Real Estate Law An Introduction to the Closing Real Estate Law An Introduction to the Closing

Subjects Covered: Preclosing Preclosing Exchange of Documents at Closing Exchange of Documents at Closing Closing Costs Closing Costs The HUD Uniform Settlement Statement The HUD Uniform Settlement Statement Tax-Related Items Tax-Related Items

Preclosing Closing Attorney: Closing Attorney: Orders and reviews examination of title; Orders and reviews examination of title; Orders and reviews plot plan; Orders and reviews plot plan; Orders and reviews Municipal Lien Certificate (obtained from the Municipal Collector of Taxes) per M.G.L. c. 60 §23; Orders and reviews Municipal Lien Certificate (obtained from the Municipal Collector of Taxes) per M.G.L. c. 60 §23; Sets up escrows and any special arrangements to correct title; Sets up escrows and any special arrangements to correct title; Prepares Attorney’s Certification in compliance with M.G.L. c. 93, §70, and title insurance policies; Prepares Attorney’s Certification in compliance with M.G.L. c. 93, §70, and title insurance policies; Requests a Mortgage Estoppel Letter from the Seller’s Mortgagee indicating payoff value of Seller’s mortgage; Requests a Mortgage Estoppel Letter from the Seller’s Mortgagee indicating payoff value of Seller’s mortgage; Receives closing package and funding from Buyer’s Mortgagee. Receives closing package and funding from Buyer’s Mortgagee.

The Real Estate Closing Parties gather to execute promises made in Purchase Agreement. Parties gather to execute promises made in Purchase Agreement. In most instances, two closings occur at once: In most instances, two closings occur at once: 1. Real estate contract is closed -- closing of sale of property AND 2. Mortgage transaction is closed -- disbursal of mortgage funds by lender.

Exchange of Documents at Closing Order of Events 1. Buyer signs: Note and Mortgage (see 10 – Financing); Note and Mortgage (see 10 – Financing); Duplicate Mortgage Application, TILA Disclosure, and Good Faith Estimate (see 10 – Financing). Duplicate Mortgage Application, TILA Disclosure, and Good Faith Estimate (see 10 – Financing). 2. Buyer provides Closing Attorney with check for balance of purchase price, closing costs, prorations, and escrows for property taxes and insurance (net of escrow deposits from Seller and funding from Mortgagee).

Exchange of Documents at Closing (cont’d) 3. Seller provides Buyer with: Deed; Deed; Smoke/CO Detector Certificate of Compliance (obtained from the Municipal Fire Department) in compliance with M.G.L. c. 148 §26F; Smoke/CO Detector Certificate of Compliance (obtained from the Municipal Fire Department) in compliance with M.G.L. c. 148 §26F; (If a Condominium) a 6d Certificate in compliance with M.G.L. c. 183A, as well as a master insurance policy Certificate of Insurance (both obtained from the Condominium Association); (If a Condominium) a 6d Certificate in compliance with M.G.L. c. 183A, as well as a master insurance policy Certificate of Insurance (both obtained from the Condominium Association);

Exchange of Documents at Closing (cont’d) (If property has a private septic disposal system) a Title V Certificate (obtained from the Municipal Building Department) in compliance with M.G.L. c. 21A, §13; (If property has a private septic disposal system) a Title V Certificate (obtained from the Municipal Building Department) in compliance with M.G.L. c. 21A, §13; Bill of Sale for personal property being sold; Bill of Sale for personal property being sold; Receipt for payment of last utility bills and taxes; Receipt for payment of last utility bills and taxes; Keys to the property. Keys to the property. 4. Buyer and Seller sign a Lead Paint Disclosure form in compliance with M.G.L. c. 111 §§ A

Exchange of Documents at Closing (cont’d) 5. Closing Attorney pays: Balance of Seller ’ s mortgage and obtains Mortgage Discharge for recording; Balance of Seller ’ s mortgage and obtains Mortgage Discharge for recording; Real estate commission based on gross sales price and to reimburse Broker for any expenses made on behalf of the Seller; Real estate commission based on gross sales price and to reimburse Broker for any expenses made on behalf of the Seller; Balance of purchase price to Seller (net of mortgage balance, commission, and taxes); Balance of purchase price to Seller (net of mortgage balance, commission, and taxes); Title examination, title insurance, inspection, survey and appraisal fees; and Title examination, title insurance, inspection, survey and appraisal fees; and Recording fees and excise taxes required by the Registry of Deeds, and withholding required by IRS. Recording fees and excise taxes required by the Registry of Deeds, and withholding required by IRS.

Exchange of Documents at Closing (cont’d) 6. Closing Attorney: Discusses with Buyer a Declaration of Homestead (see 1 – Basic Principles); Discusses with Buyer a Declaration of Homestead (see 1 – Basic Principles); Provides Buyer with copy of Note, Mortgage, duplicate Deed, Owner ’ s Title Insurance commitment, and other closing documents; Provides Buyer with copy of Note, Mortgage, duplicate Deed, Owner ’ s Title Insurance commitment, and other closing documents; Records deed, mortgage, Municipal Lien Certificate, and Seller ’ s Mortgage Discharge (when received) with Registry of Deeds. Records deed, mortgage, Municipal Lien Certificate, and Seller ’ s Mortgage Discharge (when received) with Registry of Deeds.

Important Miscellaneous Items  Make sure title reports are brought up to date of closing to ensure no last minute liens. 2. Immediately record documents to avoid potential priority problems.

HUD Uniform Settlement Statement The Real Estate Settlement Procedures Act (RESPA) requires that a uniform settlement statement (HUD-1 or HUD-1A form), or closing statement, be used in all nonexempt transactions. It is signed by the parties and the closing agent. The Real Estate Settlement Procedures Act (RESPA) requires that a uniform settlement statement (HUD-1 or HUD-1A form), or closing statement, be used in all nonexempt transactions. It is signed by the parties and the closing agent. “Nonexempt” transactions are residential sales transaction that include a federally related loan in whole or in part to purchase the property. “Nonexempt” transactions are residential sales transaction that include a federally related loan in whole or in part to purchase the property. Exemptions include: all-cash transactions, transactions involving commercial loans, existing or assumed loans, loans on vacant land or land exceeding 25 acres. Exemptions include: all-cash transactions, transactions involving commercial loans, existing or assumed loans, loans on vacant land or land exceeding 25 acres.

HUD Uniform Settlement Statement (cont’d) HUD-1 sections are: HUD-1 sections are: A through I – Names and addresses of parties, lender, settlement agent (i.e., closing attorney), loan number and closing date. A through I – Names and addresses of parties, lender, settlement agent (i.e., closing attorney), loan number and closing date. J – Summary of the borrower’s transaction. J – Summary of the borrower’s transaction. K – Summary of the Seller’s transaction. K – Summary of the Seller’s transaction. L – Parties’ closing costs. L – Parties’ closing costs. The completed form is signed by both parties and the closing attorney. The completed form is signed by both parties and the closing attorney.

Tax Related Items The Foreign Investment in Real Property Tax Act (FIRPTA), Section 1445, requires withholding of 10 per cent of the purchase price to be paid to the IRS on purchases from a foreign person. The Foreign Investment in Real Property Tax Act (FIRPTA), Section 1445, requires withholding of 10 per cent of the purchase price to be paid to the IRS on purchases from a foreign person. Exception: Purchases < $300,000 Exception: Purchases < $300,000 The Seller is required to sign a Nonforeign Certification at closing to avoid the IRS withholding. The Seller is required to sign a Nonforeign Certification at closing to avoid the IRS withholding.

Tax Related Items (cont’d) The Tax Reform Act of 1986 requires that all real estate transactions be reported to the IRS by the closing attorney. The Tax Reform Act of 1986 requires that all real estate transactions be reported to the IRS by the closing attorney. The transaction is reported on a 1099-S form. The transaction is reported on a 1099-S form. To ensure proper reporting under both acts, the closing attorney will require that each party execute an IRS Form W-9 (Request for Taxpayer ID Number and Certification) at closing. To ensure proper reporting under both acts, the closing attorney will require that each party execute an IRS Form W-9 (Request for Taxpayer ID Number and Certification) at closing.

Quiz True/False 1. Most contracts for sale and purchase mandate that the purchaser pay the balance of funds required to close by personal check. 2. Interest on loans is paid in advance. 3. A HUD-1 statement must be used for commercial transactions. 4. All-cash transactions are exempt from the use of a HUD-1 closing statement. F F F T

Quiz (cont’d) 5. Section J of the HUD-1 statement itemizes the closing costs charged to each party. 6. P.O.C. on a closing statement stands for Paid Off at Closing. 7. Items owed by a party will appear in the debit column of a closing statement. 8. The documentary stamp tax on the deed is calculated using the purchase price of the property. F F T T

Quiz (cont’d) 9. If property to be purchased is a condominium, hazard insurance is covered under the condominium association’s master policy. 10. Verification of corporate standing is done by requesting a certificate of good standing from the secretary of state’s office. T T