A real estate deal is generally a long and stressful exercise that involves many steps and procedural formalities. Closing on a house occurs when you sign the papers that make the house yours, but before that fateful day arrives, a long list of things has to happen. This article describes the 12 steps that must be taken between the moment your offer is accepted and when you get the keys to your new home.
1. Open an Escrow Account
An escrow account is held by a third party on behalf of the buyer and seller. A home sale involves multiple steps taken over a span of weeks. Therefore, the best way to prevent either the seller or the buyer from being cheated is to bring in a neutral third party. This third party can hold all the money and documents related to the transaction until everything has been settled. Once all procedural formalities are over, the money and documents are moved from the escrow account to the seller and buyer, thus guaranteeing a secure transaction.
2. Title Search and Insurance
A title search and title insurance provide peace of mind and a legal safeguard. They ensure that when you buy a property, no one else can try to claim it later. A title search is an examination of public records to determine and confirm a property's legal ownership and find out what claims, if any, exist on the property. If there are any claims, they may need to be resolved before the buyer gets the property.
Title insurance is indemnity insurance that protects the holder from financial loss sustained from defects in a title to a property. It protects real estate owners and lenders against loss or damage stemming from liens, encumbrances, or title defects.
3. Hire an Attorney
While getting legal aid is optional, it's always better to get a professional legal opinion on your closing documents. The complicated jargon in them can be difficult to understand, even for well-educated individuals. For an appropriate fee, an opinion from an experienced real estate attorney can offer multiple benefits, including hints of any potential problems in the paperwork.
4. Negotiate Junk Fees
It's a sad truth, but a reality nonetheless: there are plenty of companies in the real estate industry that are perfectly fine charging “junk fees.” While the exact definition of a junk fee remains up for debate, they typically include phrases that feed off of consumer ignorance. Common junk fees include administrative fees, application review fees, appraisal review fees, ancillary fees, email fees, processing fees and settlement fees. And while each of these fees is as ambiguous as the next, they are nonetheless a reality for inexperienced buyers and sellers.
It's worth noting, however, that knowledge is power. It's entirely possible to negotiate those fees associated with average closing costs, if not eliminate them altogether. Those willing to acknowledge these fees, and perhaps even challenge them, stand the chance of removing them from their costs altogether. Don't forget that even legitimate closing costs can be negotiated; you will never know unless you try.
5. Conduct A Home Inspection
While many will argue that a home inspection isn't required, I beg to differ. In fact, I maintain that conducting a thorough home inspection is absolutely integral to closing a real estate deal. There is only one question you really need to ask yourself when deciding whether or not to hire an inspector: Why wouldn't you? The cost is minimal and a home inspection can save you from a heap of trouble down the road. Any problems uncovered over the course of the inspection will give you the opportunity to back out of a deal, or at least ask the seller to rectify the problems before the transaction is carried out (as long as your purchase offer included a home-inspection contingency).
6. Consider Subsequent Negotiations
At this point, you may have realized that closing real estate deals has as much to do with protecting yourself as they do with seeing it through to the end. And you couldn't be more right; closing a deal should coincide with significant safety measures. However, let's not forget why you are there in the first place: to get a deal done. With that in mind, evaluate everything you have done up to this point and determine whether or not your original offer price needs to be tweaked. In the event the inspection came back with some glaring complications or some unforeseen circumstances reared their ugly heads, you may have grounds to negotiate a better deal on your behalf.
7. Remove Contingencies
Every good real estate investor knows a great offer isn't complete without contingencies; the clauses in a contract that allow you to back out of a deal in the event something goes awry. It's also worth noting that any contingencies should have been taken care of by this point. While that's fine and well, most contingencies need to be written off when they are met. In other words, you must remove the contingencies (in writing) by a certain date, which is typically identified in the purchase offer.
8. Final Walkthrough
No deal should be brought to the closing table without conducting a final walkthrough. At this point, most things should be in place and all that is required is a final walkthrough of the property to make sure it's in the condition you were promised. Be sure to confirm that no additional damage has occurred or that the fixes were addressed.
9. Sign The Papers
It should go without saying, but the most important step in closing real estate deals is signing the appropriate paperwork. Once everything is in place, feel free to start signing away. And trust me, there will be a lot of paperwork; much more than most people anticipate (upwards of 100 pages isn't uncommon). It's worth noting that the sheer volume of signatures required shouldn't, in any way, force you to rush through this critical process. I highly recommend you read each page carefully and refrain from signing until you know exactly what you are agreeing to (especially the fine print).
10. Meet Funding Requirements
You most likely deposited earnest money when you signed the purchase agreement. Earnest money is a deposit made to a seller indicating the buyer's good faith, seriousness, and genuine interest in the property transaction. The earnest money goes to the seller as compensation if the buyer backs out. If the seller backs out, the money is returned to the buyer.
To complete your purchase, you'll have to deposit additional funds into escrow. As the original earnest money is generally applied to the down payment, arranging for the various other required payments is crucial before the deal is closed. Failure to do so can lead to the sale getting canceled, with the earnest money going to the seller. Furthermore, you could still be charged for the various services you used before the deal fell apart.
How Long Does It Take For A Real Estate Closing?
It can't be underestimated: the real estate closing process can be intimidated, but that's only because of how important all of the subsequent steps are. Each task and decision carries a lot of weight, and none should ever be hurried. That said, the process can take some time. With each step having big ramifications, there is no reason to hurry, which begs the question: How long does it take for a real estate closing?
To be fair, closing a real estate deal will take as long as each party needs it to. A closing shouldn't be rushed, which means the timetable is up to the slowest mover on either side of the transaction. Two experienced parties will most likely close a deal faster than less experienced buyers and sellers. That said, there are some timelines to base a timetable off. A mortgage application, for example, usually takes 30 to 45 days to submit. No closing will happen without the application, so the application process will set the expectations. Once each party is at the closing table, however, it's entirely possible for a deal to close within an hour. Again, the experience comes into play. While some parties will close faster, talking at the closing table can also take several hours.
The Changing Dynamics Of The Real Estate Closing
Like everything else in the real estate world, closing time frames are constantly changing. There are regular fluctuations due to recurring factors such as the season, and how busy the market is. Then, there are even larger factors that can come into play. These can include major interest rate and market direction changes, or even new regulations.
While sellers and their agents seem to be more motivated than ever to close faster, many homebuyers may be experiencing longer closing times. Even the National Association of Realtors believes closing times should be extended.
What Can Slow Down Your Real Estate Closing?
There are a wide variety of factors that can potentially impact your closing times:
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- The efficiency of your mortgage company and loan officer
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- Waiting on condo or HOA approvals
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- Certificates of occupancy
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- Title and lien issues
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- Backlogs with inspectors and appraisers
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- Trouble producing underwriting conditions
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- Slow and unresponsive agents
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- Parties not prepared for closing with proper IDs
Get an early start, and preempt as many of these issues as you can to streamline your real estate closing. For example, develop relationships with the different parties involved to ensure they have your best interests in mind. A good way to do this is to respond to all communications in a timely manner and maintain positive relationships with everyone involved.
How to Speed Up Your Real Estate Closing
The number one thing you can do to speed up the closing process is to prepare for every step of the process. That said, there are additional steps you can take toward an efficient closing. These include:
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- Start looking for properties early
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- Quiz your loan officer on all potential conditions that could come up
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- Get more than the sufficient documents together before signing the contract
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- Push for preliminary title searches, condo docs, and more
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- Build relationships with vendors so they prioritize your orders
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- Double check valid IDs and extra liquid cash for closing well in advance
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- Don't use your credit, or borrow in a way that could alter your credit
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- Avoid trying to close at the end of the month or during holidays
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- Incentivize those involved to get your deal closed on time
How To Protect Yourself In A Stalled Closing
Closings do get stalled, but you can limit their likelihood by requiring sellers and their agents to demand more ‘skin in the game' in the form of larger deposits. The further out your closing is, the larger the deposit a seller may try to negotiate for. In some cases, sellers may be willing to provide an extension but this can require additional funds.
The opposite is the case for buyers. The less money you put up, the less you have at risk. If necessary, break up the deposit into several parts, and at key milestones. For example; a second deposit after the inspection, and a third after title, appraisals, and loan commitments come in. Who you deposit with makes a difference. Choose a party that is more likely to side with you, or who is at least truly independent and unbiased.
Common Real Estate Closing Costs
Closing on a real estate deal will come complete with several additional costs. However, instead of simply lumping them all under one umbrella, let's take a look at many of the closing costs one could expect to run into at a real estate closing:
- Mortgage Origination Fees
- Discount Points
- Appraisal Fees
- Title Insurance
- Real Estate Agent Fees
- Prepaid Costs
- Private Mortgage Insurance (PMI)
- Recording Fees & Taxes
- Miscellaneous Costs
What To Do After Closing A Real Estate Deal
The first thing to do after closing a deal is to make sure you protect your investment. On the day of closing, make sure to get the property insured. If you are using lender financing, you will have to. However, you should take steps to ensure the property immediately after the paperwork is signed even if you're paying in cash. Additionally, you will want to secure the property itself. Start by changing out the locks and putting plywood over any broken windows. Next, put a padlock on any basement or garage doors. By taking the above measures, you can protect yourself from any potential issues.
Ideally, you will already have a few home improvement projects in mind as you close on the property. If not, now is a good time to evaluate what you have to do, who is going to do it, and for how much. Ask your network for reliable contractors, or work with one of your existing contacts. Schedule a walkthrough and review your plans for the property. Be clear about your expectations for the project, and your ideal timeline. Remember, this is your property. You do not have to work with the first contractor you talk to. Instead, take time to find someone you trust to get the job done. With the right plan, rehabbing and selling a property should be easy. However, once the property is sold, you are still not done. There is plenty of work to be done even after you make your profits.
In order to ensure your next deal runs as smoothly as this one, you need to track your results. Going from a deal to deal or marketing plan to marketing plan can lead to a continuous cycle, with no real improvements. Even though you may already have your sights on another property, write up the process you followed to close this deal. Make a note of the purchase price, closing timeline, profits, and more. Not only can this serve to show you where you can save money and focus your future business, but you can also use this to gain new contacts as well.
The last step you should take after closing a deal is to add the finished property to your real estate portfolio. If you are not already, you should get in the habit of adding to your portfolio for each deal you are involved in. Your tracking methods could include a spreadsheet, word document, or even a presentation with photographs of your completed properties. Find a system that works for you, and remember to stay organized. This information can be used by any future private money partners, investing partner candidates and anyone that you try to work with. The more detailed information you can provide them, the better they can get a sense of how you operate and what you bring to the table.
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