Closing escrow is the final step in purchasing a self-storage property. The process can go smoothly if you take a few precautions. This article provides a pocket guide to the process, summarizing the major steps and procedures involved in closing a real estate transaction.
Escrow is a means for the transfer of ownership. It engages a neutral third party into the transaction to ensure buyer and seller perform as they have contractually agreed. The escrow holder is a disinterested party hired for the benefit of the selling and buying entities, and the main obligation of escrow is to guarantee the integrity and legality of the transaction.
Escrow provides a clearinghouse for funds and documents and a means for making sure all the conditions of the real estate transaction are met before the property changes hands. Moreover, the escrow officer must comply with the terms and conditions of the instructions and keep funds safely deposited in a separate escrow account.
To open escrow, basic criteria needs to be satisfied, including an executed contract stating the terms and conditions, competent parties, valid consideration, and an asset or property. The buyer and seller are then considered primary parties or principals in the escrow. If a lender is part of the transaction, it too becomes a primary party. The written contract used in the deal is generally called a "real estate purchase and sale agreement and receipt for deposit." The terms of the contract, among other things, include written escrow and closing instructions.
In most cases, the listing agent will open escrow. The transaction will be assigned to an escrow officer who will assign an escrow or file number. In no particular order, the escrow officer will then begin processing the following tasks:
- Order the title search, showing the current status of the property.
- Secure payoff amounts from existing lenders of all amounts owing on the property and request releases from the lender of any mortgages or deeds of trust to be paid off at closing.
- Obtain instructions and loan documents from the buyers lender.
- Resolve any outstanding liens against the property.
- Issue receipts for deposits of documents and funds.
- Prorate taxes, interest, rents, etc.
- Prepare buyers and sellers escrow instructions and ensure all documents are properly executed.
- Get title insurance for the buyer and/or lender.
- Record documents including grant deeds, deeds of trust, powers of attorney, substitutions of liability and reconveyances.
- Distribute funds to the proper parties, deliver documents and prepare the final closing statements.
The Broker's Duties
The real estate broker has specific duties to perform, which include but are not limited to:
- Ensure the contract is properly executed.
- Confirm all necessary disclosures have been given to the parties.
- Make sure the legal description of the property is correctly documented in the purchase agreement.
- Confirm contingencies in the contract are worded correctly and understood.
- Contact the escrow/title company when the property is under contract.
- Deposit or forward to escrow any earnest deposit.
- If attorneys are involved, create a punch-list of mutual responsibilities.
- Communicate all information to the attorneys and escrow officer to avoid ambiguity.
- Assist the buyer, as necessary in obtaining financing.
- Work with the escrow officer in distributing the title documents to all parties.
- Get a copy of the sellers existing mortgage account number and lender information.
- Forward copies of the current title insurance policy information to the escrow officer and attorneys.
- Current title policies may save time and money for the buyer.
The Title Company's Duties
The title company will be responsible for searching the title and determining any legal issues regarding conveying title to the new buyer. Title will list all relevant facts and provide them to the parties. Title search is conducted to historically trace the ownership of title through every available public record. The search will determine if the owner has legal ownership and the right to sell the property.
A title-company examiner will search the records of the county recorder and assessor as well as any other government taxing agencies to locate documents that may affect title. The examiner has four primary goals to meet:
- The exact description of the property
- The estate or interest in the property
- The vesting of the estate or interest
- The exceptions (liens, encumbrances and defects) affecting the current vested interest
The search will also disclose any deficiency on the title. The results are compiled in a preliminary title report or prelim. It reflects the conditions under which a title company would be willing to issue title insurance.
Its important to clear any title issues, and a new title report should be issued, removing any questionable items. Ask for a revised copy of the title report showing the clear title. If money is owed and it appears on title, creditors should agree to release their claim subject to the debt being paid at the close of escrow.
Problems also can arise in the tax description of the property or land. Minor discrepancies between the tax description and the survey is normal, but significant differences will be problematic.
One of the more important aspects of closing the deal is determining how you take title to the asset. Not only does it establish how youll be insured, it has important legal and tax consequences. Get professional advice to ensure youre proceeding correctly.
The lender will work with escrow and the real estate broker to guarantee all conditions required to fund the loan occur timely. Other service companies involved in the process may include an appraiser, surveyor and building inspector. These service companies will be responsible for performing a detailed valuation and inspection of the structures. Reports will be issued and distributed to all parties prior to closing.
You should have a complete building inspection performed by a licensed building contractor or inspection service. A qualified contractor or inspector will give the building an overall structural inspection covering all major structural systems including the foundation, plumbing, electrical, roof and heating. Plan to accompany the inspector on the inspection to determine if problems exist.
A flat fee for escrow normally covers all services within the escrow umbrella, with the exception of title-insurance fees. Under normal circumstances, the escrow fees are divided evenly between the parties, though it may differ in certain areas of the country. Prior to executing the purchase agreement, the parties should agree how the fees will be paid.
Finalizing the Sale
After the contingencies of the purchase agreement have been waived, the buyers loan has been approved, and all repairs and inspections have been completed, funds to complete the transaction will be finalized. The division of shared expenses between buyer and seller, called prorations, will be computed. The buyer will sign closing documents and release any credits or monies owed to the seller. The seller will execute a deed transferring legal title to the new buyer. The deed will then be recorded with the county recorder, including mortgage documents. The buyer will receive a policy of title insurance guaranteeing the title to the property is valid and current. The seller will then receive the balance of funds necessary to complete the sale.
In the closing statement, a balance sheet is used, which reflects debits, credits and prorations. The parties are required to sign the closing statement, confirming the calculations are correct. While debits and credits are understandable, prorations tend to create disputes. Prorations apply to any charges that a party may have incurred prior to the sale of the property. Charges may include property taxes, insurance premiums, rents, maintenance charges and impound accounts. They are paid in advance by the seller or buyer, thus necessitating a credit.
The final closing of the transaction entails a punch list of items the escrow office needs to complete and file. They include:
- The final escrow closing instructions signed by buyer and seller
- Signed loan documents
- A certified check or wired funds from the buyer for the full balance of the purchase price
- A signed and acknowledged grant deed and, when applicable, an executed bill of sale
- Instructions from buyer and seller to record the deeds on a specific date
When the closing officer has completed all documentation, the document packet is filed and recorded with county recorders office. When a document is recorded, the public is assumed to have knowledge of its existence. Constructive notice has now been given. Title represents ownership of property, and the deed is the instrument used to transfer title between the parties.
Recording the deed is essential for the buyer and the lender. In most cases, the recorded instrument carries legal preference over any unrecorded instrument. The time of recording is considered the close of escrowthe day, hour and minute when the property legally and rightfully changes hands.
Each county recorder has definitive times when documents can be recorded. A county with a heavy workload generally requires closing agents to record early in the morning to be sure the posting of all the documents is completed by close of business. Closing agents prefer to record at the earliest possible time of the day.
After the documents have been recorded, the escrow officer will release the monies that have been held in the escrow account. This involves paying the seller, the holders of old loans, the real estate agents, etc. The deal is now complete, and the buyer can take possession of the asset.
While it can be a long and tedious process, understanding the steps involved in closing a self-storage real estate transaction will help you stay clear of pitfalls and ensure a smoother process.
Stephen Grossman is a senior vice president with NAI Capitals National Self Storage Investment Group in Newport Beach, Calif., which specializes in self-storage brokerage. He has been responsible for the sale of more than 900,000 buildable square feet of entitled self-storage land, and the sale or escrow of more than 3.5 million square feet of existing self-storage facilities. For more information, call 949.468.2394; visit [email protected].