Anatomy of a Real Estate Transaction–Closing Preparation
The sonata-allegro form is used in many classical sonatas, concerti, and symphonies. Compositions in this form start with an exposition, which sets forth the theme(s) (usually two of them) in the tonic key. Then, the composition moves to the development section, where the composer expounds upon and changes the themes in a different key.
By the end of the development section, the composition modulates back to the tonic key for the recapitulation. The recapitulation is similar to the exposition but may reflect some of the changes from the development section.
This is the fourth in a series of articles about the Anatomy of a Real Estate Transaction. In previous articles, I compared the exposition to the Pre-Contract part of a real estate transaction, when the parties agree upon the framework of their relationship and terms of the transaction. The development section is like the Due Diligence Inspection Period (Due Diligence period) when the buyer inspects the real estate to determine if it meets the buyer’s needs.
This article discusses the closing preparation process (Closing Prep), which follows the Due Diligence Inspection Period. Closing Prep is like the recapitulation in the sonata-allegro form. During Closing Prep, the buyer, now fully committed to the transaction, returns to the fundamentals of the transaction and works with the seller toward the closing. The Closing Prep period ends with the closing.
This article discusses the most common responsibilities of the parties during Closing Prep. The real estate purchase agreement (Contract) usually outlines many of the parties’ responsibilities during Closing Prep, so specific responsibilities will vary from transaction to transaction. Local custom also sometimes determines the parties’ responsibilities, so specific responsibilities also can vary from state to state, and county to county.
What Happens During Closing Preparation?
At the end of the Due Diligence Period, the buyer decides to move forward with the purchase. At closing, the buyer pays for the property and the seller delivers ownership and possession of the property to the buyer.
Pre-Closing requires collaboration among the buyer, seller, and title company to assure that everything is in place for a smooth closing. So, the buyer makes sure it has the money it needs to buy the property. And the seller prepares documents and performs other tasks necessary to deliver the property to the buyer. The title company’s main focus is in assuring that it has the documentation it needs to issue the title insurance policy.
Buyer Responsibilities
The buyer’s main responsibility is making sure it can deliver the cash required for closing. For most buyers, this requires that the buyer obtain a mortgage loan. By the end of Closing Prep, the buyer and its lender must have agreed on all financing terms. They also must have negotiated and agreed upon the mortgage loan documents.
In addition to the mortgage loan, the buyer needs to ensure that it has the equity (down payment) required to buy the property. For a home purchase, this may involve only making sure that the buyer has enough money in the bank for the down payment.
In a commercial real estate transaction, obtaining the equity or down payment may be more complicated. The buyer may have equity investors providing cash for the purchase and need to negotiate the terms of a limited liability company operating agreement. Or, the buyer may be using mezzanine lending and need to negotiate those terms and the mezzanine loan documents. More details about buyer equity and mortgage financing will be covered in a future article.
The buyer also will need to prepare for property ownership. Most buyers will need to establish relationships with vendors and service providers for utilities and property maintenance. If the buyer plans to occupy the real estate, whether as a home or a business location, the buyer will need to hire a moving company or rent a truck to help it move. If the buyer is acquiring an office building or apartment complex, the buyer may need to hire a property management company.
Seller Responsibilities
Sellers also are busy during Closing Prep. Traditionally, the seller’s attorney prepares the deed. For commercial real estate, there may be additional conveyance documents, such as a bill of sale, assignment of leases, or assignment of contracts.
If the seller has a mortgage loan, it will need to arrange to pay that loan off at closing. That will require requesting a payoff letter from the mortgage lender.
Sellers must cancel any service contracts relating to the property unless the buyer has agreed to assume them. The seller should arrange for utility accounts to be put into the buyer’s name. Seller and buyer should collaborate to ensure there isn’t a gap in service. Sometimes, a seller must make upgrades or repairs to the real estate during the Closing Prep requirements to meet the buyer’s requirements at closing.
The seller also must work with the title company to address the buyer’s title concerns during Closing Prep. If there are mechanic’s, tax, or other monetary liens on the property, the seller should pay those at or before closing.
Title Company/Escrow Agent Responsibilities
To issue the title policy, the title company will collaborate with the buyer and seller to be sure that the buyer’s title concerns are addressed. The title company also will work with the parties to assure that it can issue the title insurance requirements and endorsements buyer and its mortgage lender have requested.
The title company will collect the data it needs to prepare the closing settlement statement and assure that obligations that might be a lien on the real estate are paid at closing. This data will include at minimum information about real estate taxes so they can be prorated between buyer and seller.
The title company also might need to research HOA fees, condo fees, special assessments, sewer and water bills, and other charges relating to the real estate to assure they are current and are properly prorated at the closing. The title company also must collaborate with both the seller’s and the buyer’s mortgage lenders to ensure that the seller’s mortgage is paid off and the buyer’s mortgage is properly recorded.
Buyer/Seller Collaboration
For a home purchase, there might not be much communication between the buyer and seller during Closing Prep. In a commercial real estate transaction, the buyer and seller usually will remain engaged and communicate frequently with each other.
Depending upon the type of real estate, the parties may collaborate regarding proration of utility, rent, contract, and other expenses. If there is professional property management, the management companies should work together, so the management transition runs smoothly. If there are tenants at the real estate, the buyer and seller should agree how and when to inform them of the sale.
Preparing for the Closing
In sonata-allegro form, the exposition moves into another key as it prepares for the exploratory and sometimes, turbulent, development section. Although the recapitulation is reminiscent of the exposition, it remains in the tonic key at the end of the piece.
The Pre-Contract and Pre-Closing periods are comparable to the exposition and recapitulation. In the Pre-Contract period, the parties are adversaries. They both may want to enter into a Contract, but they want that Contract on the most favorable possible terms to themselves. In the Pre-Closing period, the parties are committed to the transaction. They usually are no longer adversaries but rather, companions on a common journey toward a smooth closing.
© 2019 by Elizabeth A. Whitman
Any references clients and their legal situations have been modified to protect client confidentiality
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