The Expert Podcast

So, how does a real estate closing work? You signed a contract with a realtor with the seller to buy a home, or you're a seller and you have a buyer that signed a contract, and now you are waiting for what's called a closing date or an escrow date. That's the day when the property is actually transferred from one party to another—it's the legal date of ownership. What happens in the meantime, and what happens at that closing? What can you expect?

It's important for a buyer and a seller to know the details of what's going on behind the scenes. You may not see all of these details happening because your title company, your escrow company, or maybe an attorney is going to be doing all of these things behind the scenes. But it's important to know what they are because there may be some things that come up that could be surprises if you're not aware of them. So, we'll take them in order and we'll look at things that you may not be told about. There could be consequences. We're going to take a look at things that could cost you your life savings if you don't do it correctly. People have lost their entire down payment from fraud if they don't do this correctly. We're also going to look at what gotchas or surprises can come up at closing that you want to know about weeks in advance before you get to that closing table. Because on that day, you probably have your stuff in a moving van, ready to move into the house, and you don't want to have a surprise that forces you to do something that you don't want to do. Or, as a seller, maybe it's a surprise that you thought you were getting a big check, and you get nothing. You don't want to be in that situation either.

Let’s look at it chronologically. What happens? You work with a real estate agent, you look at a house, and you make an offer. A counteroffer goes back and forth. Finally, you have a signed contract. The buyer and seller have agreed to a price and terms on a house, and they sign a contract. In some jurisdictions, it’s called being in escrow. Houses in escrow or under contract, either way, it's the same thing. That contract almost immediately gets transmitted to a title company or an escrow company, sometimes a law firm that’s going to handle this legal process behind the scenes. And in most jurisdictions, you're allowed to pick the title company. Whoever’s paying the fees, usually the realtor knows somebody, and it’s okay to let them pick it out. That title company or escrow company, they're going to start doing a few things. First, they’re going to run a title search on the property to make sure that the owner is actually the owner. They're going to make sure there's no liens. They're going to find out what the mortgages are because they have to get paid off before the property transfers to the buyer. All the prior mortgages have to be paid off so it’s a clean title. Now, you might have a new mortgage as a buyer, and that’ll be put on there later, but you want to have the old mortgages cleaned out. They're going to make sure there's no lingering tax debts, back taxes, or real estate fees that are piled up on the property. They want to make sure it's clean.

They’re also going to look at things like HOA requirements, maybe utilities, and other pertinent restrictions on the property, maybe easements. We’ll talk about easements in a minute. Does somebody have access to your property and will have access anytime they want as long as you own it? That’s an easement. Many properties have an easement that you need to know about. You might buy a house and realize that property allows, by law, certain people to access and go on your property anytime they want to, and we’ll talk about who those might be. So, they’re going to start a title search. At some point, you’ll get a copy of that title search. It may take a week or so to get a title search, and when you get it, you want to read it. It’ll tell you what to look for.

At the same time, they’re also going to start checking into mortgage payoffs on the existing loans. They're going to start contacting the buyer (let's say that’s you) to talk about what your mortgage is going to be, where you're getting your money from, where’s your down payment, who’s your mortgage lender, how much are they funding, and they’re going to start gathering that information. They’re also going to schedule a tentative date for closing, usually about a month or sometimes a month and a half, depending upon the backlog of these different parties. They’re also going to start contacting the local tax assessor for real estate taxes to find out what the taxes are due for the year. In most jurisdictions, you pay taxes once a year for the entire year. Sometimes you pay at the beginning of the year for the year forward, and sometimes you pay at the end of the year for the year backward. Well, if you're buying a house in June, and the taxes are due at the end of the year, think about it: you're going to get a tax bill in December for the entire year's taxes, but you only live there for half the year. That's not fair. So, they’re going to calculate what the taxes will be, and they’re going to give you a credit because you’re going to have to pay that whole tax bill in December, and you need to have the seller reimburse you for how much they’ve used from the beginning of the year. That’s called a proration of taxes.

They’re also going to look at what fees are coming out of closing. The real estate agent, the broker who arranged this deal, they're going to get paid a commission. Now, the buyer, you don’t pay that; the seller pays that from their proceeds. So, let's say a house is sold for $400,000, with a six percent commission—that’s $24,000 coming out of the proceeds, and the seller is going to get an itemization of all of their fees. They get $400,000, subtract the commission (if they have a mortgage, subtract that, if they owe this the buyer money for taxes for the year, subtract that). They're going to get an itemization and then they’re going to get a check at the end, a net check for the difference.

You as a buyer have to come up with money, too. If you're buying it for $400,000, and you're getting a mortgage for $300,000, now you have to come up with a payment of $100,000 for your down payment for your equity. They’re going to calculate that. You’re going to have to get that money to them in advance of the escrow date, and they don’t take checks. They don’t take credit cards. Most of the title companies also don’t even take cashier's checks, because when that escrow company completes a transaction on that closing date, they’re handing you a deed to the house, which makes you 100 percent owner of that house. They're also handing the seller the money from that house, and they’re paying off their mortgage. If the cashier's check that they get from you turns out to be fraudulent or void or somehow not valid, they’re on the hook for that because they’ve already paid this money out. So, most escrow companies only take a wire transfer so that money is in their account. They don’t have to wait for checks to clear or validation of cashier's checks. They don’t play any of those games. They have to get good, solid money, and you might think, “Well, can I bring cash?” They don’t want you to bring $100,000 in cash because, first of all, there’s a lot of reporting for that—IRS reporting—and it puts them at risk of being robbed. They don’t want to be at that risk, so wire transfer is the preferred method.

Now, this is where the fraud comes in. This is where you have to be careful. There are scammers out there and hackers that look at real estate records for people buying and selling houses. When you go under contract, they will find out who the seller is, they’ll look at a property that’s for sale (let’s say it’s Joe Smith who is selling 12 Main Street), and this is how complicated it is. They will find that person, Joe Smith, and they will find their email address. They will hack their email and they’ll look up, “Okay, what title company is doing this?” They will find out the title company, they will find out your name as a buyer of that property, and they will send you an email as a buyer saying, “Hey, this is XYZ Title Company. Here’s your instructions for wiring your $100,000 for your closing. Wire it to this account number, this routing transfer number. Thank you, we’ll see you on this date for closing.”

So, you wire your $100,000. A week later, you get a call from the actual title company that says, “Hey, where’s the money you’re supposed to wire?” You say, “No, I wired it a couple days ago.” “We never got it,” and then you do some research and find out that the wire information is completely invalid. The money went to some overseas scammer hacker that took all your money, and there’s no getting it back. And the escrow company can’t fix it for you. They can’t say, “Well, you know, you sent your money to somebody, so you’re good, we’ll still transfer the title.” If that money’s gone and you sent it to somebody else, it’s kind of like you got robbed in the street and you can’t buy the house now. Right? The title company cannot transfer you the title to that property unless they have all the money from you, and if you send it elsewhere accidentally, that’s going to be a problem.

How do you prevent that? Well, first, hopefully, you’ll get a lot of emails from