Real Estate Market

Archive for the ‘Closing’ Category

If you have ever bought or sold real estate, you have probably paid for title insurance. What exactly is title insurance? Why do we need it? How can I save money on title insurance? These are common questions asked by real estate investors.

Whenever title passes, the seller usually gives a deed containing certain guarantees or “warranties” (hence the name “Warranty Deed”). The seller warrants that title is good, that is, no one will come challenge the integrity of the title. For example, if a deed that was passed before him was forged, all subsequent transfers are void. Other problems may be more subtle, such as a deed with an incorrect legal description or misspelled name. Any irregularities in the “chain of title” will place a “cloud” on the integrity of the title.

The Title Search

When you are ready to sell a property, a title search is performed by a title company or attorney. The title searcher follows the chain of title back about 50 years, tracing the ownership through deeds recorded in pubic records. The searcher also checks to make certain that previously recorded mortgages and other liens have been released. Based on documents found in public records, the title company or attorney will prepare a “title insurance commitment.” A commitment is a statement that based upon certain documents found by a search of public records, the company will issue a title insurance policy for a certain fee.

The Title Insurance Policy

The title insurance policy, unlike most insurance policies, covers past events. For example, the daughter of a previous owner claims that her father conveyed a deed while not mentally competent, the current ownership may be in jeopardy. The title insurance company will defend the claim and pay for any damages (usually the value of the property). The policy does not cover claims based on events that occur after the policy is issued. Furthermore, the policy usually contains numerous exceptions, such as claims based on information undisclosed to the title company. Thus, if you are aware of any potential problems that might lead to a claim, your failure to disclose this information to the title company will lead to a denial of a claim based on those events.

Ask for a “Re-issue” Rate

A title insurance coverage starts from ancient history and ends from the date you transferred title. Since most transfers are insured by a title company, the longer you own the property, the more the policy costs. Consider this: if you buy a property and the transaction is covered by title insurance, then you sell it six months later, what are the chances that something went wrong in the last six months? The answer is that the chances are slim to none, so the risk of a claim against the title are slim to none. For this reason, title companies offer a “re-issue” rate. The re-issue rate is a discounted price (usually about 40%) on the title insurance policy if another policy from a title company was issued on the same property within the last few years. The rate is lower because any claims that arise from events before the previous owner are covered by the previous policy. Thus the new policy really deals with the risk of claims from events that occurred while you owned it.

Try a “Hold-Open” Policy

If you are buying a property with the intent of re-selling it within a year, ask the title insurance company for a “hold-open” policy. For a small fee (usually an additional 10% on the policy), the title company will hold a title commitment open for a year or more. Rather than issue a policy based on the first transfer (from the seller to you), they will issue a policy on the second transfer (from you to the next buyer). Since the seller usually pays for title insurance, you can pay the additional 10% when you buy, saving 90% on title insurance when you sell.

Every Real Estate Investor (REI) wants to close as soon as possible but unless you help the process along by doing the simple tasks required by your Hard Money Lender (HML) and the title company you are almost guaranteed to miss your closing date. A real estate transaction closing is quite simple and the better you understand it the more you can impact and even influence the closing itself. Let’s start by looking at the four main parties to a real estate closing.

1.) The Buyer – You
2.) The Seller
3.) The Title Company – Closer
4.) The Lender – Hard Money Lender (HML)

Each of these parties have varying degrees of influence on a typical closing.

1.) The Buyer – You

Has most of the responsibility for producing all of the required items needed to close a loan. The buyer also is 100% responsible if something bad happens. I know many of you think that the lender, seller or even the title company can be at fault. If a closing does not happen it is the fault of the buyer. Why? Because as the buyer, you should be on-top of the transaction and be ready to step in and find a solution if a problem arises. The buyer is the only party that has the motivation, access and responsibility to ensure that all problems are solved and that the transaction closes. Let me repeat this… The buyer is the only party that has the motivation, access and responsibility to ensure that all problems are solved and that the transaction closes.

2.) The Seller

Is simply along for the ride. Once they have the property under contract to sell their sole responsibility is to show up at closing, accept a back-up contract or to give you an extension if you do not close on time.

3.) The Title Company – Closer

Will be working closely with you and your lender to bring the transaction to a successful close. However it is important to remember that there are other transactions being closed at the same title company and by the same closer so it is the responsibility of the you the buyer to ensure that the title company is moving every forward in a timely manner. Remember that a title company’s busiest time is from the 20th of the month to the end of the month. If you are trying to close your loan during this time period be aware that the title company may have problems finding a time to get you in to close. As long as you provide everything you are required to have by the lender into the title co in a timely manner your loan should close as scheduled on the contract. The lender will coordinate with the title company to close the transaction as required by the contract.

4.) The Lender – Hard Money Lender

Will drive the closing of your transaction and will work closely with you to get all of the items required to close the loan in a timely manner. It is important to note that ALL of the required items must be received by your lender as-soon-as-possible to ensure a smooth closing that happens on or before the closing date on the contract. Your lender will not close a loan until they have everything that you are required to provide. Most lenders require everything to be received by underwriting at least 72 hours prior to closing. Don’t expect to deliver requested items to the lender on the day of closing or even the day before and still close as scheduled. A lender will not draw loan docs until they have a complete loan package. Docs take 24 to 48 hours to be drawn, approved and sent to the title company. The title company itself needs several hours to prepare a HUD-1 for the lender to approve prior to closing.

As mentioned in earlier in the article that you the Buyer have the greatest responsibility and influence in a typical transaction. If you get all the required items to the lender and the title company in a time manner and stay on-top of the closing process you can almost guarantee a smooth closing every time. If you simply kick-back and wait for the transaction to close and plan on providing the required info when you “get around to it” plan on having a lot of missed closings. A smooth transaction with a Hard Money Lender should take 2 weeks from application to closing. You decide what type of closing you want.

Prior to the actual closing day, there are several things you should do to be certain that your real estate transaction will close on time, and that everything will go smoothly. A day or two before closing, you should review your final closing statement or HUD-1 Statement, whichever is used in your area of the country. You should go over all the calculations and be certain that you are given credit for all your deposits and any other credits due to you from the seller or for other items agreed upon between buyer and seller. Go over all the lender and title and escrow fees, to be sure they are what you had been told and that you agree to them. Check the math calculations on the closing statement. Errors do occur.

Carefully review the preliminary report or the guarantee of title insurance, to verify the exact legal description of the property and any liens, encumbrances or other items which may have been discovered on the property. Be sure that all items are removed that you did not agree to. Verify that the title or escrow agent has your correct vesting, or the way you want to take title to the property. This is important because to correct a vesting on a deed later on is time consuming and can be avoided if care is taken when escrow is closed.

Besides the paperwork which you must review and verify, you should reinspect the property once again just prior to closing. Is everything the way you expect it to be? Have all the necessary repairs or other corrective work been done that were promised to you? This is important so that you don’t arrive at your new house and find unexpected surprises.

The most important thing to remember is that before closing you want to be certain that all the conditions of the purchase contract have been met. You want to be sure that all directions given to the closing agent have been performed. Before signing your name to any closing documents, check and double check that everything is correct, interest rate, fees charged and condition of the property.

If everyone always did everything they said they’d do, we’d all be a lot richer. Unfortunately, tasks are overlooked, and the ball is often dropped. If you want to have successful closings, you must have strong “follow-up” skills to catch problems early in the process. Follow-up on everyone and everything.

We can’t begin to tell you the number of closings that almost fell apart, or would have fallen apart had we not kept a watchful eye on the entire process to make sure that everything was completed when it needed to be. Here’s a typical scenario: you’re wholesaling a house and you have just 30 days to get it closed before the contract with the Seller expires. You find a buyer who can get a loan and close before the expiration. Then a few days before closing you find out that the loan isn’t ready and closing must be delayed two weeks, but the Seller already has another Buyer ready to pay more than your price, so they refuse to extend your contract. You just lost the deal.

So what is follow-up? We used to think it meant staying in touch with the buyer to make sure that everything was completed for the loan. Then we learned that the buyer is often a newbie and clueless of what needs to be done. Mortgage brokers just usually respond “Everything looks great” until they can’t close the loan. So the real trick to following-up is to speak to the final decision maker for each step. This works whether you’re selling a retail house or a wholesale house, or even if you are the buyer/borrower. The goal is to close without delays.

Assuming that you have already received a pre-qualification letter from the lender, and ensured that the lender will loan on the deal (i.e. no issues with title seasoning, assignment fees, inhabitability of the property), the first step is to follow-up with the broker/lender that all of the application paperwork was submitted, and have they forwarded it to the lender? If not, what is still required? Determine if the lender requires a termite letter, appraisal, and a survey (most lenders do). If so, have they all been ordered? When is each to be completed? Keep following-up until you verify that each has been delivered. You also want to verify that the appraisal was sufficient for the loan.

If we don’t already own the house, we order a title report as soon as we go under contract with the Seller to discover any defects early in the process, and begin resolving them. Closing attorneys usually do not order the title report until just before closing to receive as current information as possible. But if they find problems, it could delay your closing. It is well worth the $125 to run title ahead of time, and eliminate delays.

Once the broker has forwarded the paperwork to the lender, the next step is to verify the loan has gone to underwriting. If not, what is the delay? If so, was the loan approved? Do any conditions need to be met? What are they and who is handling them? Make sure that once the conditions are met, the loan is returned to underwriting and approved.

Verify that the closing has been scheduled with the attorney, and that they have cleared title. Find out if and when the loan package will be forwarded to the attorney. Then remind all of the players of the date and time of closing, to bring a picture ID to closing, and to bring any funds required in a certified check.

This seems like a lot of work that should be handled by other people, but the reality is that often times something is overlooked. Through your diligent follow-up efforts, problems will be detected early and corrected, allowing your closing to occur flawlessly and on schedule.

Throughout the closing process, you will have been given various documents, some being mandatory government disclosure documents. These disclosures are meant to keep you fully informed in regard to the costs you will or may incur in your closing. Among these documents may be a Good Faith Estimate of Closing Costs and a HUD-1 Statement. You could also receive an explanation of mortgage broker fees, if you engage a mortgage broker to help you find a loan. Many of the fees disclosed may overlap or be the same fees, such as an appraisal fee, origination fee, escrow fee or title insurance fees.

There are other fees, such as courier fees, notary fees, documentation fee, overnight delivery fee, points, processing fee, which may be duplicates of other fees, or which are fees which the originator has marked up to add to it’s profit margin. These are the fees, sometimes called hidden fees, which you may overlook or not feel you have the right to question. You do have that right.

Let’s look at the fees typically disclosed on the Good Faith Estimate form. This is the document which you will first receive if you are applying for a federally related mortgage loan. It’s purpose is to give you an estimate of the loan fees you might have to pay at closing. You will want to compare the fees found on the Good Faith Estimate form with those fees listed on the HUD-1 Closing statement, which is given to you at the time of closing. A few of these fees, such as the credit report fee or the appraisal fee may be required to be paid prior to the closing, but in general closing costs are paid at the time the sale is finalized. It is wise to question the fees listed on the Good Faith Estimate form, as once stated on the HUD-1 Closing statement, changes may delay the closing or you may feel it is too late. A delayed closing may require loan documents to be redrawn, the move-in date to be changed, or one of the parties in the transaction may not be available for signature.

The first category of charges listed on the Good Faith Estimate Form are those items payable in connection with your loan. These may include an origination fee, points, appraisal fee, credit report fee, mortgage broker fee, underwriting fee, processing fee, courier fee, and wire transfer fee. An origination fee and points are typically a set fee which you have agreed to pay in order to obtain your loan. It may be a percentage of the loan amount, say 1%, or it may be an agreed on amount. In some instances, the lender may not charge either of these fees. The origination fee and points are deductible as an expense item in some instances, but must be amortized over the life of the loan in others. You will want to weigh your options when agreeing to pay this fee. Oftentimes, you can “buy down” or reduce your over-all interest rate by agreeing to pay points. Take into consideration the length of time you will anticipate keeping the loan and weigh the benefits of paying these fees.

An appraisal fee and a credit report fee are typically not negotiable, as the lender or your mortgage broker will order these. Even though you may have an appraiser which you like and will offer you a reduced fee to perform the appraisal, the lender may require that the appraisal be performed by one of their “approved” appraisers. If you do, however, have an appraiser which is considerably less costly than the lender’s appraisal company, you appraiser can typically become certified by your lender by a simply providing the lender with certain licensing certifications. Using your own appraisal company may save you several hundred dollars in appraisal fees.

The mortgage broker fee listed on the Good Faith Estimate form is a negotiable item, a cost which you and your mortgage broker will agree upon when you apply for your loan. The lender’s inspection fee and underwriting fee and processing fee may be somewhat negotiable, but many lenders stay fairly firm on these fees. You can always ask and see if they will reduce them down or waive them altogether.

Courier and wire transfer fees are typically charged for transferring loan documents to the escrow closing company and wiring the loan proceeds to the closing officer. You may ask that these be reduced or waived. Ask if your lender has the ability to transfer the documents electronically. This may save you on these fees. Also be sure to verify that the closing agent has not marked up these fees at the time of closing.

The next group of fees listed on the Good Faith Estimate form are items required by the lender to be paid in advance and reserves required to be deposited with the lender. Look these other carefully, checking the calculations and comparing the figures with the amounts you were quoted for interest, mortgage and hazard insurance. Verify the property taxes.

Following the reserves required to be deposited into escrow, the government recording and transfer charges will be listed. These are fees which the government charges to transfer the property and record your loan and purchase and they are not negotiable.

The next list of charges may be survey fees, pest inspection or property inspection fees. Verify that these fees are exactly what you agreed to pay. Remember to look for any credits which the Seller agreed to give you on these costs. Many of these inspection fees are negotiable, and either Buyer or Seller may pay them.

The last category of closing fees are the title charges. These relate to the fees charged by the title or escrow company closing your purchase. There will be a settlement or closing fee, an abstract or title search fee and a title examination fee. Ask about these with your closing agent and ask if any of them can be reduced. The title insurance fees will then be listed. Be sure to check if you qualify for a “re issue rate” or a reduced fee. Oftentimes when title on a property has recently been searched, within the last two to five years, the title company will offer a reduced rate. If your transaction is a refinance, the lender may allow you up to a 60% discount off the standard published title insurance rate. Keep in mind that title insurance rates are state specific, and some states may impose a minimum title insurance fee, while others may not.

The next listing of fees will include a document preparation fee, notary fees, attorney fees, and other miscellaneous fees. Look these over carefully. Notary fees can be waived and attorney fees should be the same as you agreed upon initially. If these fees change, question the reason for the adjustment.

While questioning your closing costs takes some time and effort, you have the opportunity to save several hundred if not thousands of dollars at closing time. The small fees of $75 up to $300 may seem somewhat insignificant in relation to the total purchase of your new property, but when added together, they can make a difference. Every savings you make at the closing will be money well spent. This money can be used for repairs, remodeling, or furture expenses that come with owning a property.

It may happen that you or your spouse must be out of town at the time of your escrow closing. Perhaps you suddenly have to go out of the country and you may be worried how you are going to close your escrow on time when you can’t physically be present for the closing. There are several solutions to this problem.

The first solution and the one that has most often been used in the past and is most widely accepted is the Power of Attorney form. This form allows you to give the power of your signature to someone else who will sign on your behalf. You may sign a Limited Power of Attorney, which would pertain to a certain transaction, so you do not have to fear that someone could sign you life away. The Power of Attorney form may also be General, covering a broad range of topics. The Power of Attorney form should be recorded at the County Recorder’s office. When the person returns, he will record a cancellation of the power at the recorder’s office.

A second alternative to signing escrow instructions when you are out of town, is the use of a signature sent by way of Fax. Some escrow and title companies are allowing escrow instructions with fax copies of signatures, with the understanding that the original signed copies will be supplied a few days later.

The escrow holder allowing a faxed signature will include a statement which will state that “in the event the buyer, seller, agent and/or assigns utilize facsimile instructions, the escrow holder is instructed to rely and act upon such instructions, in the same manner as if the original signed instructions and/or amendments were in the possession of the escrow holder and the buyer and or seller agree to forward signed hard copies of instructions, and/or amendments within 48 hours ( or other specified time ) of transmission. The Escrow holder will take no responsibility or liability for any party who relies upon facsimile instructions which were erroneously transmitted to the escrow holder.”

Many escrow companies do not like to rely on a fax copy of signatures, as the opportunity to forge a signature is easily done. The escrow companies may use the fax system to gather required information, such as payoff and credit information, but they prefer to close escrow on live signatures, or with a Power of Attorney authorization.

A local friend of mine, a real estate attorney who has been a very successful full-time investor for 30+ years, shared this story with me one time. These are the actual letters; he kept copies for humor’s sake…

Hal
————-

Years ago, a New Orleans lawyer sought an FHA loan for a client. He was told the loan would be granted IF he could prove satisfactory title to a parcel of property being offered as collateral. No big deal; customary request.

The title of the property dated back to 1803. Instead of tracing title back 50 years, the customary amount, the lawyer traced it all the way back to 1803. This took him three months.

After sending the information to the FHA, he received the following reply (actual letter):

“Upon review of your letter adjoining your client’s loan application, we note that the request is supported by an Abstract of Title. While we compliment the able manner in which you have prepared and presented the application, we must point out that you have only cleared title to the proposed collateral property back to 1803. Before final approval can be accorded, it will be necessary to clear the title back to its origin.”

Peeved, the attorney sent back the following (actual letter):

“Your letter regarding title in Case No. 189156 has been received. I note that you wish to have title extended further than the 194 years covered by the present application.

I was unaware that any educated person in this country, particularly those working in the property area, would not know that Louisiana was purchased, by the U.S., from France in 1803, the year of origin identified in our application.

For the edification of uninformed FHA bureaucrats, the title to the land prior to U.S. ownership was obtained from France, which had acquired it by right of conquest from Spain. The land came into possession of Spain by right of conquest made in the year 1492 by a sea captain named Christopher Columbus, who had been granted the privilege of seeking a new route to India by the Spanish monarch, Isabella. The good queen Isabella, being a pious woman and almost as careful about titles as the FHA, took the precaution of securing the blessing of the Pope before she sold her jewels to finance Columbus’ expedition.

Now the Pope, as I’m sure you may know, is the emissary of Jesus Christ, the Son of God, and God, it is commonly accepted, created this world. Therefore, I believe it is safe to presume that God also made that part of the world called Louisiana. God, therefore, would be the owner of origin and His origins date back to before the beginning of time and of the world as we AND the FHA know it. I hope to hell you find God’s original claim to be satisfactory.

Now, may we have our damn loan?”

The loan was approved soon thereafter.