CHAPTER 14 SNAPSHOT REVIEW
Real Estate-Related Computations and Closing of Transactions
BASIC REAL ESTATE COMPUTATIONS
Sales commissions
● negotiated between agent and client; specified in contract; split between brokers and co-brokers and between brokers and associates
Calculating gain on sale
● original price + costs/improvements = total cost; sale price – sale costs = amount realized; amount realized – total cost = gain on sale
PRELIMINARY STEPS TO CLOSING
Contracting and escrow
● fully executed purchase contract: contains terms and conditions of the transaction; sets duties of each party; enforceable only when fully executed
●earnest money and other funds: good faith deposit from buyer; broker to deposit into broker, title company, or attorney’s escrow account within 3 business days of receipt; funds remain in account until closing; additional funds to be deposited and tracked
The pre-closing period ● loan application and approval: buyer to apply for loan to finance purchase; may get pre-approved; should lock in interest rate
●contingencies: typical include buyer financing, inspections, disclosures, repairs, buyer right to cancel; contingencies subject to active or passive approval
●appraisal: lender orders to confirm property value to support mortgage loan; to confirm appropriate selling price
●title search and insurance: search verifies ownership and finds clouds on title; seller responsible for corrections; lender and buyer need insurance for unknown issues in the future
●inspections: property inspection for structural and system issues; pest inspection for WDOs
●repairs: unless “As Is” contract, property repairs should be contingency
●survey: required by lender and title company; confirms boundaries and encroachments
● hazard insurance: hazard and flood separate policies; both may be required by lender
Final preparations ● final walkthrough: before closing to assure repairs made, property vacated, contingencies removed
● closing documents: buyer and seller should review closing documents prior to closing
● additional buyer funds: additional payments may be required for both buyer and seller; included on closing statement
● earnest money transfer: broker is responsible for funds belonging to third party; transfer happens after lender approves closing
THE CLOSING EVENT
The setting ● sale contract sets date, location, and who participates
The closing process ● verify contract fulfillment; exchange consideration and title; pay expenses; sign final documents; arrange for recording the transaction
Transfer of title ● seller gives evidence of marketability– title abstract or title insurance commitment; may also need affidavit stating no new encumbrances incurred; seller must remove encumbrances or liens prior to the specified date; if seller is paying off mortgage lien, lender provides a payoff statement
Transfer of
purchase funds ● buyer produces funds and documents needed to complete the transaction
Escrow procedures ● if closing “in escrow,” escrow agent holds and disburses funds and releases documents when escrow conditions have been met
Lender closing requirements ● common: survey, inspections, hazard insurance, title insurance, certificate of
occupancy, reserves for taxes and insurance, private mortgage insurance
Broker’s role ● broker’s role ranges from nil to conducting the proceedings to reporting the transaction
RESPA ● for residential property, first or second mortgage, federally-related mortgage,
assumption modifying loan terms, lender charging over $50 for assumption
TRID ● TILA/RESPA Integrated Disclosure Rule requires use of Loan Estimate and Closing Disclosure forms
Information booklet ● lender must provide borrower with CFPB booklet, “Your Home Loan Toolkit”
Loan Estimate ● lender must provide CFPB’s H-24 Loan Estimate of settlement costs
Mortgage servicing
disclosure ● lender must disclose who will be servicing loan
Closing Disclosure ● lender must use CFPB’s H-25 Closing disclosure
Disclosures after
settlement ● loan servicers must provide annual escrow statements to borrowers
Limits on escrow
accounts ● places ceiling on amounts lenders may compel borrowers to place in escrow
Referral fees
and kickbacks ● RESPA prohibits payment of referral fees and kickbacks; business relationships between firms involved in the transaction must be disclosed
FINANCIAL SETTLEMENT
OF THE TRANSACTION
Settlement process ● identify closing costs; determine who pays what; do prorations; assign debits and credits; complete closing statement; disburse funds
Selling terms and closing costs ● price, deposits, downpayment, financing, final expenses to be paid at closing;
apportionment of expenses determined by sale contract or custom
Debits and credits ● excess of buyer’s debits over credits is amount buyer must produce at closing; excess of seller’s credits over debits is amount seller must receive
Prorated expenses ● non-prorated items : incurred by one party only; not shared
● prorated items: incurred by buyer or seller in advance or arrears; shared by buyer and seller; typical: real estate taxes, insurance premiums, mortgage interest, rents
Computing prorations ● sale contract or local custom establishes methods of proration to be used for particular items
● 12-month/30-day method: determines average daily amount based on 12-month year and 30-day month
● 365-day method: determines an amount using the actual number of calendar days
STATE TRANSFER TAXES
State documentary stamp
tax on deeds ● based on percentage of property’s sale price; usually paid by seller but is negotiable
● current rate of 70 cents per $100 of sale price in all of Florida except Miami-Dade where it is 60 cents per $100 of sale price on single-family homes and a surtax of 45 cents per $100 of sales price on other residential dwellings
● exemptions include gifts, one spouse to the other, one ex-spouse to the other, inheritance, partition deed, U.S. government or between government agencies, eminent domain, nonprofit to state agency
State intangible tax
on mortgages ● based on loan amount; $2 per $1,000 of loan amount; due at closing
State documentary
stamp tax on notes ● based on mortgage and lien amounts; 35 cents per $100 of promissory note total due at closing
OTHER CHARGES
Document preparation ● person who has to sign usually pays for preparation
Recording ● party who wants to record usually pays for recording
Broker’s commission ● person who employs usually pays commission; set in contract
Title insurance ● fees and charges negotiable as to who pays
RULES OF THUMB
Seller credits and debits ● customary seller credits: prepaid items, purchase price
● customary seller debits: property tax (prorated), stamp tax on deed, owner’s title policy, deed preparation, seller’s attorney, broker’s commission (if hired), loan payoff, prepaid rent (prorated), security deposits
Buyer credits and debits ● customary buyer credits: property tax (prorated), earnest money deposit, prepaid rent (prorated), security deposits, loan proceeds
● customary buyer debits: purchase price, stamp tax on note, lenders title policy, intangible tax on mortgage, mortgage and note preparation, buyer’s attorney, deed recording, mortgage recording
CLOSING DISCLOSURE
Forms and procedures ● mandatory: Your Home Loan Toolkit booklet at loan application; Loan Estimate form 3 business days after loan application; Closing disclosure 3 business days before consummation
Good faith ● lender must ensure good faith: Loan Estimate costs based an best information available; Closing Disclosure costs must equal estimate costs within certain tolerances
Types of charges ● specific charges may exceed estimate; most cannot
Applicable transactions ● most closed-end consumer mortgages, including construction loans, loans secured by vacant land, loans to trusts
●not covered: home equity loans, reverse mortgages, loans on mobile homes, loans by small lenders (no more than 5 loans per year)
The H-25 Closing
Disclosure form ● form varies depending on loan type; describes terms, payments, costs
