The Closing Process Flashcards
The consummation of the real estate transaction is known as the closing, or settlement. Closing is when title is officially transferred from seller to buyer in exchange for consideration (which is most likely to be money). In Arizona, closing is usually referred to as “close of escrow,” or COE. COE and closing can be used interchangeably.
In many transactions, the closing is also when the buyer’s mortgage funds are disbursed to cover the cost of the property. After closing, the purchase contract will have been fully executed.
Local Rules
Every locality does things a little differently when it comes to closing. Also, each property, buyer, and seller has different needs. Maybe the buyer is buying from out of state, or the seller is financing the purchase. Each transaction is unique, just like your fingerprints.
However, there’s a general process for closings in Arizona. We’re going to walk through the typical closing process for a piece of residential real estate. To make things simple, we’ll assume the buyer and seller used the Arizona Association of Realtors standard contract. If that doesn’t sound like your kind of thing, then use your imagination to make the necessary changes.
Closing
When you picture a real estate closing, you might picture what’s called a “table closing:” a buyer, seller, and various money people sitting around a table signing things. Then at the end, the seller gets a fat check and the buyer gets a new set of keys. While that is how closing happens in some states, generally, Arizona doesn’t do it this way.
Who’s Who
Let’s start by meeting the players in our real estate drama:
Buyer: pays the seller and receives the title
Seller: receives payment and transfers title to the buyer
Real estate agent (broker and/or sales agent): accounts for all the transacted monies, fulfilling their fiduciary duty of accounting (so while you won’t be preparing the settlement statement, for example, you will double-check that it’s right.)
Escrow officer: The person who runs the closing (also known as the closing agent). In Arizona, escrow officers generally hold all of the documents and money as a neutral third party as the transaction takes place. They will order the title search, prepare the closing documents, pay off liens, calculate prorations, disburse funds, and eventually record the deed.
Lender: The lender supplies the money for the purchase unless the buyer is buying in cash or using seller financing. A buyer contributes a down payment, and the lender provides the rest of the funds.
Title company agent: The title company agent does the title search on the property to discover any liens or title issues. They will then issue the title commitment and the title insurance (which remember, serves as proof of marketable title). Title agents and escrow officers are two different people with two different jobs, though often they are both employed by the same larger company.
It Starts With the Contract
When a seller accepts a buyer’s offer, they sign a contract. It’s also customary (but not required) that they put down a deposit to secure the contract. The amount of the deposit is spelled out in the contract. At closing, the deposit amount will be applied to the money the buyer is bringing. If the contract is canceled, the deposit will be returned to the buyer, but if the contract is broken, the seller might get to keep it.
Opening Escrow
The contract and deposit are sent to an escrow officer for safekeeping. The escrow officer then opens the escrow and sends a receipt to the buyer and seller for the deposit. “Opening escrow” is the start of the purchase process here in Arizona. It just means the contract is officially in effect and the escrow officer has started the ball rolling toward closing.
Once escrow is opened, all of the parties to the transaction have different tasks to do. One of the first things on the escrow officer’s to-do list is to order a title search from a title agent. They will also be finding the payoff amounts for any liens (including the seller’s mortgage), and requesting information from the seller’s HOA (if they have one) about what needs to be done to transfer the property.
The Arizona Closing Process
Here’s a timeline for the whole escrow process, open to close. In this example, we used 40 days as the period between signing the contract and opening escrow, but that number can vary. The close of escrow date will be listed in the contract. And if this seems like a lot of information, don’t worry. We’ll go over each of these dates in the following screens in detail, and you’ll see this timeline again at the end of the chapter.
A timeline of the Arizona escrow process outlining key deadlines and actions performed by the buyer and the seller.
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Escrow Timeline
The inspection period is 10 days that involves a lot of back-and-forth before the contract is officially official. Let’s walk through what that looks like.
Doing the Inspection
If the buyer and seller are using the standard Arizona Association of Realtors contract, the buyer has 10 days after signing the contract to do any inspections they want to. During this inspection period, the buyer can back out of the contract for any reason without penalty (and have their deposit returned).
Typically, a buyer will do at least a standard inspection, and possibly a pest or radon inspection. The general inspector may suggest getting other experts, like an HVAC or roofing specialist, involved, depending on what they find.
Order It Fast
If you’re representing a buyer, you should strongly recommend that they hire a licensed inspector to do the inspection. And it’s wise to get the inspection ordered as soon as possible (within a day) after the contract is signed. After all, they only have 10 days to do any necessary inspections. You don’t want to run out of time with questions about the property unanswered!
Seller Property Disclosure Statement
The Arizona Association of Realtors contract also requires the seller to provide the Seller Property Disclosure Statement (SPDS, charmingly pronounced “spuds”) to the buyer within three days of signing the contract. The buyer has five days after receiving the SPDS to rescind the contract.
If the seller is late providing the disclosure, the buyer still has five days after receiving it to cancel the contract, even if the 10-day inspection window has already closed. (Note that the agent getting the SPDS is the same as the buyer getting it, so hand it over as soon as you can, because the clock has already started ticking.)
Insurance Claims History
The seller should also provide the buyer with a five-year insurance claims history within five days of signing the contract. The buyer has five days after receiving the claims history to cancel the contract. Just like the SPDS, the buyer’s agent getting the claims history is the same as the buyer themself getting the claims history. The clock starts when the documents are delivered to anyone on the buyer’s team. If you sit on these documents and don’t give them to clients right away, you’re costing them precious decision-making time!
The insurance claims history isn’t offered to buyers in every state. That’s a special Arizona bonus we get. A Zona bonus. It allows the buyer (and their agent!) to cross-reference it against the disclosure statement. If a seller “forgets” to mention something major on the SPDS but they made an insurance claim about the issue, the buyer is notified about it (and also has the valuable information that the seller might not be entirely trustworthy).
Buyer’s Inspection Notice
After the inspection report comes back, the buyer’s agent fills out the Buyer’s Inspection Notice. The Buyer’s Inspection Notice, sometimes called the request for repairs, lists everything the buyer would like the seller to fix, based on the issues found by the inspector. It’s not an iron-clad demand, though. Instead, the Buyer’s Inspection Notice opens the negotiations on repairs and concessions (a concession is a reduction in the sale price or a credit to the buyer for approximately the amount of money it would cost to do the repair). It should include anything that the buyer absolutely needs to be repaired to go through with the deal, but can also include some nice-to-haves.
The Buyer’s Inspection Notice must be submitted within the 10-day inspection period. If no inspection notice is submitted, the buyer is agreeing to buy the property as-is. Note that a buyer can only submit one of these, so make sure it’s thorough before sending it over.
a paper monthly calendar showing each day with a pen sitting on top
Five-Day Response Period
The seller has five days after receiving the inspection notice to decide whether or not they want to make the requested repairs. They can either:
Move forward with no repair requests. If they do this, the inspection period is over and the contract is final.
Request repairs. They might offer to only make some repairs, or offer a reduction in price to not do some of the repairs requested.
Cancel the contract completely. A seller can say no way to the whole thing.
Another Five-Day Response Period
If the seller either makes a repair counter-offer or rejects the inspection notice altogether, the buyer has five days to decide if they want to go through with the purchase either with no repairs or the ones suggested in the counter-offer. Thankfully, this is a take-it-or-leave-it kind of situation: there’s no counter to the counter.
If the buyer says no thanks, they have five days to cancel the contract. If any repairs are agreed upon, the seller must have them completed three days before the close of escrow. The buyer can do a walk-through to verify the repairs are done before closing (more on that later!).
The Inspection Period
Whew! That was a long road to get from a signed contract to… well, still a signed contract. But now it’s signed, sealed, and ready to be delivered. Here’s what happens next.
Preliminary Report and Title Commitment
Remember the preliminary report the title company provides? We talked about it in the last level. After the title company completes the title search, this report is sent to the buyer and their agent. The escrow officer will work to clear up any liens that the title company wants cleared before they issue a title commitment. Once the title company is happy, they commit. The buyer has five days after the title commitment to cancel the contract based on what’s in there. Maybe there’s a deed restriction they didn’t know about or an unacceptable, previously-undisclosed easement. After five days, though, the sale moves forward as is.
Getting a Loan
If the buyer is using a mortgage to purchase the property, they’ll start the process of applying for a loan as soon as the contract is finalized. Within three days of applying for a loan, a lender must provide a borrower with something called the Loan Estimate. This is a form that estimates all of the costs for the loan.
Once the buyer selects a lender, the escrow officer works with the lender to get them all of the information they need for closing.
What Lenders Want
Getting a loan is an exercise in paperwork. Borrowers have to provide tons of documentation to their prospective lender. Typically, they’ll have to send:
ID for all borrowers
Two months of pay stubs
Two months of bank statements for all bank accounts, retirement accounts, etc.
Proof of any non-bank assets
Tax returns for the previous year or two
If a borrower is self-employed, the lender will request additional proof of income
The lender will also want to know about the property they’re buying. In addition to the title commitment, they’ll need an appraisal. As you recall from a previous level, an appraisal is a licensed appraiser’s estimation of the property’s current market value. The buyer generally pays for the appraisal. Even if the property has been appraised recently, the bank will want a fresh, up-to-the-minute appraisal. It will be up to the buyer and seller to negotiate a time when the appraiser can check out the property.
Homeowners Insurance
The lender will also require the buyer to get homeowners insurance for the property. The buyer needs to shop for this before the closing because the bank won’t approve the loan without evidence of insurance. Usually, the cost of the policy is folded into the closing costs. Depending on where the property is located, the lender might also require the buyer to get flood insurance. I’m sure you remember this, Anthony, but flood insurance is always a separate policy.
Lender Commitment
When the loan is approved, the escrow officer will put together a settlement statement with all of the credits and debits for the buyer and seller.
This statement is known as the Closing Disclosure. It’s a kind of companion document to the Loan Estimate with more finalized versions of those costs. It must be sent to the buyer at least three days before closing. You’re going to learn a lot about the laws that created these requirements in the next level, but we’ll do a quick preview in this level.
Title Commitment and Lender Approval
Whew! That was a long road to get from a signed contract to… well, still a signed contract. But now it’s signed, sealed, and ready to be delivered. Here’s what happens next.
Preliminary Report and Title Commitment
Remember the preliminary report the title company provides? We talked about it in the last level. After the title company completes the title search, this report is sent to the buyer and their agent. The escrow officer will work to clear up any liens that the title company wants cleared before they issue a title commitment. Once the title company is happy, they commit. The buyer has five days after the title commitment to cancel the contract based on what’s in there. Maybe there’s a deed restriction they didn’t know about or an unacceptable, previously-undisclosed easement. After five days, though, the sale moves forward as is.
Getting a Loan
If the buyer is using a mortgage to purchase the property, they’ll start the process of applying for a loan as soon as the contract is finalized. Within three days of applying for a loan, a lender must provide a borrower with something called the Loan Estimate. This is a form that estimates all of the costs for the loan.
Once the buyer selects a lender, the escrow officer works with the lender to get them all of the information they need for closing.
What Lenders Want
Getting a loan is an exercise in paperwork. Borrowers have to provide tons of documentation to their prospective lender. Typically, they’ll have to send:
ID for all borrowers
Two months of pay stubs
Two months of bank statements for all bank accounts, retirement accounts, etc.
Proof of any non-bank assets
Tax returns for the previous year or two
If a borrower is self-employed, the lender will request additional proof of income
The lender will also want to know about the property they’re buying. In addition to the title commitment, they’ll need an appraisal. As you recall from a previous level, an appraisal is a licensed appraiser’s estimation of the property’s current market value. The buyer generally pays for the appraisal. Even if the property has been appraised recently, the bank will want a fresh, up-to-the-minute appraisal. It will be up to the buyer and seller to negotiate a time when the appraiser can check out the property.
Homeowners Insurance
The lender will also require the buyer to get homeowners insurance for the property. The buyer needs to shop for this before the closing because the bank won’t approve the loan without evidence of insurance. Usually, the cost of the policy is folded into the closing costs. Depending on where the property is located, the lender might also require the buyer to get flood insurance. I’m sure you remember this, Anthony, but flood insurance is always a separate policy.
Lender Commitment
When the loan is approved, the escrow officer will put together a settlement statement with all of the credits and debits for the buyer and seller.
This statement is known as the Closing Disclosure. It’s a kind of companion document to the Loan Estimate with more finalized versions of those costs. It must be sent to the buyer at least three days before closing. You’re going to learn a lot about the laws that created these requirements in the next level, but we’ll do a quick preview in this level.
Title Commitment and Lender Approval
The Real Estate Settlement Procedures Act (RESPA) was created in 1974 as a way to regulate the lending process around federally related loans. There are a number of RESPA laws that must be followed during a real estate transaction. In this level, we are going to talk about one specific RESPA requirement.
The Settlement Statement (No Longer Used)
RESPA used to require that both the borrower (the buyer) and the seller receive something called the Settlement Statement (HUD-1 form) at closing. It was a standard form that showed all of the borrower’s and seller’s charges arising from the settlement of their real estate transaction (for example, the buyers’ and sellers’ closing costs).
In 2015, the HUD-1 Settlement Statement was replaced by a document called the Closing Disclosure that consolidates the HUD-1, Good Faith Estimate, and Truth in Lending Act (TILA) disclosures.
The Closing Disclosure
A few levels ago, you learned about the Loan Estimate form. The Loan Estimate is a preliminary estimate of loan costs.
The Closing Disclosure (also called the closing statement) is the final itemization of all services and fees charged to the borrower by the lender when applying for a real estate loan.
For loans that require a Loan Estimate and that proceed to closing, creditors must provide the Closing Disclosure reflecting the actual terms of the transaction. The creditor is generally required to ensure that the consumer receives the Closing Disclosure no later than three business days before consummation of the loan.
The Closing Disclosure should contain the actual terms and costs of the transaction.
If the actual terms or costs of the transaction change prior to consummation, the creditor must provide a corrected disclosure that contains the actual terms, which results in a new three-day waiting period before consummation.
To be clear: The Closing Disclosure is the official name of the RESPA/TILA integrated form that serves as the closing statement, which is still sometimes called the settlement statement.
No Fees Allowed!
For loans subject to RESPA, no fee may be charged for preparing the Closing Disclosure, Loan Estimate, escrow account statement, or any other disclosures required by the Truth in Lending Act.
The Closing Disclosure
🎶 It’s the final walkthrough! Badababa bada-ba-ba-ba! 🎶
The final walkthrough is where the buyer and their agent check out the property before agreeing to close. This could take place anytime from a week before closing to the signing day for the buyer.
The purpose of this walkthrough is to make sure the property’s condition hasn’t changed and that the agreed-upon terms have been met by the selling party. If the seller agreed to make fixes during the inspection period, they should be completed by the final walkthrough.
There are a number of things that the broker and buyer should be looking for during a final walkthrough. You can find plenty of examples of checklists online.
Here’s an example of a few things you should look for:
A buyer and agent performing a final walkthrough of the property, referencing the closing contract.
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How to Remedy Issues
What happens if the buyer finds issues during the final walkthrough? There are a few different ways to deal with that.
Terminate the Contract
If the seller is in breach of contract, they can issue a cure notice with the pre-closing walkthrough form. If the seller fixes the breach, the contract must move forward. If the seller doesn’t fix the breach then the buyer has the option to cancel.
Delay the Closing
The buyer can delay the closing and give the seller more time to fix the issues.
Negotiate a Concession
The buyer could negotiate a deal with the seller in which the seller pays the buyer an agreed-upon amount of money in lieu of fixing the issues.
Avoiding Pre-Closing Walkthrough Issues
Often these issues result from a seller not paying enough attention when moving out.
So, when representing a seller, make sure that they are fulfilling all of their contractual obligations. Finding issues during the final walkthrough can create quite a headache.
Pre-Closing Walkthrough
After the contract is signed and the closing date is set, it’s your job to make sure all the little details are taken care of so the closing can proceed smoothly.
This can mean a number of things, but often it takes the form of making arrangements for obtaining title evidence, surveys, appraisals, inspections, repairs, and other items listed in the contract.
Keep Them on Track
If you’re representing a seller, you can probably chill for a while. Your hard work is done. You just have to make sure they fulfill any repair obligations in the contract and don’t wreck the place before closing. Nice!
If you’re representing a buyer, now is the time for you to kick into high gear. You need to make sure your client is on track with getting their loan. If they don’t get loan approval in time, it can delay closing or even cancel the deal.
Check in on them to make sure they’re getting paperwork back to the lender quickly. They might need advice about where to find an insurance company or whether or not to go for the home warranty. It’s fine to suggest a few insurance companies or otherwise help them out (though remember, no kickbacks!). You might feel like a taskmaster, but keeping them on the closing timeline will make everyone’s life better in the end.
Emotional Support
Buying or selling a property can sometimes be emotionally tough. A seller might start feeling some sadness or regret that they’re letting a beloved property go. A buyer might be freaking out about the financial commitment they’re making. Both buyer and seller can have a nagging feeling that they should have asked for more from the other, or that the price was too high or too low.
Moving is no fun, and packing all your stuff in boxes can sometimes bring difficult feelings to the surface. These feelings are all normal! It’s part of life. Major life events are exciting but stressful. Part of your role will be holding your client’s hand (metaphorically!) and reassuring them that they’re making a good choice. Remind them that seller’s and buyer’s remorse is incredibly common, and they’ll feel better once they’re in their new home. Just be there for them if they need it, Anthony!
Should You Go to the Closing?
Some buyers and sellers want their agent there, and some don’t. Plan to go to your client’s signing appointment unless you’re told not to. Especially for new buyers and sellers, they’ll likely be happy to have some guidance and another set of eyes on everything.
Okay But What About the Money?
Remember that only brokers can pay you. So while the escrow officer will send your broker a check (or wire them money, or whatever they prefer), you won’t get paid until your broker does.
What Are You Doing This Whole Time?
So what do the buyer and seller need to close?
The Buyer’s Deposits
Prior to closing, the buyer deposits:
The balance of the cash needed to complete the purchase, usually in the form of a certified check
Loan documents (if the buyer is securing a new loan)
A hazard insurance policy, including flood insurance (where required)
A survey, if requested in the contract or required by the lender
Other documents needed to complete the transaction (such as an appraisal)
The Seller’s Deposits
When closing in escrow, the buyer and seller deposit all pertinent documents prior to closing.
The seller usually deposits:
The deed conveying the property to the buyer
Title evidence (abstract or title insurance policy)
The payoff letter (a letter from the mortgagee of the existing mortgage, setting forth the amount needed to pay the loan in full) or an estoppel certificate (a statement showing the exact amount the buyer will assume)
Affidavits of title
Other instruments or documents necessary to clear the title or complete the transaction
The Seller’s Affidavits
Among the seller’s affidavits is an affidavit as to debts and liens, a sworn statement in which the seller assures the title company (and the buyer) that there are no liens, unpaid bills for repairs or improvements, or undisclosed defects in the title.
Required by the title insurance company before it will issue an owner’s policy to the buyer, this affidavit establishes the right for the title company to sue the seller if their statements in the affidavit prove incorrect.
Buyer and Seller Deposits
Besides the Closing Disclosure, what documents will need to be presented at closing?
Sales contract
Deed
Mortgage documents
Survey
Property inspection
Homeowners insurance
Bill of sale (if personal property is being transferred)
IRS Form 1099-S
A stack of animated paper documents.
The Sales Contract
There is one document that you could argue is the most important closing document. I’m talking about the sales contract.
The sales contract includes all the most necessary information about the transaction: the purchase price, how the buyer is paying for the property, the closing date, and the terms of the sale.
Deed
As we talked about in the last level, a deed is the legal document that transfers a real estate title from one party to another.
The seller will sign a new deed transferring the property to the buyer. That deed, along with the affidavit of value, is filed with the county recorder to close escrow.
Mortgage Documents
If the property is being financed by a mortgage (It usually is.), then mortgage documents will be needed at closing. This is how the property is paid for.
Survey
Remember surveys? A survey is the process and physical product of finding and measuring the boundaries of a piece of real estate, including the location of improvements, encroachments, and easements.
A survey could be required by the buyer or the buyer’s lender to make sure that the property description is accurate.
Property Inspection
Before a house is closed on, the buyer and buyer’s lender might require a number of different types of inspections of the property.
Two inspections that will almost always happen are pest inspections (required for VA loans) and home inspection (both at the buyer’s request).
All performed inspections will have a corresponding report present at closing.
Homeowners Insurance
Like title insurance, homeowners insurance will typically be required by the lender.
At closing, the buyer will provide proof of a new homeowners insurance policy that is sufficient to cover the cost of the mortgage in the event of a disaster (ex: house fire, satellite falling on and squishing home).
Flood insurance is a separate policy that may or may not be required based on the location of the property.
Bill of Sale
Sometimes a real property transfer will include the transfer of personal property. Take, for example, a transaction where a buyer really wants to buy the seller’s couch.
The couch is technically personal property (since it’s not affixed to the property). But during negotiations, the seller agrees to sell the couch to the buyer for an additional $300.
If so, a bill of sale might be used to transfer the couch. A bill of sale is a written agreement used to sell, reassign, or transfer one’s right to or interest in personal property, like furniture or appliances.
In other scenarios, the transfer of the couch could be included in the actual real estate sales contract.
IRS Form 1099-S
An IRS Form 1099-S will need to be filled out in just about every real estate transaction an agent is a part of.
Usually, the escrow officer or the mortgage lender will fill out Form 1099-S, but any license holders involved in the transaction could be held liable if the IRS is not properly notified.
Various parties can be designated as the person responsible for filing the 1099-S, including the transferor’s attorney, the transferee’s attorney, or the disbursing title or escrow company. The IRS provides extensive guidelines about who can be held responsible for filing this form, and in what circumstances.
Closing Documents
After everything is approved, the final walkthrough is done, and the documents are all ready, the closing process can start. Closings in Arizona are typically done in escrow, which means that the buyer and seller sign their various paperwork at different times. The time a person goes and signs their stuff is called their “signing appointment.”
Close of Escrow
In Arizona, the deal is finally done when escrow closes. This is known as close of escrow, or COE. Makes sense, right? The deal starts when escrow is opened and ends when escrow is closed. The contract will specify what date escrow must close on, and every other deadline for paperwork goes backward from there. COE happens not when the loan is funded or the deed signed, but when the deed and affidavit of value are officially recorded at the county recorder’s office.
COE must be on a day that the escrow office and county recorder’s office is open. If you’re working with a buyer, make sure they understand that they won’t get keys until escrow is closed. They shouldn’t book the movers to come on the day of their signing appointment. Instead, they won’t be moving until after COE.
Buyer Closing
Closings generally take place at the escrow officer’s office. The order of events can vary slightly between deals. The standard Arizona Association of Realtors contract requires the buyer to have their loan documents to the escrow officer three days before COE. If they don’t have a loan approval by then, closing will be delayed or the loan approval contingency in the contract might come into play.
The buyer will sign all of the loan documents and deliver their down payment to the escrow officer. There will be a bunch of other stuff for them to sign, too.
Generally, the escrow officer will then send the loan documents back to the lender, who will look them over, approve them, then fund the loan. This can take 24-48 hours. Sometimes a lender will “table fund,” or fund the loan when the documents are signed, but this isn’t the norm in Arizona.
Seller Closing
The seller will have a separate signing appointment where they sign the deed and the affidavit of value, among other paperwork. This might happen before the buyer closes or it might happen after.
COE
The final step is recording the deed and affidavit of value at the county recorder’s office. This is done electronically these days, and only typically takes a few minutes. Once that deed is officially recorded, escrow is closed. The buyer gets keys and the deal is done.
Distributing the Funds After Closing
Once the buyer’s loan funds, the escrow officer will distribute the funds: they’ll pay off the seller’s loan, if they have one, pay any liens that need paying, cut checks to the brokers, and pay anyone else listed in the closing documents as being owed money. This still isn’t the end, though! Escrow is not closed!
After the closing is complete, the escrow officer will send a packet of closing documents to the buyer to keep for their records, including information about their title insurance and a copy of their deed. Remember that once the deed is recorded, the actual paper deed isn’t necessary to have in a property owner’s possession.
Escrow Accounts
After a transaction closes in escrow, another kind of escrow account might come into play. The borrower will pay monthly into an escrow account held by their loan servicer as part of their mortgage payment. The servicer then uses the money to pay the borrower’s home insurance premiums and property taxes.
Escrow accounts are mandatory for many loans, including government-insured loans and some conventional loans. Some buyers elect to have an escrow account even if they don’t have to have one as a condition of the loan. It divides costly expenses like property taxes into manageable monthly payments.
The Closing
Double escrow is when one buyer signs a contract to buy a piece of property, and before they close, go into contract to sell that property to another buyer, with closings on the same day. It sounds odd, but it’s used sometimes in investment and wholesale real estate.
EXAMPLE
Sandi signs a contract to buy 10 acres of land from Jim. Escrow is opened on the deal. Then, during the escrow period, Sandi finds a buyer for the land: Emi. Emi signs a contract with Sandi and escrow opens. They have the same close of escrow day. If all goes according to plan, Jim closes escrow with Sandi, the deed is recorded, then later that day, Sandi closes escrow with Emi and that deed is recorded. Emi now owns the acreage.
Double Escrow and Disclosure
Double escrow is legal in Arizona, but, according to the Arizona Association of Realtors, the middle seller is required to disclose the double escrow to the final buyer. So in the example above, Sandi (and her agent) must disclose the double escrow to Emi. This is because if Sandi is unable to close on the purchase of the property, it affects Emi’s ability to purchase the property, and is therefore a material fact.
You are unlikely to be in this situation unless you specialize in investment property, and in that case, you will have been given a lot more training from your broker. But it’s good to know about!
Double Escrow
Another quirky thing to know about is the Foreign Investment Real Property Tax Act, or FIRPTA. FIRPTA is a law designed to ensure the IRS gets any capital gains taxes they’re owed. It only applies to non-U.S. resident sellers. Any seller who is not a U.S. citizen or resident alien (green card holder) will have 15% of the gross purchase price of the property withheld from them at closing.
That money is held until the seller files a U.S. tax return for the year they sold the property. At that point, if they’re owed any of it back, the IRS will refund it to them.
Buyer Can Be Liable
If the taxes aren’t withheld from the seller and that seller fails to pay their capital gains tax, the buyer can be held liable. It’s the buyer’s responsibility to ensure this money is withheld. The actual withholding will be taken care of by the escrow officer. But if you’re working with someone buying a property from a non-U.S. resident (Arizona is a popular vacation home spot!), ensure that the money being withheld for FIRPTA appears on the settlement statement.
Foreign Investment Real Property Tax Act (FIRPTA)
Sometimes you’ll be a little sad to part ways with your client, sometimes you’ll breathe a big sigh of relief.
But you know what else happens at closing?
Commission payments! So, even when you have less than ideal clients, there’s always a silver lining.
Key Terms
Here are the key terms you learned in this chapter:
Closing Disclosure
a form used to itemize services and fees charged to the borrower by the lender when applying for a real estate loan; a.k.a. closing statement
escrow
a process in which funds and/or financial documents are held by a disinterested third party on behalf of the other two parties in the real estate transaction until specific conditions are satisfied
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter.
Closing
The consummation of the real estate transaction is known as the closing, or settlement. Closing is when title is officially transferred from seller to buyer in exchange for consideration (which is most likely to be money). In Arizona, closing is usually referred to as “close of escrow,” or COE. COE and closing can be used interchangeably.
In many transactions, the closing is also when the buyer’s mortgage funds are disbursed to cover the cost of the property. After closing, the purchase contract will have been fully executed.
Who’s Who
Buyer: pays the seller and receives the title
Seller: receives payment and transfers title to the buyer
Real estate agent (broker and/or sales agent): accounts for all the transacted monies, fulfilling their fiduciary duty of accounting (so while you won’t be preparing the settlement statement, for example, you will double-check that it’s right.)
Escrow officer: The person who runs the closing (also known as the closing agent). In Arizona, escrow officers generally hold all of the documents and money as a neutral third party as the transaction takes place. They will order the title search, prepare the closing documents, pay off liens, calculate prorations, disburse funds, and eventually record the deed.
Lender: The lender supplies the money for the purchase unless the buyer is buying in cash or using seller financing. A buyer contributes a down payment, and the lender provides the rest of the funds.
Title company agent: The title company agent does the title search on the property to discover any liens or title issues. They will then issue the title commitment and the title insurance (which remember, serves as proof of marketable title). Title agents and escrow agents are two different people with two different jobs, though often they are both employed by the same larger company.
Timeline
A timeline of the Arizona escrow process outlining key deadlines and actions performed by the buyer and the seller
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The Closing Disclosure
The Closing Disclosure (also called the closing statement) is the final itemization of all services and fees charged to the borrower by the lender when applying for a real estate loan.
For loans that require a Loan Estimate and that proceed to closing, creditors must provide the Closing Disclosure reflecting the actual terms of the transaction. The creditor is generally required to ensure that the consumer receives the Closing Disclosure no later than three business days before consummation of the loan.
Close of Escrow
In Arizona, the deal is finally done when escrow closes. This is known as close of escrow, or COE. Makes sense, right? The deal starts when escrow is opened and ends when escrow is closed. The contract will specify what date escrow must close on, and every other deadline for paperwork goes backward from there. COE happens not when the loan is funded or the deed signed, but when the deed and affidavit of value are officially recorded at the county recorder’s office.
FIRPTA
FIRPTA is a law designed to ensure the IRS gets any capital gains taxes they’re owed. It only applies to non-U.S. resident sellers. Any seller who is not a U.S. citizen or resident alien (green card holder) will have 15% of the gross purchase price of the property withheld from them at closing.
Chapter Summary
