The process of buying or selling a home has many steps.
But if everything proceeds according to plan, it will all culminate in settlement (sometimes called a closing) and the transfer of ownership will take place with the final stroke of a pen.
So, exactly what takes place in the few days before and during the day of settlement? Much of what you need to know is outlined in the road map for any home sale – The Residential Contract of Sale. In that contract, there are several paragraphs that specifically address what the buyers and sellers must do to produce a legally acceptable settlement.
Deed and title
In paragraph 20 of the contract, it addresses the Seller’s responsibility to convey the property “free of liens and encumbrances.” After all, you can’t sell something unless, first, you can prove that you own it, and, second, demonstrate that all liens the seller may have against the property (mortgage, home equity loans, etc,) will be fully satisfied at settlement.
With respect to the buyer, paragraph 20 also says, “Buyer expressly assumes the risk that restrictive covenants, zoning laws or other recorded documents may restrict or prohibit the use of the Property for the purpose(s) intended by the Buyer.” By the time of settlement, the buyer should have already had the opportunity to review any restrictions resulting from a homeowner’s association or unique zoning issues, such as might be associated with a house in a historic district or other special use situation.
So, paragraph 20 warns the buyer that you can’t come back after settlement and want a “do-over” because you suddenly found out that the zoning laws won’t let you open up a tattoo parlor in your garage.
If there are title defects that must be resolved, paragraph 20 give the seller up to 14 days from the original date of settlement to, at the seller’s expense, cure these defects. If the seller is unable or unwilling to correct title problems, then the ball is in the buyer’s court, and they can either take the property “as is,” or withdraw from the contract.
In the contract’s next paragraph (No. 21), it says, “At settlement, Seller shall deliver possession of the Property and shall deliver the Property vacant, clear of trash and debris, broom clean and in substantially the same condition as existed on the Date of Contract Acceptance. All electrical, heating, air conditioning, plumbing and any other mechanical systems and related equipment, appliances and smoke detector(s) included in this Contract shall be in working condition. Buyer reserves the right to inspect the Property within five (5) days prior to settlement.”
Even though the buyer may have already completed a home inspection, this is their last bite at the apple to make sure that “what they see is what they get,” and that everything works. If the furnace was working properly during the home inspection, but is found to be non-operational during the final walk-thru, it remains the seller’s responsibility to put it in working order.
Consequently, when a buyer does the pre-settlement walk-thru with their agent, it’s important to check everything out and confirm that it’s working. Start the dishwasher, turn on the stove, run the heat, flush the toilets.
Do it all, because after settlement, you’ll own the place, and unless it’s possible to prove some sort of fraud, there will be no recourse.
Many times, a buyer will purchase a home warranty or make such a warranty part of the contract. These warranties typically cost about $500 and will cover the buyer (less a $100 deductible) for one year against the failure of what’s built into a house, things like the HVAC system, plumbing, electrical and appliances. For a reasonable cost, it’s a nice safety net for buyers who might have lingering concerns about the future condition of expensive components, such as air conditioning compressors.
For sellers, a home warranty can also be a benefit, since it will provide coverage during the time that their house is on the market. There’s nothing more aggravating than a $5,000 air conditioner that decides to go south three days before you go to settlement. A home warranty can help protect sellers against such an unfortunate circumstance.
In paragraph 22, called Adjustments, it basically notes that the date of settlement will define when ownership of the house has passed from the seller to the buyer. Accordingly, adjustments will be made at settlement to reimburse the seller for property related expenses that they may have prepaid.
The most common of these are real estate taxes and homeowner’s fees. If a seller has already paid all of their property taxes for 2012, but sells his house on July1, he will be reimbursed at settlement for a half year of property taxes. On the date of settlement, that expense becomes the responsibility of the new owner. The same calculation will also be applied against other prepaid items, like water and sewer assessments or homeowner’s and condo association dues.
However, there are some items for which there will be no adjustment. For example, paragraph 22 also says, “Any heating or cooking fuels remaining in supply tank(s) at time of settlement shall become the property of the Buyer.”
So, if you’re a seller, you’ll want to make sure the heating oil company doesn’t come out and top off your tank the day before you go to settlement. Whatever they pour in will automatically belong to the buyer.
At settlement, there’ll be a blizzard of papers to sign. Most of them will pertain to the transfer of ownership and paying off an old mortgage, or setting up a new one.
But, there’s one document that garners more attention than any other, the HUD-1. Sometimes called a settlement statement, the HUD-1 contains all of the financial figures associated with a home sale transaction, and as you might suspect, the money side of this is something buyers and sellers will carefully review. In most cases, your agent will get a preliminary HUD-1 a day or two before settlement, so they’ll have a chance to check it for accuracy and make any necessary corrections.
On the buyer’s side, the HUD-1 will show the purchase price and all the expenses buyers are responsible for. Likewise, a second column will detail the seller’s expenses.
At the bottom of page one, it will then summarize how much the buyer must pay at settlement, and how much the sellers will get. Unfortunately, those positions can sometimes be reversed. There can be conditions where a buyer might not need any cash at closing, or the seller might need to come to the table with money, because they’re selling the house for less than the remaining balance on the mortgage. Regardless, the HUD-1 spells it all out, so there shouldn’t be any confusion about who owes what.
Every once and a while, we’ll have a buyer ask us, “when will we get the keys and own the house?”
The answer is immediately after settlement is completed. As soon as all those papers are signed, we hand you the keys and you own the house. The money will change hands right there at the settlement table, or occasionally there will be a wire transfer; and instantly, the deal will be done.
That’s one of the interesting parts of real estate, there’s a clear-cut conclusion to the process. So as settlement day approaches, work closely with your agent to make sure everyone has their ducks in a row. Confirm that you clearly understand how it’s all going to go, because once it’s over, it’s over.
Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is McWilliams@BobDonna.com.