June 2011 • Volume 99 • Number 6 • Page 290
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Real Estate Law
How to Be a Good Closer
In baseball and residential real estate practice alike, it often comes down to the last inning when a lights-out closer can make the difference. Here are tips from veteran lawyers about what you might encounter at a real estate closing and how to handle it.
The darndest issues can threaten to derail a residential real estate closing.
Naperville lawyer Richard Kuhn remembers a suburban closing around 25 years ago in which his clients, the buyers, were from England. "They were very formal people. Everybody had their best Sunday-go-to-meeting attire on."
A relatively new lawyer at the time, Kuhn felt that everyone in the room was watching him as he explained the documents to his clients. "About halfway through the closing there was a break. My clients said, 'We need to bring up an embarrassing question.' I asked them whether they wanted to discuss it in private or in front of everybody, and they said they'd just discuss it openly."
"It's the toilet seats," the clients said.
Unable to think what to say, Kuhn hemmed for time. "Everybody was staring. I asked what about the toilet seats were bothering them. They said, 'It's the toilet seats, Mr. Kuhn. They're still there. They're still in the house.'"
Kuhn hemmed again, looked at the other attorney, and asked him what he was going to do about the toilet seats that were still in the house. "There was a deafening, difficult silence. Everyone was baffled."
Then, Kuhn says, "A light bulb went off in my head. I asked, 'By any chance, is it a custom in England for the sellers to take the toilet seats with them?' They said, 'Mr. Kuhn, of course! We are proper people.' They were very uncomfortable bringing up this issue."
Once Kuhn elicited the explanation of the problem, the tension dissolved. Everyone laughed, the sellers agreed to remove the toilet seats right after the closing, the buyers said they were happy to replace them with the new seats that they had brought with them, and the closing concluded without further ado.
Kuhn's anecdote illustrates why lawyers experienced in residential real estate closings maintain "there are no routine real estate closings." "I can count on one hand the number of closings I've handled where something hasn't come up. There's always some dumb little thing," says Ogle County lawyer Maria Berger.
Though "routine" may not be the best adjective to apply to closings, all closings do have some basic procedural components that lawyers should know. Two ISBA members, one from the Chicago area and one from downstate, spoke to the IBJ about typical closing practices and some of their regional variations.
"[K]now who the players are"
Solo practitioner Maria Berger has handled residential real estate closings throughout the last decade in northern Illinois's rural counties as well as the Chicago collar counties. Berger emphasizes that lawyers need to know who the players are and what they should expect to do before they walk into a closing.
"When you're a new attorney, everyone else seems to know what's going on except for you. There's lots of pressure to hurry up and just get everything signed. You're the only one in the room who gets paid regardless of whether the deal closes. So everybody else just wants the transaction to close."
Oak Brook lawyer Colleen L. Sahlas has been handling residential real estate closings for more than a decade, since she joined the transactional practice of her father, David Hoy. "It took me numerous closings over at least a couple of years for me to get my sea legs. There are so many variables and players and possibilities of problems involved."
Sahlas begins by addressing the role of the seller's attorney at closing. Though both lawyers will have been working together before closing to help get the deal for their clients done, their duties at closing are very different, Sahlas says. "There's much less for the seller's attorney to do at closing than there is for the buyer's attorney, because the seller's attorney will have prepared all of the necessary documents in advance."
"Whenever I have a closing in a county that I'm not familiar with," Berger says, "I call the closer at the title company, identify myself as the seller's or the buyer's attorney, say what documents I'm planning on bringing to the closing, and ask whether any other documents are required at the closing table." That's because certain documents that are viewed as essential in some counties are simply not used in others. (Why? Go figure. The deals get done with or without them.)
Representing the seller
At closings in Cook and the surrounding counties, Sahlas says, the seller's attorney will bring a bill of sale for all personal property listed in the contract, such as security systems, outdoor sheds, ceiling fans, appliances, and vegetation, an affidavit of title, and a summary of all of the seller's charges and credits (known as a closing statement, but distinct from the HUD-1, which is also sometimes referred to as the closing statement), Sahlas says.
In the more rural counties, Berger says, the latter documents are not used. "We never have a survey because they're much more expensive out here. That can derail a deal when a buyer from the suburbs expects one."
"As the seller's attorney in a rural area, I bring only the deed and the state and local transfer tax declarations," Berger says. "The title company prepares the other documents." In the collar counties, though, the seller's attorney should plan on bringing to the closing a staked survey that's no more than six months old, the deed, the ALTA statement, and the 1099 questionnaire form.
In addition to those documents, if the property is a condominium or subject to a homeowner's association, the seller should bring a waiver of right of first refusal from the association, an insurance certification, and a letter certifying that all assessments through the date of closing have been paid.
If the property was mortgaged, the seller's attorney must bring a mortgage payoff letter from the seller's lender reflecting the sum due the first business day after the closing date. If there are any defects on the title commitment or survey, the seller's attorney must make sure at closing that all are accounted for, either by having been cured, as in the case of a mechanic's lien, lis pendens, building code violation, or unpaid property taxes, or insured over by the title company.
In all regions, the seller's attorney must also show that all municipal real estate transfer requirements have been fulfilled by bringing municipal real estate transfer stamps or evidence of compliance with any municipally required inspection and a paid water bill certificate. Finally, the seller's attorney must bring evidence that any promised home repairs have been completed, and make sure that the client has brought the keys to the house and any garage door openers.
Representing the buyer
When she's representing the buyer, Sahlas says, as soon as she walks into the closing she will check with the closing agent - who in her area is usually a representative of the title company - to find out what the lender requires in order to release the funds for the closing.
"Sometimes there may be only a handful of documents that the lender will review from the loan package," she says. "That will always include the title company's settlement statement [also known as the HUD-1]. Other times, the lender will want to see every single document in the loan package that it sent to the closing and make sure everything was signed appropriately and accurately."
After making that inquiry, Sahlas makes sure her client, the buyer, has proper identification, meaning one or, preferably, two forms of a government-issued photo ID for each buyer, such as a driver's license, a state ID card, or a current U.S. passport. She also reviews the other required items that she's told her client in advance to bring to the closing, typically proof of homeowner's insurance for the first year and a cashier's check for the required funds for the down payment.
"Next, even before I go through the settlement statement, I want to know whether the buyer had the final walkthrough and whether there are any walkthrough issues."
Final walkthroughs typically occur shortly before the closing, either the day before or earlier on the same day. Issues that can arise after the walkthrough may include items left in the house that the buyers do not want - the toilet seats, in Kuhn's case, or, more commonly, old appliances, furniture, or trash. Or items that the buyers expected to remain in the house, such as vintage light fixtures, desirable appliances, or plantings, may be broken or no longer present.
If the contract does not address those issues, Sahlas says, what the buyers expect or want is not open to discussion. But, she adds, if the property's condition has altered since the inspection by, for example, a leaking water heater or damage during the seller's move, the parties will have to resolve that matter at closing.
As experienced attorneys know, a key principle that resolves most such issues is "Money makes everything better." But, Sahlas cautions, "RESPA law says that there cannot be any money exchanged between the buyer and the seller that's not on the closing statement. Any credits from the seller to the buyer, even $25 for a light fixture, must be on the HUD-1." Sahlas emphasizes that whatever the issues, negotiating them will depend on the contract.
A more complex issue that may surface during final walkthroughs may be the discovery that the seller has not yet moved out. Sahlas says she comes to closings prepared with blank copies of agreements that she's drafted in advance to cover such contingencies.
"If that happens, the buyer could still decide to close as scheduled, but on the condition that a post-closing agreement is signed in which the seller pays rent to the buyer and has X days to get his stuff out." In such cases, sellers are typically required to place a sum in escrow to ensure that they'll be out by the agreed date, Sahlas says.
The all-important HUD-1
Having addressed those matters with the lender and her buyer client, Sahlas will then review one of the most important closing documents of all: the settlement statement from the title company, also known as the RESPA statement or HUD-1.
"The title company prepares this document based on information from the seller's attorney, the buyer's lender, and the title company's own invoice," she says. "The company compiles all of those figures into the HUD-1, which lists and summarizes the charges and credits for both the buyer and seller. It will disclose how much the buyer had to bring to the closing and how much the seller is netting."
Sahlas and Berger say it's critical for lawyers to review the closing statement with the utmost care. "All fees and charges must be on the HUD-1 form: attorney fees, transfer taxes, title company fees, realtor commissions, and repairs."
But they also acknowledge that lenders do not like to see any sums for repairs on the closing statement because they view such entries as undermining the appraisal value and the loan - a knotty subject that many ISBA members have discussed with frustration on ISBA's electronic discussion groups. (For more explanation of the HUD-1 form, see preceeding page.)
Other loan documents
Having checked the HUD-1 to be sure all figures are recorded and accurate, Sahlas and Berger proceed to review the other loan documents in the package provided for the buyer by the lender. "I go over each title or lending document with my client," says Berger. "Usually they're so tired they don't care, but I make sure to give them at least a brief explanation of each document."
Says Sahlas, "I'll explain to my clients what their significant legal rights and obligations in the loan package are and have them sign the documents that the lender requires for funding the loan first." Sahlas says that waiting for the lender to authorize disbursal of the funds for the transaction typically takes longer than any other task in the closing process. "Everybody in the room is waiting on the buyer to sign the documents so they can be sent back to the lender for approval and disbursement."
Don't assume the documents that someone else has prepared are accurate, the lawyers say. "Make sure they're accurate and what the client agreed to, and not discriminatory, deceptive, fraudulent, or otherwise illegal," Sahlas says.
The willingness to walk away
As in any deal, the parties' greatest leverage in negotiating is being willing to walk away. But with address changes having been made, moving trucks on the way, and multiple interdependent closings, using that leverage often isn't realistic for clients.
Says Berger, "If a closing scheduled for a Friday doesn't happen by 5 p.m., the seller will not have the mortgage paid off and the mortgage interest accumulates for another couple of days. Then the seller can't close on his new transaction where he's the buyer, and everything gets backed up. There are other associated costs, such as hotel expenses, too."
Sometimes, she says, a closing problem can be resolved by doing a "dry closing." She explains, "Everything happens except the money. Everybody signs the documents and the deed is given, but the title company sits on all the documents. Then, as soon as the money comes through, the title company does the payoff and records the deed and so on. If the last seller in the chain of interdependent closings is willing to move the date back a couple of days, that can solve matters."
Sahlas remembers a client who had been promised a loan before closing with no prepayment penalty. At closing, the loan documents reflected a prepayment penalty. "The lender said take it or leave it. The buyer chose to take it."
One of Berger's clients, on the other hand, was paying cash for a property and was willing to walk away over a $500 window repair issue. "The repair list said the windows needed to be opened. At the walkthrough my client said the windows still didn't open." Because, Berger says, it was clear that the miscommunication was due to the real estate agents and not to the buyer or seller, both parties felt the agents should split the cost. "Eventually that happened, but it took three hours to get to that spot."
The "funding approval" nightmare
Mount Prospect lawyer John Haas believes the majority of challenges attorneys confront at closing are the result of lender issues. He warns of "the nonsensical 'funding approval' nightmare which takes place during the closing itself. During that funding approval process, many lenders subject their borrowers, the attorneys, and realtors present at the closing to unreasonable delays in the actual consummation of the closing of the transaction.
"After the borrowers have signed all the loan documents and the attorneys have reached agreement regarding the other aspects of the closing, I then have to warn my clients, only half tongue-in-cheek, that the funding approval process will now take somewhere between five minutes and five hours. To make matters worse, lenders concoct 'at closing' conditions, of which they fail to inform their borrowers or borrowers' attorneys, such as producing recent bank statements or other documentation, further delaying the conclusion of the closing."
Surely a telephone call to the lender in advance of the closing should forestall such problems? Haas agrees that's a good idea, but douses any optimism. "Even proactive calls by the borrowers' attorney in advance of closing to try to identify 'at closing' conditions often are fruitless because the lenders either do not respond or do not disclose the conditions, regardless of our best efforts."
Haas's best recommendation for addressing such problems is for homebuyers, not their attorneys. "Deal with a reputable lender." He suggests that some mortgage brokers, particularly during the real estate boom that is now over, steer homebuyers to less than quality lenders that provide corresponding service.
To best combat such problems, attorneys may wish for buyer clients such as one of Kuhn's partners, Leonard Monson. Monson remembers that he, his client, and all of the others in the closing room were twiddling their thumbs, waiting for the lender to disburse the funds so the sale could close.
Though the lender's agent had repeatedly assured them that the disbursement had been approved, no funds were forthcoming. "My client turned out to be the head of the disbursement unit. He got on the phone and yelled. The disbursement came right away."
Helen W. Gunnarsson, a lawyer in Highland Park, is an Illinois Bar Journal contributing writer.
One of the most important documents for lawyers to review at closing is the HUD-1 form, also known as the RESPA statement, the settlement statement, and the closing statement. The Real Estate Settlement Procedures Act, or RESPA (12 USC section 2601 et seq), requires this three-page form, available on the website of the federal Department of Housing and Urban Development (www.hud.gov/offices/adm/hudclips/forms/files/1.pdf), to be prepared for every residential real estate closing that involves a federally related mortgage - which applies to nearly all residential real estate purchases.
The HUD-1, page by page
RESPA requires the HUD-1 to state all costs relating to the real estate transaction. Here's what you'll see when you get the form at closing.
Page 1 is a summary of the transaction and its costs. It will include the names and addresses of the buyer and seller, the property location, the type of loan and reference number, and the closing location and agent. The purchase price of the property, settlement charges to the borrower, amounts paid by the borrower, and amount due to the seller with line item reductions will be stated, together with the cash amount to be paid from or to the borrower and seller at the closing.
Page 2 breaks the settlement charges down into two columns: those paid from the borrower's funds and those paid from the seller's funds. Most items on that page are taken from the lender's Good Faith Estimate of charges that it is required to send to the borrower before closing.
Page 3 contains a direct comparison of the charges stated on the GFE with those on the HUD-1, together with lists of charges that are not permitted to vary and those that may increase up to ten percent. The former include the loan origination charges, any credit or points for the specific interest rate, and transfer taxes. The latter includes government recording charges. (More information on what charges may vary and to what extent is on the GFE form, also available on HUD's website.)
Underneath those lists are the charges that may differ from those stated on the GFE, including the escrow deposit, homeowner's insurance, and daily interest charges. The loan amount, rate, term, initial payment, and other associated matters are stated in a section below those lists.
Both borrower and seller must sign the HUD-1 and certify its accuracy to the best of their knowledge and belief, as must the closing agent, usually a title company representative. Failing to disclose or inaccurately characterizing any related costs, no matter how small, is a RESPA violation, which may be a felony and subject the violator to substantial penalties. 12 USC section 2607.
Two confusing modifications
Effective January 2010, HUD adopted new regulations, including a revision of the HUD-1. Accustomed to the old form, some lawyers have reported confusion on being presented with the new form at closing. Naperville lawyer Leonard Monson says the form has two basic modifications.
One of those modifications, Monson says, is indeed perplexing. "On page two, the HUD-1 shows the buyer paying for the seller's transfer taxes as well as the seller's loan policy that the seller is buying for the buyer. But on the front page there's a credit back for those taxes. It seems to imply that the buyer is paying a transfer tax when the buyer is not."
The other modification, he says, involves the fees due to the title company. "The title companies' fees are no longer broken down" as they formerly were. "Sometimes it's very difficult to ascertain what's included, and whether it's a valid fee or not."
RESPA violations at closing
Despite the clarity of RESPA's requirements, do a search for HUD-1 on ISBA's transactional law discussion group and you'll find virtual teeth being gnashed with frustration. Lawyers have reported, for example, that before closing, lender agents have verbally okayed sums for repairs being placed in escrow or otherwise disclosed on the HUD-1, but at closing the same lenders have refused to authorize the disbursement of funds if any sums for repairs are shown, no matter how small, suggesting instead that the parties informally exchange funds without noting them on the HUD-1 - a clear RESPA violation.
Additionally, "There are reports from a number of attorneys that good faith estimates may vary from the fees that are actually charged at closing," Monson says. Some lawyers have said that based on many similar experiences with different clients, they're convinced that some lenders have produced revised GFEs at closing and falsely stated that they were sent to the borrowers.
What's a lawyer to do in either situation? There are no easy answers. Ogle County lawyer Maria Berger says she's withdrawn her representation and walked out of closings when clients have indicated they'll accede to RESPA violations.
Monson says he believes that adopting new regulations requiring GFEs to be signed and dated by the borrowers would eliminate any suspicions of lender fraud. In the meantime, he advises lawyers to advise their clients to deal with reputable lenders and mortgage brokers. Additionally, "Retain everything the lender gives you in an orderly file and date it."