What Happens at Closing?
At closing, ownership of the newly purchased property is officially transferred from the seller to you. It may involve you, the seller, the real estate agent, your attorney, and the lender’s attorney. Additionally, it may involve representatives from the title or escrow firm, and a variety of clerks, secretaries, and other staff. It is possible to have an attorney act on your behalf if you cannot attend the closing (for example, if the property is in another state).
Closing can take as little time as an hour to sign all the forms and transfer ownership. Or, it can take several hours, depending on the contingency clauses in the purchase offer (and any escrow accounts that may need to be initiated). Much of the paperwork involved in closing (or settlement) is done by attorneys and real estate professionals. You may be involved in some of the closing activities and not in others. This will depend on local customs and on the professionals with whom you are working.
Before you close on the property, you should have a final inspection, or walk-through. You will want to make sure that any repairs you requested have been made and that items which were to remain with the property (light fixtures, etc.) are still there.
In most states, settlement is done by a title or escrow firm to which you forward all the materials and information along with the appropriate cashiers’ checks. The closing agent (title/escrow agent) will make the necessary disbursements. The real estate agent or another representative of the title company will deliver the check to the seller and the property keys to you.
Statutory Closing Costs
Statutory costs are expenses you would have to pay to state and local agencies even if you paid cash for the property and did not need to take out a mortgage. They include the following:
These are required by some localities to transfer the title and deed from the seller to you.
Recording Fees for Deed
Used to pay for the county clerk to record the deed and mortgage and change the property tax billing.
Items such as school taxes and municipal taxes may have to be split between you and the seller because they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2 months while the seller would owe taxes for the other 10 months. Prorated taxes usually are paid based on the number of days (not months) of ownership. Some lenders may require you to set up an escrow account to cover these expenses. Some lenders may not require you to open an escrow account. However, you may want to set up a special account, on your own. This is a good idea in order to make sure you have money set aside for these important, and relatively large bills.
Other state and local fees
These can include mortgage taxes levied by states as well as other local fees.
Third-Party Closing Costs
Third-party costs are expenses paid to others such as inspectors or insurance firms. You would have to pay many of these expenses even if you paid cash for the property. Examples of third-party costs are:
You may wish to work with an attorney when buying a property. On larger commercial loans, many lenders will require the borrower to obtain an “Attorney Opinion Letter.” This is a document states that the attorney has reviewed the transaction. It further states that it is fine for his client to obtain and close on the requested loan. Attorneys may work for a flat fee or on an hourly basis.
Title Search Costs
Usually your attorney will do or arrange for the title search to make sure there are no items that “cloud” the title from a clean transfer. In some cases, you may work with a title company to verify a clear title to the property.
Property Owner’s Insurance
Most lenders require that you prepay the first year’s premium for property owner’s insurance (aka hazard insurance). You will need to bring proof of payment to the closing or pay the premium through the closing agent. This insures that the lender’s investment is secured, even if the property is destroyed.
Real Estate Agent’s Sales Commission
Usually, the seller pays the commission to the real estate agent(s). If one agent lists the property and another sells it, the commission is usually split between the two. It’s important to keep in mind that even the commission is negotiable between the seller and the agent.
Finance and Lender Charges
Most people associate closing costs with the finance charges levied by mortgage lenders. The charges you pay will vary among lenders. So it can be prudent to shop around for the best combination of mortgage terms and closing (or settlement) costs. You may have to pay the following charges:
Origination or Application Fees
These are fees for processing the mortgage application and may be a flat fee or a percentage of the mortgage or a combination thereof.
All commercial lenders will require a credit report on all borrowers who have a 20% or greater interest in the subject property. Commonly, this fee is a part of the closing costs.
A point is equal to 1% of the amount borrowed. Points can be payable upon receipt of a lender commitment letter or through closing. Points may be shared with the seller. You may want to negotiate this in the purchase offer. Some lenders will let you finance points, adding this cost to the mortgage, which will increase your interest costs. If you pay the points up front, they may be deductible in your income taxes in the year they are paid. It is best to seek the advice of a tax professional such as a Certified Public Accountant (CPA) for such matters.
Lender Attorney Fees
Lenders may have their attorney draw commercial loan documents. And also to verify that the title is clear, and represent them at the closing.
Document Preparation Fees Paid at Closing
You will see an amazing array of paperwork at closing. This ranges from the application to the Loan Commitment (Commitment) to the closing documents themselves. Lenders may charge for these, or they may be included in the application and/or attorney fees.
Preparation of Amortization Schedule
Some lenders will prepare a detailed amortization schedule for the full term of your commercial loan. They are more likely to do this for fixed mortgages than for adjustable mortgages.
Most lenders will require the property to be surveyed to make sure that no one has encroached on it. They also want to verify the existing buildings and improvements on the subject property (the As-Builts).
Lenders want to be sure the property is worth at least as much as the mortgage. Professional property appraisers will compare the value of the property to that of similar properties in the neighborhood or community. Please see our Appraisals webpage.
Lender’s Title Insurance
Even though there is a title search for any title obstacle (liens, lawsuits, etc.), most lenders require insurance. Consequently, should a problem arise, they can recover their mortgage investment. This is a one-time insurance premium, usually paid at closing. It is insurance for the lender only, not for you as a purchaser.
The seller may have worked with a contractor who placed a lien on the property. If so, the lienholder expects to be paid from the proceeds of the sale of the property. In this case, there may be some fees to release the lien. Although the seller usually pays these fees, they could be negotiated in the purchase offer.
Possible Lender Required Inspections
Many lenders will require several third-party reports. These could include: Phase I ESA, Property Condition Report, and a PML Report. A PML could be required if the property is located in a strong seismic zone. There could be many other types of inspections required depending on the current condition of the subject property. Therefore, it is always best to make sure that there exits as little deferred maintenance on a property prior to making a commercial loan application.
Your first regular mortgage payment is usually due about 6 to 8 weeks post-closing. For example, if you close in August, your first regular payment might be in October. The October payment covers the cost of borrowing money for the month of September. This is known as “paying in arrears.” Interest costs, however, start as soon as you close. The lender will calculate how much interest you owe for the fraction of the month in which you close. For example, if you close on August 25, you would owe interest for 6 days, through August 31. In most cases, this is due at closing.
Lenders will often require that you set up an escrow account. You will make monthly payments into this account for taxes, insurance, and property reserves, if any. You will place money into this escrow account at closing. The amount depends on when property taxes are due and the timing of the settlement transaction. The lender should be able to give you a close approximation of these costs. This is usually done at the time you apply for your commercial mortgage.
Other Up-Front Expenses
The major portion of other up-front expenses is the deposit or binder. This is made at the time of the purchase offer and the remaining cash down payment you make at closing. In addition to the deposit and down payment, other up-front expenses may include the following:
You can make your purchase offer contingent on the satisfactory completion of certain inspections. These would be in addition to inspections required by the lender. These inspections might include: structural, water quality tests and radon tests. You and the seller will need to negotiate who pays these expenses.
Owner’s Title Insurance
It is always wise to purchase Buyer’s title insurance, so that if problems arise, you are not left owing a mortgage on a property you no longer own. A thorough title search (going back to 1900 if necessary) is often assurance enough of clear title.
You may want to hire your own appraiser, either before you sign a purchase offer or after seeing the results of the lender’s appraisal. Though ordering a second appraisal can add additional and possibly unnecessary expenses.
Money to the Seller
You will need to pay for items in the property that you want and that were not negotiated in the purchase offer. Such items may include appliances, light fixtures, equipment, and also fuel oil and propane left in tanks.
Escrow Account Funds
In the purchase offer, you can request that the seller set up an escrow account to defray any costs of major cleanup. These could include: radon mitigation procedures, property painting, and other items. Also, make sure you have a chance to test various appliances (the furnace if you buy in the summer or the air conditioner if you buy in the winter). You may request an escrow account to cover repairs if necessary.
Depending on the purchase offer contract and contingency clauses, you may find you have some expenses immediately upon taking possession of the subject property. For example, your purchase and sale agreement may contain a clause making the purchase contingent on a satisfactory structural inspection. The property inspector could determine that the property requires need a new roof. If so, you could negotiate to have the seller arrange for the work to be done. Though this could and probably would delay the closing. And, you may have to agree to a higher price for the property or to cover some of the expenses of the new roof. Most assuredly, such an improvement/repair would be a wise investment in the long run.
Or you and the seller may be able to split the cost of a new roof. The roof could be put on after you take possession. You would use contractor estimates of your choice. And both you and the seller could place funds into an escrow account for the new roof. Or the seller may be willing to reduce the sales price of the property by a mutually agreed upon amount. In either case, shortly after possession of your new property, you will need cash for a new roof.
An often overlooked, major, up-front cost in buying a property is the time investment. The average property hold time is about 4 months property hunting and looks at an average of 20 properties prior to closing a deal. In addition to shopping for a property, you will also spend time trying to find the best commercial loan.
How much time you spend looking for a property, a mortgage, and an attorney depends on your location. You will spend less time if you know what you desire in a property. And of course it helps to know just how much you can afford to invest as a down payment. Naturally, working with real estate agents will help focus your search. How many mortgage lenders are in your area?
You can reduce time shopping for a commercial mortgage by simply calling Assets America® at 206-622-3000! We’ve been doing this for greater than three decades. We know what to do, how to do it, and where to source the best funding options. We know will take your commercial loan application, process and underwrite your package. Consequently, we are experts from soup to nuts, from application, to loan submission, to loan commitment, to funding, to closing. Call us today!