Contracting and escrow
The pre-closing period
Contracting and escrow
Fully executed purchase contract. Whether the contract is a standard form, such as the FAR/BAR “As Is” contract, or a custom agreement, it contains the terms and conditions governing the transaction. It sets forth the duties and obligations of each party, such as giving the buyer a certain timeframe to inspect the property. The contract should be reviewed and renegotiated until both parties are satisfied enough to sign it. The contract is enforceable only when it is fully executed.
Earnest money and other funds. After the execution of the contract (typically within three days), the buyer provides earnest money to the licensee as a good faith deposit. The licensee must turn the money over to his or her broker by the end of the next business day after receiving it. The broker must then deposit the earnest money into an escrow account within 3 business days from the date the licensee received the money.
The escrow account may be the broker’s own escrow account or it may be with a title company or an attorney. The earnest money will remain in the escrow account until completion of the transaction (closing), at which time it will be transferred to the appropriate party. If the purchase contract calls for any additional funds from the buyer prior to closing, then those funds must be tracked and deposited into the escrow account as indicated in the contract.
The pre-closing period
Loan application and approval. A buyer who plans to finance the home purchase must obtain a mortgage loan prior to completing the purchase transaction. Buyers may obtain pre-approval for a loan before finding a home so they are aware of the maximum loan for which they qualify. Pre-approval also speeds up the closing process in that there is no additional wait time for loan approval. If the buyer has not been pre-approved, he or she must apply for and obtain loan approval. The buyer may also want to lock in the loan’s interest rate in advance so there are no rate increases during the loan approval and transaction closing processes.
Most transactions allow for the contract to be contingent upon the buyer’s obtaining conventional or FHA financing for the purchase. Since loan approval is typically a contingency within the purchase contract, the seller should be notified when the approval is obtained.
The purchase contract usually contains some contingencies to the purchase. Typical contingencies include the following:
- the buyer’s obtaining financing
- the buyer’s performing a home inspection and a pest inspection
- the seller’s disclosing of all known material facts that can affect the home’s value
- the seller’s completing any agreed-upon repairs unless the contract is an “as is” agreement
- the buyer’s right to cancel the contract based on the results of the inspections
The contract will include whether the contingencies are subject to active or passive approval. If they are to be actively approved, the contract must also include the dates by which the contingencies must be met and removed. If approval of the contingencies is to be passive, they will be considered approved if the buyer does not actively disapprove them.
Appraisal. The lender will order a property appraisal to ensure that the property’s value is sufficient to cover the mortgage loan should the buyer ever default. The buyer will also be interested in the appraisal to determine if the selling price is in line with the property’s actual value. The buyer has a right to receive a copy of the appraisal at least three business days before the scheduled closing.
Title search and insurance. A title search verifies the ownership of the property and uncovers any missing deeds and/or clouds on the title. The search is performed in the county where the property is located. Any issues found are the responsibility of the seller to correct. To protect against unknown title issues that appear down the road, both the lender and the buyer need separate title insurance policies.
One of the most important steps in a real estate transaction is having the buyer inspect the property to ensure it is in saleable condition. This is especially important in a state as hot and humid as Florida, since the climate poses many risks to properties. The property inspection will check the structure and all systems on the property, such as plumbing, electric, HVAC, etc. Even with “As Is” contracts, property inspections are important to determine what issues, if any, the property has.
A pest inspection is separate from a property inspection and is especially critical in Florida where wood-destroying organisms (WDO), such as termites and carpenter ants, are a real threat. Inspectors issue a WDO report and provide copies to the buyer, lender, and title company. Contingencies in the contract should include actions to be taken if this inspection uncovers infestation or damage.
Required repairs. Unless the contract specifies the sale is “As Is,” contingencies should include repairs, payment, or lowered sale price for any issues found in either inspection. Once the repairs are completed, the work should be inspected to assure it was completed and completed properly. Then this contingency can be removed.
Survey. Like inspections and title searches, a survey is crucial for confirming the suitability and representation of the property. Both title companies and lenders require surveys. Buyers should also require one, as a survey will confirm whether the property boundaries match what is stated in the publicly recorded legal description and whether there are any major encroachments on the property.
Buyer hazard insurance. Lenders require a property hazard insurance policy to be in place prior to closing. In Florida, insurance policies for flood and windstorms are also particularly important, and lenders will require them, depending on where the property is located (such as in a coastal and/or low-lying flood area). Property insurance rates are set by the company offering coverage, but standard flood coverage is a national program, so those rates are set by FEMA.
Final walkthrough. Before closing, the buyer and the buyer’s agent should perform a walkthrough of the property to make sure the seller or tenant has vacated the property. They should also check for the removal of any furnishings and appliances that were not included in the sale and the completion of any previously agreed-upon repairs. This is the point to confirm that all related contingencies have been removed.
Review of closing documents. There are several vital closing documents that must be signed and executed before the closing is finalized. These include the warranty deed, bill of sale, closing disclosure, a closing statement, loan documents such as the note and mortgage, and title clearing documents. Some of these documents are prepared by the title company or attorney, and others are prepared by the lender.
Both the seller and the buyer need to review all of the documents they will be signing. While real estate licensees are not attorneys, they should be familiar with closing documents and be able to explain them to their clients and make any necessary changes or corrections they can legally make. They should go over the closing disclosure with their clients the day before closing is scheduled and plan to attend the actual closing.
Additional buyer funds. Prior to closing, the buyer may need to deposit additional funds into escrow. As the original earnest money is generally applied to the down payment, various additional payments may be required at different times before closing. For example, the lender may require the buyer to deposit money in the escrow account to pay for insurance and taxes for the property to protect the lender’s collateral.
Just before escrow is closed, both the buyer and the seller receive a closing statement from the escrow officer which lists the purchase price and all the expenses associated with buying the property and how those expenses will be allocated between the buyer and the seller. Many of the fees listed on the closing statement will have already been paid. However, the final closing statement has the credits and debits, which are paid out of escrow on behalf of the party being debited. Both buyer and seller will want to inspect the closing statement to ensure that everything is in order. The seller will also want to be assured that the buyer has the money to close the transaction.
Earnest money transfer. In accordance with Florida license law, if the broker has held the earnest money in his or her own escrow account, the broker must account for and deliver all appropriate funds, deposits, payments, abstract of title, mortgage, conveyance, lease, and associated documents to the closing agent and/or other designated entitled individuals. When closing is imminent and the lender has approved the loan transaction closing, the closing agent will prepare to transfer the earnest money deposit, the additional buyer proceeds, and the mortgage loan funds to the seller.