About Closings
Are you buying or selling a house, apartment, condominium, building or even a shopping center? Are you getting a new mortgage or loan secured by property like that?
If so, there are a few basics you should know. This is geared to readers in New York.
The “Closing” refers to the transaction where the property and the money actually change hands. Frequently people talk about hiring an attorney for a closing, but the attorney almost always does a lot more than show up when the deed is signed.
Start with the buying or selling of property. Normally the first step, which usually does not involve an attorney, is the buyer and seller coming to a handshake agreement on the sale price. At that point, they normally will talk to their attorneys (or hire an attorney) to deal with the legal issues.
The first thing the attorney should do is to see if the transaction is advisable. That does not mean overriding the clients’ own business judgment as to what a good deal is – what it does mean is that the attorney will look at the transaction to see if there are any issues that a lay person might not understand. In a simple house closing, there is not much for the attorney to review. If the client is buying a cooperative apartment in New York City, there could be all kinds of issues, and that attorney will typically review the offering plan and the past few years’ financial statements and often the minutes of the past few years’ board meetings.
Assuming that after the review there are no serious problems, the next step is the drafting of the contract of sale. For houses and cooperative and condominium apartments, the contracts are largely “boilerplate” but often times a rider is attached to the contract to add additional terms. In many cases, the contract permits one party or the other to back out of the deal with no penalty under some conditions. Individual purchasers will almost always want a “financing contingency” that allows them to back out if they cannot get a mortgage or coop loan to help pay for the purchase. Sellers often want provisions that allow them to back out if there are title problems that cannot be easily or cheaply cured. For house purchases, there are often provisions that permit cancellation of the contract if the house is found to have termites or serious hidden defects. One of the important reasons to have an attorney draft or review the contract is to make sure that the proper provisions to protect you are in the agreement.
When the contract is signed, the buyer usually pays a deposit; often 10% of the purchase price. That amount is held in escrow, usually by the seller’s attorney, until the closing. Under New York law and most contracts of sale, if the buyer does not close, that deposit is forfeited and the seller has to take that amount as the full damages for failure to close; the contract can make other provisions, however.
After the contract is signed, there are several things that have to be done, mostly by the buyer or the buyer’s attorney. They may include obtaining financing, having an engineer inspect the property, having a title search done to make sure that the seller can give a clear title, or seeking approval of the coop board or condominium governors if approval is needed for the purchase and sale. There is often a “due diligence” period for the buyer to investigate to determine if certain specified conditions exist.
In most cases, the buyer will get title insurance. Title insurance is a very, very good idea because if someone later claims to have a lien or other interest in the property, the insurance company will defend any lawsuit brought to enforce that interest, and will pay any damages (within the limits of the policy terms) that are incurred. So if you pay $1,000,000 for a house, and it turns out that the seller’s ex wife actually is a 50% owner because of a divorce decree, the title company may have to pay $500,000 to clear the title. The title insurance company is almost always the company that does the title searches to find out if there are liens or encumbrances on the property, before the actual closing. The buyer’s attorney is almost always the one who arranges for the title insurance and the title search, and if there is a lender financing the purchase, they will insist on reviewing the title search reports.
In coop closings, sometimes there is no title insurance. The reasons are that most of the time, the coop corporation cancels the old proprietary lease and issues a new lease and new share of stock and also that a cooperative apartment under New York law is not real property but is personal property – so judgments and tax liens are not automatically liens on the apartment. Those things are both true; but there are still lawsuits to set aside sales of cooperative apartments and they can be expensive and can potentially be won by the persons challenging ownership, depending on the circumstances. If there is a lawsuit about ownership, the buyer will regret not buying the insurance because the amount saved by not getting insurance will be spent on legal fees very quickly.
On very important aspect of title insurance is that the title insurance company pays the legal fees for the defense of the court case challenging ownership.
After the buyer obtains any needed financing and approvals, it is time to do the actual closing. The attorneys for the buyer, the seller, the lender, any lender who is being paid off at closing, and possible the coop board attorney, the various brokers and sometimes other people as well, have to be consulted. There may be a dozen people necessary at the closing, and the closing has to be scheduled so they all can be present.
Additionally, the attorneys will have to work out the financial details because it is almost always the case that several certified checks will have to be brought to the closing, and the amounts of the checks have to be known a day or two ahead of the actual closing. If the property being sold is subject to a mortgage or other loan, the lender will have to compute the amount that has to be paid at closing – which usually involves computing interest on a daily basis. There are always fees and other payments that have to be made. Lenders who are financing the purchase will charge for things such as their attorneys’ fees, origination fees (points), loan application fees, interest until the first payment date, tax or maintenance escrow, credit check fees, document preparation and messenger fees, filing fees for financing documents, and so on, which are usually taken out of the loan proceeds. If the seller has a mortgage, the seller’s lender will also charge various fees of that nature. The real estate broker(s) will be there to collect their commissions. The cooperative corporation will charge fees for their attorneys, document preparation fees, and possibly fees for “moving in” costs and so on. There are transfer taxes that will have to be paid. If one of the parties is a non-resident alien, there may have to be withholding payments taken.
All of these financial details are the things that can make a closing a headache. That is one of the major things that you are paying for when you hire an attorney to represent you at a closing.
Refinancing closings have many of the same features – but there is only one owner of the property, instead of a buyer and a seller.
The types of questions that clients want to know are usually “How long?” and “How much money?” questions. The answers depend on the type of closing. Here are some rough estimates, based upon typical charges in the New York City area.
For a simple cooperative apartment, cooperative apartment, or single family house where there are no unusual problems, where there is financing involved, it almost never is less than 30 days between the handshake deal and the actual closing. It is usually less than 90 days. In most cases, no matter what the buyer’s lender advertises, it take about 30 days for the bank to give the approval for the loan and process the paper work. Sometimes it is less, and sometimes it is more. If approval of the coop board is needed, that can take longer than 30 days – a lot of boards only meet once per month, and you may have to wait 30 days to be interviewed.
Actual preparation of a simple contract of sale should not take more than a few hours once the details of the deal are set. Review by the buyer’s attorney of any documents depends on what the documents are and what issues may come up.
The cost also depends on the details of the transaction. For simple, straight forward, no problem closings, in New York City, the buyer’s and seller’s legal fees are unlikely to come in much under $1,000, and are probably going to be less than $2,000 – but that assumes there are no problems. The closing costs for the buyer are usually more than the buyer expected when the handshake deal was reached. For a typical mid priced apartment or house, the costs are usually in the range of a few thousand dollars.
After the closing, the buyer’s and seller’s attorneys will prepare a closing statement, which is a document that summarized the transaction. It should explain where the money came from and where it went and why, which is important in preparing tax returns, and will be needed in computing any capital gains when the buyer sells the property in the future.
The foregoing was about a simple closing that can get more complex. If the property is income generating property, like an apartment building, there will be further legal work involved in transferring the rights to unpaid rent, rights under leases, assigning warranties for repairs or equipment that may be extant, negotiating any agreements between the buyer and seller that are going to be enforceable after the closing, and further documents that have to be filed with various agencies.