CA Real Estate Practice
Overview
This is the reading material for the closing process in California Real Estate. It will be followed by assignments at a later date. It lays out the steps that a realtor needs to make sure take place to ensure a smooth close.
The Closing Process
The closing process
Our learning objectives for this week are
- Explain the series of events that take place during closing
- Discuss responsibilities for ordering inspections and insurance, and state which party
usually pays for these products or service - Describe the process for estimating seller’s net proceeds and buyer’s net cost
- Understand federal and state laws that regulate settlement
- Summarize the real estate agent’s role during the closing process
The Steps in the Closing Process --
Steps in closing process
1. Inspections ordered by buyer or real estate agent, as soon as possible -- these are usually a termite inspection, roof inspection and a home inspection.
a. Reports sent to buyer or buyer’s agent and lender - the lender only needs to see these if you have written on the contract that you are requiring them. Any time you request any thing on the contract you have to show the lender. The pitfall on this is that the lender can require repairs based on reports provided.
i. Buyer, with the advice of their agent, must decide whether to request that seller make any repairs
called for by report. You will need to use a "request for repairs" form.
b. If seller agrees to make repairs, need to verify that repairs are adequate (via
reinspection)
c. Inspections: structural, electrical and plumbing, interior, pest, soil, and environmental
i. Most lenders require structural pest control inspections - these are only required on VA loans who require a clearance of all items on the reports. Most lenders do not require them unless it is on the RPA. (Residentail purchase contract)
ii. Usually, sellers pay for corrective repairs, and buyers for preventive ones - this is something that will be negotiated. The seller is under no obligation to pay for repairs.
d. If asked, agent should give buyer at least three names of inspectors; verify
credentials with business organizations
e. If repairs necessary, seller and buyer negotiate costs; must also do reinspection of repairs before closing
2. Financing applied for and/or finalized by buyer
a. Lender’s staff plays active role throughout closing process
3. Escrow real estate agent, with delivery of purchase agreement and EMD (ernest money deposit)
4. Escrow instructions signed by parties; may be included in purchase agreement or
separate document - In California the RPA includes the escrow intructions.
5. Appraisal ordered by lender
a. Lender is appraiser’s client; other parties may have to request report from
lender
6. Preliminary title report ordered by closing agent; copies sent to lender and buyer,
for approval and/or corrections by seller
7. Loan payoff amount requested from seller’s lender
a. Using “Demand for Payoff” or “Request for Beneficiary’s Statement” form
b. Escrow agent or buyer’s lender must also get figures for any other liens or
judgments
8. Loan approval documents signed by buyer
a. Lender sends loan documents to escrow agent, for buyer to review and sign
b. After documents signed, escrow agent gives them to lender, coordinates loan
funding
9. Downpayment and closing costs deposited by buyer, once all contingencies met
10. Loan funds deposited by lender
11. Title insurance policy issued by title company
a. Two main types of policies
i. Lender’s policy
ii. Owner’s policy
b. Lenders require buyers to purchase lender’s policy; protects lender’s security
interest
c. Owner’s policy benefits buyer; protects against undiscovered title problems
i. In northern California, buyer usually pays for owner’s policy
ii. In southern California, seller typically pays for policy
d. Standard coverage protects against problems with matters of record, e.g.,
deeds, liens, and other recorded interests
e. Extended coverage includes all of the above, plus problems discoverable by
inspection, e.g., encroachments or adverse possession
f. Homeowner’s coverage covers most of the same matters as an extended
coverage policy, plus some additional issues such as violations of restrictive
covenants
g. Lender’s policy is always extended coverage; owner’s policies are usually
homeowner’s coverage
12. Hazard insurance policy issued to buyer - this is the homeowners insurance
a. Minimum policy required by lenders is usually HO-3 policy
i. Protects against numerous perils; usually covers personal property, too
ii. Does not cover damage from earthquakes or floods; need supplemental
policy for that
b. Some purchase agreement forms now have hazard insurance contingency
provision
13. Settlement statements prepared by closing agent or lender
14. Documents filed for recording
15. Funds disbursed by closing agent
D. Real estate agent’s role is to make sure tasks are completed, and to communicate
regularly with all parties
1. If problems, agents should deal with them in a fair and direct manner
2. Agent’s role during closing just as important as negotiating sale
Closing Costs:
A. Some closing costs are paid by seller, some by buyer, some split - this is set County by County. Always check for what is customary for the county you are working in.
1. Settlement statement (part of the closing disclosure form) is used to list closing
costs
a. Preliminary and final statements prepared for seller and buyer by closing agent
or lender
b. Seller’s net proceeds (cash at end of sale) and buyer’s net cost (cash buyer
pays at closing) depend on how closing costs are allocated
i. Use software to calculate net proceeds and net cost
ii. Some expenses prorated between buyer and seller, based on time, interest,
or benefit
B. Costs and credits
1. Debits: costs party must pay at closing
2. Credits: payments parties will (or have) receive(d)
3. Some closing costs paid to other party; others paid to third parties
4. Many costs are standard or allocated by custom; others allocated based on purchase agreement or by law
C. Buyer’s net cost
1. To estimate buyer’s net cost, total debits are reduced by total credits
a. Purchase price is major cost (debit); good faith deposit and financing are
credits offset against purchase price, to get remainder (downpayment) needed
at closing
b. Closing costs usually paid by buyer include: appraisal fees, credit report fees,
origination fees, discount points, prepaid (or interim) interest, lender’s title
insurance, inspection fees, hazard insurance, recording fees for new mortgage
c. Examples of fees split or prorated: escrow fees and property taxes
2. To pay net cost, buyer usually delivers certified check or cashier’s check (or wires
money); verify with escrow agent
D. Seller’s net proceeds
1. Sales price is largest credit for seller; any other credits seller will get at closing
are added together, any costs (debits) subtracted
2. Examples of credits include refunds for property taxes paid in advance, or reserves remaining in impound account
3. Examples of debits a seller pays: seller financing or loan assumption, payoff of
seller’s loan, interest on seller’s loan (and prepayment penalty if applicable), sales
commission for broker, documentary transfer tax, escrow and recording fees
4. Examples of closing costs a seller may agree to pay include: owner’s title insurance premium, discount points (or buydown), repair costs, and attorney’s fees
5. Escrow agent may offer seller options for receiving net proceeds, e.g., cashier’s
check or direct deposit - today most funds are wired.