Real Estate Law

An Introduction to the Closing

Real Estate Law

An Introduction to the Closing

An Introduction to the ClosingAn Introduction to the Closing

Subjects Covered:Subjects Covered:

PreclosingPreclosing

Exchange of Documents at ClosingExchange of Documents at Closing

Closing CostsClosing Costs

The HUD Uniform Settlement The HUD Uniform Settlement StatementStatement

Tax-Related ItemsTax-Related Items

PreclosingPreclosing

Closing Attorney:Closing Attorney: Orders and reviews examination of title;Orders and reviews examination of title; Orders and reviews plot plan;Orders and reviews plot plan; Orders and reviews Municipal Lien Certificate Orders and reviews Municipal Lien Certificate

(obtained from the Municipal Collector of Taxes) per (obtained from the Municipal Collector of Taxes) per M.G.L. c. 60 M.G.L. c. 60 §23;§23;

Sets up escrows and any special arrangements to Sets up escrows and any special arrangements to correct title;correct title;

Prepares Attorney’s Certification Prepares Attorney’s Certification in compliance with in compliance with M.G.L. c. 93, M.G.L. c. 93, §70, and title insurance policies;§70, and title insurance policies;

Requests a Mortgage Estoppel Letter from the Requests a Mortgage Estoppel Letter from the Seller’s Mortgagee indicating payoff value of Seller’s Mortgagee indicating payoff value of Seller’s mortgage;Seller’s mortgage;

Receives closing package and funding from Buyer’s Receives closing package and funding from Buyer’s Mortgagee.Mortgagee.

The Real Estate ClosingThe Real Estate Closing

Parties gather to execute promises Parties gather to execute promises made in Purchase Agreement.made in Purchase Agreement.

In most instances, two closings occur at In most instances, two closings occur at once:once:

1.1. Real estate contract is closed -- closing of Real estate contract is closed -- closing of sale of propertysale of property

ANDAND

2.2. Mortgage transaction is closed -- disbursal Mortgage transaction is closed -- disbursal of mortgage funds by lender.of mortgage funds by lender.

Exchange of Documents at ClosingExchange of Documents at Closing

Order of EventsOrder of Events

1.1. Buyer signs:Buyer signs:

Note and Mortgage (see 10 – Financing);Note and Mortgage (see 10 – Financing);

Duplicate Mortgage Application, TILA Duplicate Mortgage Application, TILA Disclosure, and Good Faith Estimate (see Disclosure, and Good Faith Estimate (see 10 – Financing).10 – Financing).

2.2. Buyer provides Closing Attorney with check for Buyer provides Closing Attorney with check for balance of purchase price, closing costs, balance of purchase price, closing costs, prorations, and escrows for property taxes and prorations, and escrows for property taxes and insurance (net of escrow deposits from Seller insurance (net of escrow deposits from Seller and funding from Mortgagee).and funding from Mortgagee).

Exchange of Documents at Closing Exchange of Documents at Closing (cont’d)(cont’d)

3.3. Seller provides Buyer with:Seller provides Buyer with: Deed; Deed;

Smoke/CO Detector Certificate of Compliance Smoke/CO Detector Certificate of Compliance (obtained from the Municipal Fire Department) (obtained from the Municipal Fire Department) in compliance with M.G.L. c. 148 in compliance with M.G.L. c. 148 §26F;§26F;

(If a Condominium) a 6d Certificate in (If a Condominium) a 6d Certificate in compliance with M.G.L. c. 183A, as well as a compliance with M.G.L. c. 183A, as well as a master insurance policy Certificate of master insurance policy Certificate of Insurance (both obtained from the Insurance (both obtained from the Condominium Association);Condominium Association);

Exchange of Documents at Closing Exchange of Documents at Closing (cont’d)(cont’d)

(If property has a private septic disposal (If property has a private septic disposal system) a Title V Certificate (obtained from the system) a Title V Certificate (obtained from the Municipal Building Department) in compliance Municipal Building Department) in compliance with M.G.L. c. 21A, with M.G.L. c. 21A, §13;§13;

Bill of Sale for personal property being sold; Bill of Sale for personal property being sold;

Receipt for payment of last utility bills and Receipt for payment of last utility bills and taxes;taxes;

Keys to the property.Keys to the property.

4.4. Buyer and Seller sign a Lead Paint Disclosure Buyer and Seller sign a Lead Paint Disclosure form in compliance with M.G.L. c. 111 form in compliance with M.G.L. c. 111 §§ 190-§§ 190-199A199A

Exchange of Documents at Closing Exchange of Documents at Closing (cont’d)(cont’d)

5.5. Closing Attorney pays:Closing Attorney pays:

Balance of Seller’s mortgage and obtains Balance of Seller’s mortgage and obtains Mortgage Discharge for recording;Mortgage Discharge for recording;

Real estate commission based on gross sales Real estate commission based on gross sales price and to reimburse Broker for any expenses price and to reimburse Broker for any expenses made on behalf of the Seller;made on behalf of the Seller;

Balance of purchase price to Seller (net of Balance of purchase price to Seller (net of mortgage balance, commission, and taxes);mortgage balance, commission, and taxes);

Title examination, title insurance, inspection, Title examination, title insurance, inspection, survey and appraisal fees; and survey and appraisal fees; and

Recording fees and excise taxes required by the Recording fees and excise taxes required by the Registry of Deeds, and withholding required by Registry of Deeds, and withholding required by IRS.IRS.

Exchange of Documents at Closing Exchange of Documents at Closing (cont’d)(cont’d)

6.6. Closing Attorney:Closing Attorney:

Discusses with Buyer a Declaration of Discusses with Buyer a Declaration of Homestead (see 1 – Basic Principles);Homestead (see 1 – Basic Principles);

Provides Buyer with copy of Note, Mortgage, Provides Buyer with copy of Note, Mortgage, duplicate Deed, Owner’s Title Insurance duplicate Deed, Owner’s Title Insurance commitment, and other closing documents;commitment, and other closing documents;

Records deed, mortgage, Municipal Lien Records deed, mortgage, Municipal Lien Certificate, and Seller’s Mortgage Discharge Certificate, and Seller’s Mortgage Discharge (when received) with Registry of Deeds.(when received) with Registry of Deeds.

Important Miscellaneous ItemsImportant Miscellaneous Items

1.1. Make sure title reports are brought up Make sure title reports are brought up to date of closing to ensure no last to date of closing to ensure no last minute liens. minute liens.

2.2. Immediately record documents to avoid Immediately record documents to avoid potential priority problems.potential priority problems.

HUD Uniform Settlement StatementHUD Uniform Settlement Statement

The Real Estate Settlement Procedures Act The Real Estate Settlement Procedures Act (RESPA) requires that a (RESPA) requires that a uniform settlement uniform settlement statement statement (HUD-1 or HUD-1A form), or closing (HUD-1 or HUD-1A form), or closing statement, be used in all nonexempt statement, be used in all nonexempt transactions. It is signed by the parties and the transactions. It is signed by the parties and the closing agent.closing agent.

““Nonexempt” transactions are residential sales Nonexempt” transactions are residential sales transaction that include a federally related loan transaction that include a federally related loan in whole or in part to purchase the property.in whole or in part to purchase the property.

Exemptions include: all-cash transactions, Exemptions include: all-cash transactions, transactions involving commercial loans, transactions involving commercial loans, existing or assumed loans, loans on vacant land existing or assumed loans, loans on vacant land or land exceeding 25 acres.or land exceeding 25 acres.

HUD Uniform Settlement Statement (cont’d)HUD Uniform Settlement Statement (cont’d)

HUD-1 sections are:HUD-1 sections are:

A through I – Names and addresses of parties, A through I – Names and addresses of parties, lender, settlement agent (i.e., closing attorney), lender, settlement agent (i.e., closing attorney), loan number and closing date.loan number and closing date.

J – Summary of the borrower’s transaction.J – Summary of the borrower’s transaction.

K – Summary of the Seller’s transaction.K – Summary of the Seller’s transaction.

L – Parties’ closing costs.L – Parties’ closing costs.

The completed form is signed by The completed form is signed by both parties and both parties and the closing attorneythe closing attorney..

Tax Related ItemsTax Related Items

The The Foreign Investment in Real Property Tax Act Foreign Investment in Real Property Tax Act (FIRPTA)(FIRPTA), Section 1445, requires withholding of 10 , Section 1445, requires withholding of 10 per cent of the purchase price to be paid to the per cent of the purchase price to be paid to the IRS on purchases from a foreign person.IRS on purchases from a foreign person.

Exception: Purchases < $300,000Exception: Purchases < $300,000

The Seller is required to sign a The Seller is required to sign a Nonforeign Nonforeign CertificationCertification at closing to avoid the IRS at closing to avoid the IRS withholding.withholding.

Tax Related Items (cont’d)Tax Related Items (cont’d)

The The Tax Reform Act of 1986Tax Reform Act of 1986 requires that all real requires that all real estate transactions be reported to the IRS by the estate transactions be reported to the IRS by the closing attorney.closing attorney.

The transaction is reported on a The transaction is reported on a 1099-S form1099-S form..

To ensure proper reporting under both acts, the To ensure proper reporting under both acts, the closing attorney will require that each party closing attorney will require that each party execute an execute an IRS Form W-9IRS Form W-9 (Request for Taxpayer (Request for Taxpayer ID Number and Certification) at closing.ID Number and Certification) at closing.

QuizQuiz

True/FalseTrue/False

1.1. Most contracts for sale and purchase Most contracts for sale and purchase mandate that the purchaser pay the mandate that the purchaser pay the balance of funds required to close by balance of funds required to close by personal check.personal check.

2.2. Interest on loans is paid in advance.Interest on loans is paid in advance.

3.3. A HUD-1 statement must be used for A HUD-1 statement must be used for commercial transactions.commercial transactions.

4.4. All-cash transactions are exempt from the All-cash transactions are exempt from the use of a HUD-1 closing statement.use of a HUD-1 closing statement.

FF

FF

FF

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Quiz (cont’d)Quiz (cont’d)

5.5. Section J of the HUD-1 statement itemizes Section J of the HUD-1 statement itemizes the closing costs charged to each party.the closing costs charged to each party.

6.6. P.O.C. on a closing statement stands for P.O.C. on a closing statement stands for Paid Off at Closing.Paid Off at Closing.

7.7. Items owed by a party will appear in the Items owed by a party will appear in the debit column of a closing statement.debit column of a closing statement.

8.8. The documentary stamp tax on the deed The documentary stamp tax on the deed is calculated using the purchase price of is calculated using the purchase price of the property.the property.

FF

FF

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Quiz (cont’d)Quiz (cont’d)

9.9. If property to be purchased is a If property to be purchased is a condominium, hazard insurance is covered condominium, hazard insurance is covered under the condominium association’s under the condominium association’s master policy.master policy.

10.10. Verification of corporate standing is done Verification of corporate standing is done by requesting a certificate of good by requesting a certificate of good standing from the secretary of state’s standing from the secretary of state’s office.office.

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