How To Close a Real Estate Deal and Go Through Settlement

Note: This is Chapter 6 of an entire guide on How To Buy Your First Investment Property.

By this point, you're in the home stretch. You've got your contract and your financing is ready to go. Finally, you'll need to close (AKA go through settlement).

This is basically the signing of all legal documentation that makes the deal official between you and the seller. This is also where you pay closing costs and other documentation fees.

Note: there is little difference between closing on a personal property and an investment property. This means that if you've purchased a personal property before, the process is practically the same.

The closing process is fairly standardized, but does vary from state to state.

Preparation

Before getting started, there are a few line items to make sure the purchase goes through smoothly.

1. You'll want to have an agent.An agent comes in many forms at this time. This can be done via an attorney, closing agent, or often, a title company will have a transactions agent who completes the transaction for you. This is crucial to make sure all legal documents are valid.
2. Set a closing date.Working with your agent, work out what an appropriate close date would be. Conducting a lot of the legal documentation needed to close on a property takes significant upfront work. This is especially apparent when you are financing the deal via a lender.
3. Ensure financing approval is complete.You should already have been approved for financing, but you may want to double check that your loan approval is in good order because you'll need it to close on the home. It is a good idea to talk with your lender before engaging your closing agent.
4. Get homeowners insurance.Most lenders require that homeowners insurance is in place prior to the close of a home.
5. Check closing costs.A lender is legally required to give you an estimate of your closing costs so that you can ensure you can the cost. Moreover, note that you will need a certified bank check for closing as personal checks are typically not used. More on this below.
6. Final due diligence.This is the last part of due diligence you'll complete. This ensures that the property is in the condition you expect it to be in and that it is compliant with local building and zoning codes via survey and inspection.Part of this also means getting a title search and title insurance. This is important as you want to ensure that the seller is the sole owner of a property and other stakeholders will not stop or slow a deal.

Closing Costs

When people say that real estate has high transaction costs, they are usually referring to closing costs for the bulk of it. Because you are a buyer, we'll only be covering the buyer portion in this article.

Typically, the buyer pays the following line items:

• Downpayment
  • This is the downpayment (typically 20%+) that is used to purchase the home.
• Credit Report
  • A credit report is usually drawn alongside your financing by your lender. This report is used as part of your loan application and is needed to close on your home as it is a part of the financing.
• Transfer taxes (state + local)
  • Transfer taxes are usually state and local fees that are charged anytime a piece of property with a deed is transferred. This means you pay a tax to a local government for the transfer of a property to your name officially. This is usually based off a percentage of the home value.
• Escrow deposit (covers taxes)
  • Transfer taxes are usually state and local fees that are charged anytime a piece of property with a deed is transferred. This means you pay a tax to a local government for the transfer of a property to your name officially. This is usually based off a percentage of the home value.
• Agent and/or attorney fees
  • This is a one-time fee that you pay to a lender to acquire a loan. It is usually based on a percentage of the loan amount.
• Loan origination fees
  • This is a one-time fee that you pay to a lender to acquire a loan. It is usually based on a percentage of the loan amount.
• Record fees (for mortgage and deed)
  • This is typically a small one-time fee under $500 that is used to cover paperwork for the mortgage and deed of the property.
• Title fees (search and insurance)
  • You will want to pay for Title Search and Title Insurance. Title search is important to make sure there are no other outstanding persons who may be on the title of your home. This is to ensure that the seller is the only seller (and other stakeholders will not block the purchase). Title insurance can be purchased to make sure that there aren't any issues with the Title post-close.
• Land Survey fee
  • Depending on the property, you may want to purchase a land survey. This is used to make sure the home is up to current local standards. This is especially important with older homes or homes that have been renovated.

The typical closing costs vary from locale to locale. You should budget around 5% of the purchase price towards the closing costs, but this is just a general rule of thumb. This means that an investment property purchase requires around 25% of the home purchase price in order to cover the entire transaction because of the downpayment.

The Home Stretch

And that's basically it! On the day of closing, you'll want your agent next to you. After that, it's just a matter of exchanging materials and signing contracts.

The only thing is to make sure you know what you are signing!

After closing, you'll have your property. And the only thing left is property management which will be the next article.