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Real estate closings are a complex process requiring a number of steps to be completed before a property can be sold. If you're preparing to buy or sell a home for the first time, understanding the nine steps of a real estate closing can make you a more informed buyer or seller and help the closing process go smoothly.
What is a real estate closing?
A real estate closing is the legal process that helps transfer ownership and interest in a property from the prior owner to the buyer and begins after a real estate contract has been executed by both parties.
How long does a real estate closing take?
A real estate closing can take just a few weeks or up to 60 days, depending on the terms of the contract, financing type, and if there are any issues discovered during the closing process.
Many steps of a real estate closing happen simultaneously, and that's one reason it's helpful to have a real estate agent to help move the process along and coordinate with the multiple parties involved in the transaction. Some states use a title company to conduct real estate closings, while others solely use a real estate attorney. So the exact process for a real estate closing varies from state to state, but these are the nine basic steps of real estate closings.
The 9 steps of a real estate closing
- Open escrow and deposit escrow funds.
- Conduct a title search and order title insurance.
- Conduct inspections.
- Request property insurance quote.
- Get the lender-ordered appraisal (if a lender is being used).
- Renegotiate terms or request repairs (if needed).
- Choose a closing date and review closing paperwork.
- Conduct final walk-through.
- Execute closing documents on closing day.
1. Open escrow and deposit escrow funds
Most real estate contracts allow the seller to designate the closing attorney or title company that will be used for the transaction. The title company or attorney's job is to act as a third party intermediary whose job is to uphold the terms of the contract, holding no bias toward the buyer or seller.
Once a contract is signed, the seller or real estate agent working with the seller needs to notify the title company of the real estate transaction, sending a copy of the executed contract requesting that escrow be opened.
If the buyer is offering an escrow deposit or earnest money deposit as a part of the contract, the buyer is required to deposit the funds by cashier's check or wire them into an escrow account within the specified period of time as stated in the contract, typically 48 to 72 hours from when the contract was executed.
The escrow agent will send confirmation to both parties once the escrow funds are deposited.
2. Conduct a title search and order title insurance
The title company or closing attorney will then order a title search to obtain title insurance. This step is to ensure that there are no liens, encumbrances, or title defects that would prohibit the transfer of ownership from one party to the next. If there are any issues such as open violations, unpaid taxes, or other defects, they will need to be addressed prior to closing or paid at closing.
If the title search is returned clear of defects, the title company or attorney will order the issue of a title insurance policy, which protects the buyer if there are any claims that need to be made toward title after the closing.
3. Conduct inspections
Most contracts have an optional inspection period, which if elected is generally 14 days. This is the period of time the buyer has to inspect the property and exit the contract without losing their earnest deposit or request or renegotiate any terms, repairs, or concessions.
It is suggested the buyer or the real estate agent representing the buyer order the proper inspections immediately after the earnest deposit has been received in order to stay within the limit of the inspection period. Property inspections can include:
4. Request property insurance quote
Once the inspection has been ordered, the next step is to request a quote for property insurance. Many insurance providers will use information from the property inspection to prepare their quote or possibly deny coverage based on findings from the inspection, so it's important to shop around for a competitive quote with an insurance agent immediately after your inspection has been ordered or completed.
5. Get the lender-ordered appraisal (if a lender is being used)
If the buyer is getting a traditional mortgage through a bank or lending institution, the lender will order an appraisal. An appraisal ordered by the buyer or seller will not be accepted by the lender. The appraisal needs to come in at the contract price or higher. If the appraised value is less than the sales price, the sales price will need to be lowered to reflect the appraised value.
6. Renegotiate terms or request repairs (if needed)
If anything is discovered from the title search, inspection, or appraisal that significantly alters the original terms of the contract, the buyer can attempt a renegotiation such as extending the closing date, requesting repairs from the seller, or asking for a concession, which is a credit given by the seller to the buyer at closing. The seller can agree to these changes or allow the buyer to exit the contract without penalty as long as this is done within the inspection period.
7. Choose a closing date and review closing paperwork
Once the appraisal, inspections, title search, and terms of the contract are approved and completed, the closing agent will coordinate a closing date with the buyer, seller, and lender (if being used). The escrow agent will send the closing paperwork to both parties prior to closing to review for accuracy.
If the buyer is getting a mortgage, a few days before closing the lender will re-run the buyer's credit and lock in the interest rate for the loan. Once confirmed, the lender is required to send the buyer a TILA-RESPA Integrated Disclosure (TRID) -- which discloses and explains the cost for closing and financing -- at least three days prior to closing.
8. Conduct final walk-through
A day or two before closing, buyers can conduct their final walk-through to ensure no alterations other than what has been agreed upon in the contract have been made.
9. Execute closing documents on closing day
Closings can happen face to face in the office of the title company or real estate attorney or, depending on the state, as a mail-away closing where paperwork is executed outside of the closing agent's office in the presence of a notary and then returned by mail to the closing agent on or before the designated closing day. If the closing is happening face to face, the buyer and seller will meet on closing day, bringing identification and, of course, closing funds.
Since most closing agents use technology to assist in the closing process, most other required documents needed for closing, like a trust agreement or operating agreement for an LLC (often used if the buyer or seller is a trust or company), are in the hands of the closing agent before closing day.
Depending on the state and the type of property being sold, the closing package and documents can be extensive and both parties will sign a lot of paperwork. If you don't understand any of the paperwork, ask for an explanation from the closing agent or your attorney.
Once the closing documents are signed by both parties, the closing agent will record the deed, satisfaction of mortgage from the seller (if applicable), and mortgage (if applicable) in public records for the county the property is located in. The buyer is now the owner of a new home and is able to rekey the property if desired and begin moving in.
Common problems that delay closings
While closings can happen in 30 days or less, complications from title issues and title defects or delays in financing from the buyer's lender are common problems that can delay closings. Your closing agent or real estate agent should keep you up to date with how things are progressing, and it's suggested to check in with your agent every few days to ensure the process is moving forward smoothly. If complications do arise and more time is needed to close, make sure to get an extension signed by both parties and provide that to the closing agent.
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