The following is an extended-length guest post from Avky Inc.
Avky Inc: How Sellers Prepare For Closing
Sellers All written contracts should have a closing date. The closing date is the day where everyone signs and the sale becomes a “done deal”…right? In theory, yes, that is right. In reality, that date is actually a “target” date to sign the paperwork. I can’t specifically recall any contract that has actually closed on the actual closing date. You see, most prepared contracts also provide for an automatic extension of that date to finalize contract terms and contingencies. Additionally, addendums are available allowing for more time to close a sale. With that said, every effort should be made to aim for the contract specified closing date. Ever, that if something does not fall into place that does not mean the entire sale is lost. Agreement of the parties is the key to determining the actual closing date.
Again the warning, make absolutely sure the agreement of the parties is in writing. This is, in particular, the time when the practice of getting things in writing seems to become lax. You have limited or no recourse if you allow the contract to expire without obtaining an extension in writing. Protect yourself!
The buyer will have to satisfy the lender requirements, review title policy, obtain insurance, etc… You do not need to pre-occupy yourself with the buyer’s responsibilities other than to get reassurance that they are being fulfilled. The details of their financing is of no importance to you. This book focuses attention to the sellers, so you need to pay attention to your duties. All too often sellers are so nosey finding out how much down payment the buyer is having to make or what interest rate they are getting that they fail to fulfill their own obligations. Unless the seller is owner financing, this information is useless to you.
What exactly are the responsibilities you need to focus on? Let’s discuss some of the basic ones. When you go to closing you will be reviewing, among other forms, a HUD1. This is a standardized forms that discloses all credits and debits to the buyer and seller. I have provided a blank sample for you to familiarize yourself with.
If you have a mortgage on your property how much is your payoff? It is generally not the amount that is shown on you monthly stub. That amount represents the payoff if you were to pay your loan in the time frame it was originated. You will need to call or fax a note to your lender requesting the payoff . They will need the name and address of the closing agent and the closing date
The closing date? Oh no, what happens if you don’t close on the closing date? Don’t fret, typically the mortgage company will add ten days or so of interest to the quoted payoff allowing for transaction and courier time. If you close on time you can expect a refund for a few dollars of interest. Other lenders might give a payoff for the actual closing date and instruct the closing agent to add a per day amount to cover the interest for each additional day past the quoted closing date.
It may seem petty for the lender to be so sticky about a few dollars here and there but I assure you they are not pleased about losing the long term interest they would have made had you kept your loan through the original term. They’re going to get every penny they can at this point.
Many mortgages contain escrow clauses allowing the lenders set aside a monthly account to cover insurance and taxes. In these cases a portion of your payment is placed in this account. “Many people do not realize this. It is easy to take for granite that your lender pays your property taxes and insurances–not realizing that you are the one actually paying for them”, notes Avky Inc. co-founder Kyle Uchitel.
Since taxes and insurance may not be paid at the same time depending on your loan specifications (taxes are paid in arrears, insurance in advance) you will most likely have an amount due you from your escrow account.
Some lender will take this amount into consideration when supplying your loan pay-off to the closing agent and give you credit. Others will wait for a written request from you. It is your responsibility to determine which type of lender you have. I suggest that you request the status of your escrow account in writing at the same time you request your loan pay-off. Also at this time include a stipulation that if the lender does not provide credit at the time of closing they need to issue a refund check.
Good news with the property taxes! Other than checking for accuracy you can leave the work to the closing agent. Depending on what time of the year you close on your sale you will either receive a credit or deduction for your taxes, states Avky Inc.
If you close on July 7th and taxes for the year have not been paid the closing office will estimate your taxes from January 1st through July 7th (the seller pays through the closing date) and charge that amount to you. That is, you will be have that amount deducted from your proceeds
Here’s the confusing part. The buyer will have that amount credited to their settlement costs. This means that they will have to come up with less funds at closing. However, when the tax bill becomes due the buyer will have to pay for the entire year, not just July 7th to December 31st.
This is really very simple but it sounds so confusing. Just remember taxes are paid at the end of the year (in arrears).
Now, for example, if you close the sale of your home in November, say November 12th, and your taxes were paid in full on October 31st the tables are turned. You have already paid the buyers portion of the taxes due (the amount from November 16th through December 31st so the buyer will have a charge on their closing statement for their pro-rated portion of the taxes and you will receive a credit. Remember, either way, the seller pays for the closing date.
Credits and More
These credits and deductions are irregardless of your status with your escrow account. You will have to get the refund from them, if applicable. The closing agent deals directly with the buyer and seller to issue tax credits and will not accept any lenders promise to pay taxes. Title can not be transferred with taxes due as the title insurance will not accept a tax lien on the property from an existing owner. Late taxes and penalties will also be taken from the seller proceeds.
A word of warning to the seller. It is not unheard of for a seller to have to come up with money to close a sale. If you are in a predicament where you have not paid your taxes in a few years you could find yourself in quite a bind come closing time. Those penalties add up fast! You can try and get a reduction from the taxing entity by begging but don’t count it as a sure thing! Some areas have laws prohibiting this. Don’t be embarrassed at closing time and expose yourself to liability. If you fall in this hole check out your financial ability to sell your home before placing it on the market.
Unlike taxes, insurance policies are paid in advance. That means, depending on when your policy is issued, you have a full year of coverage. Say, for example, you paid your policy from April 1st to the next April 1st. If you close your sale in July you will be due a refund from the insurance company of a portion of the policy.
Avky Inc is a distribution company based out of Phoenix. Avky Inc can be reached on Twitter at @avkyinc.