Anatomy of a Real Estate Transaction: From Contract to Closing
Many people who are first-time buyers don’t know the particulars of what occurs in a real estate transaction from the beginning to the end. For those who have bought or sold before, this will be a refresher.
All real estate transactions begin with a Contract of Sale. Under New York’s Statute of Frauds, a written contract is required for a real estate transaction to be valid. A real estate contract requires certain terms to be included in order for it to be enforceable. For example, a contract requires a description of the property in sufficient detail so that it can be identified. Many times, a street address is sufficient, but it’s better to have the street address and section, block, and lot numbers, which identify the parcel on a tax map in the municipality. In addition, the buyer, the seller, the purchase price, and the relevant terms of the purchase must be listed.
Relevant Terms Include:
- The amount of the down payment;
- A mortgage amount;
- Who’s going to hold the down payment? and
- Under what circumstances will that down payment be released to either the buyer or the seller (depending on what occurs in the transaction)?
If you are a buyer, you are typically working with a realtor to locate a property. Once you do, you make an offer. Then the realtor asks you to sign a document called a “binder,” that they present to both the buyer and the seller for approval. We suggest that sellers do not sign binders. Instead, we encourage them to take the binder presented by the realtor and give it to us so we can prepare a formal contract. We suggest this because the binder agreement can be enforced, in some cases, as a contract to purchase the property if all of the relevant terms are included as required by the Statute of Frauds.
It is much better to sign the more formal, detailed contract. The binder usually just has the basic terms on a one-page document prepared by the realtor. If you’re using an attorney, and most people do, you should simply go directly to contract as soon as possible, as opposed to having both sides sign a binder.
Once there is an agreement in principle for the basic terms of the sale or purchase, the attorney for the seller typically prepares a contract and sends it to the attorney for the purchaser. The attorney for the purchaser reviews it, makes comments and looks for changes in the legalese. Then they meet with the purchaser, have the purchaser review it with them, purchaser signs, gives the down payment check, and then the contracts are forwarded to the seller’s attorney.
It seems odd to most sellers that they don’t have an opportunity to see the contract first. Don’t let this concern you, because, the contract won’t be binding until after the seller signs it. So the seller’s attorneys include in their cover letter a statement that says, “This contract shall not be considered binding until after the sellers review it with their attorney and make any required changes. Furthermore, the contract must be returned within a stated time frame otherwise, it will be considered null and void. Once both sides sign and all changes are made, the down payment check is deposited in the seller’s attorney’s escrow account and held until closing occurs, or the deal is a bust.
Once a contract is signed, a title search is ordered through a title abstractor insurance company. Title insurance companies’ rates are regulated by the State of New York, which requires that they charge the same amount for the insurance. If there is financing involved, there will be two title insurance policies, one for the lender and one for the purchasers. This is paid for by the purchasers. The premium is included on a title bill at the closing along with charges for searches, surveys and other things that are performed by the title company in order to exercise due diligence before the insurance policy is issued. The title search also reveals other matters that concern the purchasers and the purchaser’s attorney must review the report for liens, out-of-possession issues, judgments, bankruptcies, municipal code compliance, etc.
In addition to the title work, the purchasers process their mortgage documents and work with their bank and their loan officer to perfect their mortgage. The contract usually provides for 30 or 45 day period of time from contract signing for that to be issued. Once the mortgage application is approved, a commitment is issued. Many purchasers presume that they are “ready to close” once their mortgage commitment is issued. In reality, issuance of the mortgage commitment begins the “bank clearance” process. The commitment is usually conditioned upon a list of closing pre-requisites. For instance, all commitments require a “satisfactory appraisal of the property”. Other conditions may require proof of the borrower’s source of funds for the down payment. The transaction will not close until the bank “clears” the loan for closing. The closing is typically scheduled for 60 to 75 days after the contract signing. Closing dates in New York are usually written as “on or about” dates, and this means that the closing will occur from the date that is stated or any date past that date within the next 30 days or so afterwards. Many purchasers assume that they will close on the date stated in the contract. Most times, that is not the case.
Once closing is set, the parties review all bills for realtors’ commissions, title expenses, survey expenses. The parties’ attorneys account for adjustments for taxes, heating oil that remains in the tank, propane that remains in tanks, and so on. Once the sides agree on what the adjustments are, they appear at the closing table.
At the closing, the seller signs a deed and other New York State transfer documents that are required for processing the deed. The purchaser signs all of their mortgage documents, typically a promissory note and a mortgage which creates the lien on the property, along with many other documents that the bank generates. Each bank is somewhat different; some generate a stack of paper that’s a half-inch thick, and some generate a stack of paper that’s two inches thick. In any event, the purchasers will get copies of all of the documents that are presented for signature by both the bank as well as the title company and the seller.
When the transaction is concluded and the money has changed hands, the seller provides keys, alarm codes, remote controls, etc. to the purchasers, and then the parties go their separate ways, and the purchasers can enjoy their new home.
If you feel lost in the home-buying process, do yourself a favor and contact Jim Leonick or Lisa Leonick, who have over 50 years of combined experience handling all types of real estate transactions.
James F. Leonick
Leonick Law, P.L.L.C.
TEL: (631) 486-9500