Do your homework. Ace your closing.
Do you have nightmares about closings gone badly? While most Realtors® experience one or two unpleasant settlements during their career, there are ways to increase the likelihood of success. Settlement attorneys, home inspectors and veteran real estate professionals suggest a few ways to prevent the most common problems that cause traumatic transactions.
“The biggest, best thing you can do is to communicate with everyone about everything before settlement,” says Helen Krause, marketing director for New World Title and Escrow in McLean. “Sometimes Realtors® tell the lender about something like a rent-back or that one of the sellers won’t be at the settlement, and they’ll assume that the lender has let us know. Make sure you tell both the lender and the title company about anything they need to know.”
Title companies typically send an information sheet to the buyers and sellers before settlement. Krause says Realtors® should encourage their customers to complete these and return them as early as possible.
“Fifteen percent of the work that Realtors® do is getting a contract written,... The other 85 percent is keeping that contract together.” -John McAllorum
Suzanne Simon, managing broker of Long & Foster Real Estate in Arlington, says both buyers and sellers should be given a list of things to do before settlement. For example, sellers should make sure they provide any repair receipts to the buyer’s agent before the walk-through. Buyers should maintain contact with their lender and alert their Realtor® of any financing changes.
“Fifteen percent of the work that Realtors® do is getting a contract written,” says John McAllorum, branch vice president of Coldwell Banker Residential Brokerage in Springfield. “The other 85 percent is keeping that contract together.”
WALK-THROUGH ISSUES AND INSPECTIONS
One area that can cause delayed or even a cancelled settlement is a dispute over the condition of the property.
“Agents should manage their clients’ expectations, particularly if they’re first-time buyers,” says Simon. “If they’ve moved from one rental to another, they’re used to moving into places that have been professionally cleaned and freshly painted. They need to know that ‘broom clean’ means just that.”
One potential issue during the walk-through is that sometimes sellers have the utilities turned off the day after they move.
“I suggest that sellers leave the utilities on until the day after settlement and that buyers have the utilities put in their name the day before settlement just to make sure there’s no gap,” says Simon.
Another potential pitfall arises when a seller fails to remove personal property from the home. “Sellers need to be out of the property before the walk-through, and they can’t leave things like a dresser in the attic unless the buyers actually have agreed they want it.”
McAllorum suggests that sellers maintain their homeowners insurance until the sales transaction has been recorded for extra protection in case something happens to the house between the closing and recordation.
Brenda Heffernan, branch manager of MBH Settlement in McLean, recommends that if the seller is making repairs pursuant to a home inspection, the parties should schedule two walk-throughs: one a week before settlement to check on repairs and a second one 24 hours before the closing as a final check.
“Settlements get delayed because the sellers haven’t provided proof that a licensed contractor did the work or they don’t have receipts at all,” says Heffernan. “The buyer’s agent should set terms upfront that receipts must be provided seven to 10 days before settlement.”
Krause says that lenders rarely allow buyers and sellers to set up an escrow account to handle repairs as they did in the past.
“You need time to call a plumber to fix a leak you discovered at the walk-through and get the final bill before settlement. Very few lenders allow you to create an escrow account for repairs at the closing,” says Krause.
BECOME A PRE-INSPECTION GENIUS
One way to reduce potential problems at settlement is to identify issues even before your buyers make an offer.
“Realtors® should look for ‘Anatomy of a House’ programs or articles to be on alert for red flags when they’re previewing homes,” says McAllorum. “Don’t claim to be an expert, but suggest that the buyers have an inspector look at anything you notice that could be a problem.”
“They should also let buyers know they have the option of a more detailed inspection with an infrared camera if they’re worried about moisture or mold.”
Some of the simplest yet most important items to check include looking for old water stains in the basement and on the first floor ceiling under the second floor bathrooms, says Kevin Dougherty, a home inspector with Pillar to Post in McLean.
“A lot of older homes aren’t built even close to today’s safety standards,” says Dougherty. “I was in one home with a screened porch without a railing system. If someone fell through the screen they’d fall 15 feet to an asphalt driveway. Some of these things can be easily remedied.”
Dougherty recommends that buyers and their agents take a “10-minute reprieve” from admiring the floorplan, fixtures and finishes in order to take a cautious look around for old appliances or systems, signs that the homeowner has undertaken some do-it-yourself projects, or moisture.
“It’s nice for an agent to set expectations for the buyers about issues that can come up during the home inspection,” says Dougherty. “They should also let buyers know they have the option of a more detailed inspection with an infrared camera if they’re worried about moisture or mold.”
ESTATE SALES AND ABSENTEE SIGNERS
If you’re handling an estate sale, Krause recommends getting the title company to look at the paperwork as early as possible.
“We had one estate sale with 14 beneficiaries and every one of them had to sign off on the sale,” says Krause. “These can’t be electronically signed, either, so you need time to get each signature notarized and sent back to the title company before the transaction can be recorded.”
If a beneficiary is a minor, this requires a court-appointed representative to be at the settlement table, says McAllorum.
“You need to get that attorney lined up before the closing date, otherwise it can be a huge problem if the buyers are trying to move in that day,” says McAllorum.
In general, says Heffernan, Realtors® need to know their clients and look out for any unusual circumstances such as an estate sale, a trust sale, a divorce, a foreign seller or an absentee client.
“One home was being sold on behalf of an elderly client who was in an assisted living facility,” says Heffernan. “The daughter had a general durable power of attorney but she needed the original of that document for banking and other needs and didn’t want to release it to us. We explained that the original power of attorney needed to be recorded with the court, and there would likely be a delay in getting it back to her after settlement. To solve the problem, I went to the courthouse with the Realtor® and the daughter one morning two weeks before the settlement to record the power of attorney in person. This way, she could keep the original. If you need a power of attorney it’s better to get a special power of attorney (one that is specific for the transaction), and remember that it must be notarized.”
“Sellers need to be aware that by statute, funds can only be disbursed after recording – so they shouldn’t expect to walk away from settlement with a check."
Heffernan says all kinds of issues with absent sellers and buyers can be handled, but title companies need time to make arrangements before settlement day.
FUNDING ISSUES
Recommend a reliable lender and stay in touch with your buyers’ lender to prevent last-minute issues with a mortgage. In addition, make sure your buyers are aware that they’ll need to have certified funds or to arrange a wire transfer before the settlement for any amount they will owe at closing above $1,000, says Heffernan. Buyers may use a personal check for smaller differences in the amount owed. They cannot use a debit or credit card.
“Sellers need to be aware that by statute, funds can only be disbursed after recording – so they shouldn’t expect to walk away from settlement with a check,” says Heffernan. “They should bring wiring instructions to the settlement.”
DISPUTE AGREEMENTS
If your clients have agreed to a post-settlement occupancy, you need to make sure there’s a separate agreement that spells out everything from the occupancy dates to who will hold the security deposit, says Heffernan.
“Typically the post-settlement occupancy fee is based on the buyer’s principal, interest, taxes and insurance, but if it’s written ‘PITI’ on the agreement not all sellers will know what that means,” says Heffernan. “If the sellers haven’t paid a mortgage in awhile or have a very low loan balance, they’re sometimes shocked at the amount they’re expected to pay.”
All addenda should be provided along with the contract to the title company as soon as possible. Any changes to the contract, changes to the addenda or new addenda should also be given to the title company before settlement, says Heffernan.
“It’s important to remember that 99.9 percent of buyers want to buy and 99.9 percent of sellers want to sell, so it’s in everyone’s best interest to find a way to resolve any conflicts,” says Simon. “The best way to do that is to resolve problems before you get in the closing room.”
10 Top Tips for a Smooth Settlement
1. Communicate with the title company and the lender as soon as you have a ratified contract and until settlement to avoid last-minute glitches.
2. Order termite, well and septic and other inspections early so issues can be addressed long before settlement day.
3. Schedule the walk-through a few days before settlement to allow for time to negotiate any disputes over the property’s condition.
4. Have your sellers keep all receipts for repairs and make them available to the buyer’s agent before the walk-through.
5. Avoid any issues with utilities by having the buyers switch the utility bills to their names the day before settlement and the sellers cancel their utilities the day after settlement.
6. Tell the sellers to leave their homeowners insurance in effect until they have received their funds from the settlement. This will ensure coverage if something happens to the house during that grey area after settlement but before the transaction has been officially recorded.
7. Remind your buyers to bring funds as a certified check or arrange a wire transfer prior to the settlement, and to bring a personal check to pay for small discrepancies in the final settlement.
8. Ask your clients if anyone will be unable to attend the closing in person – they may need to mail notarized paperwork or arrange for a power of attorney.
9. If you’re handling an estate sale, find out beforehand the complete list of every beneficiary who might need to sign papers at settlement.
10. If a beneficiary is a minor, that minor will need a court-appointed attorney to be present at settlement.