Flashcards in Chapter 14: Real Estate-Related Computations & Closing of Transactions Deck (62)
The closing of a real estate transaction is the final act that concludes the contract between the buyer and seller. All money due is paid, all costs are allocated and paid, and title is conveyed to the buyer. The settlement of a real estate transaction occurs when the seller delivers the deed to the buyer, and the buyer pays the seller the amount agreed upon for the purchase of the property. Typically, a real estate settlement is called a closing. On the day of closing, all accounting in the transaction is finalized.
Who conducts closings?
Title companies, attorneys, and real estate brokers conduct closings. Real estate licensees must be capable of explaining the closing process to the parties with whom they deal. Since most buyers and sellers may be involved in the purchase or sale of property only a few times in their lives, they will be uncertain about the process. Various steps must be taken to close a real estate transaction, including obtaining evidence of the seller’s ownership, securing mortgage loan information, completing property inspections, obtaining property insurance, itemizing costs and expenses for the buyer and seller, and preparing legal documents.
Federal Government Requirements for Real Estate Settlement Reporting
Effective August 5, 1997, the Taxpayer Relief Act of 1997 changed the rules for Internal Revenue Service reporting requirements related to real estate transactions.
Closing agents handling title transfers involving the sale of principal residences with gross sales prices of $500,000 or less for married couples or below $250,000 for single taxpayers do not need to file IRS Form 1099 that indicates the name and address of each party to the transaction.
After a purchase and sale contract has been negotiated between the buyer and seller, many details must be handled prior to the day of closing. The seller must clear any title problems and arrange for preparation of the deed that will transfer ownership. Usually, the seller provides either an abstract of title or a title insurance policy as evidence of a merchantable title.
Preclosing Activities for buyer
The buyer must conclude financial arrangements, and perform necessary property inspections and title examination. This process can be time-consuming as unforeseen problems can occur.
Preclosing Activities for Licensees
Licensees often create checklists to ensure that all tasks and responsibilities are handled in a timely manner and that nothing is overlooked. In addition to the list of items to do, there should also be a place for the scheduled date, the actual date when the responsibility was met or completed, and the initials of the person who completed the task. A good checklist will help to ensure that nothing is missed along the way and all requirements are met in a timely manner. The contract, company policy, legal requirements, and local customs in your area dictate what goes into the checklist.
Copies of the contract
the buyer, seller, cooperating broker, title closing agent, and lender must receive legible, clean copies of the fully executed contract.
should be kept current to reflect the changing states of the listing.
the buyers need to submit a loan application within the time frame specified, unless they are paying cash.
Inspection and Insurance
any inspection and homeowner hazard insurance need to be ordered and completed.
may need to be cleared, such as inspection, appraisal, and loan approval.
later on in the process, the sellers may need to schedule repair work identified in the inspection and arrange access for such work.
the clients may need to select a closing agent, if the sellers had not already done this at the time they signed the listing agreement. The closing agent will require certain information and copies of some documents, such as a copy of the seller’s deed, previous title insurance policy, and existing mortgage information. It is helpful if the sellers have the survey from when they purchased.
coordination between the sellers and the buyers is helpful when arranging for the switching over of the utilities effective the day of closing.
Closing Date and Location
near the end of the process, the appropriate associate should inform the parties of the time and place of the closing.
inspection of the property should be scheduled.
any escrowed (earnest money) funds must be delivered to the closing agent.
The purpose of a closing statement is to summarize the transaction as of the day of closing. It is where the seller learns how much money they will “take away” from the closing and the buyer learns how much money they must bring to the closing.
Each charge or receipt is listed individually so the parties can verify the amounts.
The sales contract addresses who will pay for each item, and if nothing is negotiated to the contrary, the charges will be assessed as stated in the contract. This is known as allocating the charges according to custom.
What are the three major parts to a closing statement worksheet?
1. Seller's Statement
2. Buyer's Statement
3. Broker's Statement
The Buyer's and Seller's Statement each contain what two columns?
Debit and Credit
Debit column closing statement
the second letter of the word debit is “e” for expense.
Credit column closing statement
the second letter of the word credit is “r” for receipt.
The Broker's Statement contains
The Broker’s Statement contains a receipts and disbursements column in place of debits and credits. The Broker’s Statement derives its name from years past when brokers closed their own transactions and accounted for the funds. Today, closing or title companies offer closing services to brokerage companies and make the necessary disbursements at closing.
Whenever a debt (left-hand column)
is made to the seller, a corresponding credit (right-hang column) for the same amount must be made to the buyer.
If the buyer is not to receive those monies, it is entered in the disbursement column (right-hand column) on the Broker’s Statement.
For every amount entered as a left-handed entry
the same amount has a corresponding right-hand entry. This allows the Grand Totals on the bottom of the Broker’s Statement to balance when the worksheet is complete and assures the closing company that all numbers were entered appropriately.
A single-entry item affects only one party and appears only on that party’s statement as either a debit or a credit.
item affects both parties and appears on both statements; however, a double-entry item is always a charge or debit to one party and a credit or benefit to the other party.
are expenses and receipts (debits and credits) that are divided proportionately between the buyer and seller. All entries in the Prorations and Prepayments section are always double-line entries.
Example of prorations
An example would be the real estate taxes (city, county, on lines 16 and 17). Taxes are paid for each calendar year, from January 1st of the current year to December 31st. In Florida, when property tax bills are mailed on November 1st, they go to the property owner of record who is responsible to pay for the entire year. This is called paying taxes in arrears.
If a closing takes place in July, the seller has not received the current year’s tax bill yet. At closing, the real estate taxes are collected from the seller for the portion through the closing day and given to the buyer so that they can pay the taxes for the entire year when due. This amount would be recorded in the Prorations and Prepayments section as a debit to the seller and a credit to the buyer.