefore, if the Seller sets the deposit too low, and the Buyer develops a case of “Buyers Remorse”, the Buyer may default realizing the penalty (the forfeiture of the deposit) is a reasonable sacrifice to terminate the contract requirements. The Seller may still attempt to sue the Buyer for “specific performance”, and require the Buyer to buy the property, but this involves long and costly litigation, and assumes the Buyer continues to have the ability to purchase the property. Additionally, the Seller may have taken the property off the market awaiting the sale, expended funds to begin the closing process, and then realizes that after a Buyer’s default the Standard Contract only allows the Seller one half (½) of the deposit, as the Standard Contract directs that the Sellers’ Broker receive one half (½) of the deposit for finding the Buyer (Yes, the one that has now defaulted). Conversely, if the Seller sets the deposit too high, the Buyer may balk at execution of the contract as the Buyer may have intended to finance the purchase and part of the Deposit would have been included in the financing, or simply, the Buyer has insufficient funds available outside of financing.

         

      2. Financing. The Standard Contract allows the Buyer to have a financing contingency. In essence, the Buyer does not have to close and will obtain a return of their deposit if they attempt to obtain financing, and are unsuccessful. Perfectly reasonable, assuming the Buyer is attempting to obtain financing at current market standards as to rates, amounts, percentages (i.e. 80% loan to value), terms, and conditions. Also, how long does the Buyer have to make their application and thereafter learn if they are approved. These are all terms that must be carefully considered by the Seller who desires not to waste time with an unrealistic Buyer, and a Buyer who has just put a Deposit at risk and needs to be confident they can close.

         

    4. Inspection and Warranties. The Standard Contract sets forth a time period for the inspections of the property that will be sold. The Buyer has the burden of insuring that the inspections are ordered and completed, and that the Seller is given notice of all defects covered in the Warranty set forth in the Standard Contract. If the Buyer fails to have an inspection, or fails to inform the Seller as required, the Seller’s obligation to make repairs is waived. There are some defects that cannot be waived, but the majority of issues usually involve repairs and inspections that can be waived, and therefore the timeliness of the Buyers actions are important (See “time is of the essence” above).

       

    5. Repair Costs. The Standard Contract sets forth limits for repair costs which are typically calculated as a percentage of the total purchase price. As a Seller, you are responsible for this percentage if there are repairs that are necessary after an inspection is conducted by the Buyer. As the Buyer, this is the total amount the Seller must spend for repairs. These amounts must be taken into consideration in determining how much the Buyer will offer to purchase the property, and how much the Seller is willing to accept from the Buyer. As everything else in the Contract, these percentages are open to negotiation.

       

    6. Title Evidence. A typical real property closing requires that a title insurance policy be provided to the Buyer. This policy insures that the Seller has good title, that any mortgages or liens are satisfied prior to transferring the title to the Buyer and that while there might be the typical covenants and easements on the property (i.e. utility, electric, railway, road) such encumbrances do not affect the Buyers ability to use the property for its intended purpose. Who pays for the title insurance is a matter of custom from County to County in the State of Florida, and is an issue which is also negotiable between the Seller and Buyer as a cost of sale. The standard Contract also sets forth time periods for the cure of any defects in title by the Seller and specific time periods for the Buyer to object to title if the Buyer believes that title is unreasonably encumbered. Naturally, these cure periods for title will extend the closing date to which the parties agree.

       

    7. Costs. There are a myriad of costs which arise during the conducting of a closing. A short list of which include (i) title search fees, (ii) city lien letter fee, (iii) estoppel fee, (iv) documentary stamps, (v) tangible tax, (vi) recording fees, (vii) overnight delivery fee, (viii) title insurance fee, (ix) real estate taxes, (x) wire fee, and a (xi) closing fee. The Contract sets forth the broker fees, which are again usually indicated by a percentage of the total sale price which will be paid to the brokers involved. Additionally, the Contract will set forth whether the Seller or the Buyer pays these fees. This is negotiable by the parties, but usually subject to the listing agreement the Seller executed with the listing broker. It will also be the listing agreement which will indicate to the parties whether or not the real estate broker is due a transaction/administrative fee for the paperwork involved in listing the property. This administrative fee is over and above the percentage of the sale which the brokers take as a fee.

       

  2. “AS IS” Contracts. A specific version of the standard real estate contract is an “As Is” Contract. Typically, in this contract the Seller makes no warranties or guarantees as to the condition of the property (other than structural or other known defects of which the Seller is aware) and as such the Buyer takes the property as it exists. The protection for the Buyer is provided by a contingency in the contract for an inspection. The Buyer has the opportunity to inspect the property, hopefully using professional inspectors, and thereafter making a determination that after considering the defects which may exist, the price offered by the Buyer still makes the transaction viable. If the Buyer determines that the defects in the home would be to expensive to repair considering the purchase price, the Buyer may terminate the contract and obtain a return of their deposit. The Buyer can also accept the contract and the property with the defects discovered. The “time is of the essence” standard for real estate contracts is particularly important at this point, because the inspection period is finite, and typically written notice must be provided to the Seller indicating that the Buyer no longer wishes to purchase the property and desires to terminate the contract and obtain a return of their deposit.

     

  3. Short Sale Contracts. Due to the current financial circumstances, many properties are owned where the fair market value of the property is actually less than the mortgages which are outstanding. Offers are made to the mortgage holder for a payoff of the outstanding mortgages at a value less than the full mortgage amount. This process is called a “short sale”, and involves the Buyer, Seller and mortgage company. Typically, the Buyer using a “short sale contract”, makes an offer understanding that the acceptance of the Seller is contingent upon the mortgage companies approval. The negotiation with the mortgage company is usually handled by the Seller as due to financial disclosure laws, the mortgage companies can not provide financial information of the Seller to the Buyer. These transactions take time, and unfortunately the Buyer may not know for weeks if the mortgage company will accept the offer.

     

  4. Standards for Real Estate Transactions. The current real estate contracts have at least two (2) pages of single spaced type written terms which are an integral part of the contract between the Seller and the Buyer. These “Standard Terms” are vital to the contract and detail provisions which affect the Buyers and Sellers duties and obligations. A thorough review and understanding of these “Standard Terms” is necessary before any real estate contract should be executed. While these pages do not require the signatures of the Seller or the Buyer, they are essential to the contract, and all of these “Standards” are negotiable. THEY SHOULD NOT BE TREATED AS BOILER PLATE AND IGNORED.

     

 

*** WE STRONGLY URGE YOU TO OBTAIN COUNSEL IN ANY REAL PROPERTY TRANSACTION. THIS SUMMARY IS INTENDED TO PROVIDE BASIC GENERAL INFORMATION CONCERNING A REAL PROPERTY CLOSING, AND IS NOT TO BE ACCEPTED NOR IS IT OFFERED AS LEGAL ADVICE. LEGAL ADVICE FROM DEAN L. WILLBUR, JR., P.A. IS ONLY PROVIDED ON AN INDIVIDUAL BASIS CONCERNING A SPECIFIC SET OF ACTUAL FACTS.
* The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you free written information about our qualifications and experience.