The last of three parts.
Dealing with the myriad legal details at the closing can be one of the most difficult parts of selling your home without a real estate agent.
In previous columns, we’ve outlined the advantages of a for-sale-by-owner transaction — mainly, saving tens of thousands of dollars in brokerage commissions — and examined how to get started with the presale fix-up, required disclosures and contract negotiation.
Here’s what you need to know to navigate the settlement process when you’re trying to go it alone:
●What is a settlement? The settlement is essentially the point in time when all the buyer’s and lender’s money is in the settlement attorney’s escrow account; when the deed and related documents are signed by sellers; when lender’s documents are signed and all financial adjustments among the parties are calculated and disclosed on the HUD-1 settlement sheet.
●What is a HUD-1? The HUD-1 form was created by the U.S. Department of Housing and Urban Development and is used nationwide to uniformly disclose all of the financial aspects of a residential real estate transaction. This three-page — and virtually incomprehensible — disclosure document is prepared by the settlement attorney. The parties are entitled to receive a copy of the HUD-1, upon request, one day before the settlement. Unfortunately, since lenders often fail to provide their figures until immediately before settlement, it is practically impossible for the settlement attorney to provide a complete HUD-1 much before the settlement.
●Who selects the settlement attorney? By law, the buyers have the legal right to select their settlement attorney. But not all settlement attorneys are alike. Some are completely independent. Other settlement attorneys work for title companies that are co-owned by the real estate broker or lender. In such cases, the law requires you to receive an affiliated business disclosure form to warn you of this affiliation. You may be surprised to learn that you do not need to be a lawyer to conduct settlements or hold the escrow funds. There are many experienced, non-lawyer settlement agents who do a fine job.
●Does the settlement attorney work for me? Unlike a typical attorney-client relationship, in which the attorney has an exclusive, fiduciary duty to his client, the settlement attorney represents “the transaction.” Representing the transaction means that settlement attorneys do not represent any one party’s interests exclusively. Rather, they represent all of the parties on a non-exclusive basis. They make sure that the buyers’ and sellers’ interests, as expressed in the contract, are implemented.
They represent sellers’ interests to the extent that they properly pay off the sellers’ existing mortgages and prepare and record the deed. Settlement attorneys represent buyers’ interests to the extent that they ensure that the buyers are purchasing a property with clear title. They will offer buyers optional title insurance (lenders insist on obtaining title insurance at buyers’ expense) to protect the buyers’ investment and will coordinate the signing of all the lender documents.
Settlement attorneys represent the buyers’ lender to make sure that before they disburse the lender’s funds, all the lender’s documents are properly completed, signed, notarized and ready to be recorded. Finally, settlement attorneys represent the title insurance underwriter by conducting a title search, examining the title report and, to the extent possible, removing any title clouds prior to settlement.
●Who pays for the settlement costs? Although the buyer selects the settlement attorney, both parties pay a fee for the settlement services they receive.
●What if I cannot attend the settlement in person? You may use a power of attorney to appoint someone you trust to sign on your behalf. But you must use one that is current, is drafted for the specific transaction and contains specific statutory language. Do not rely on forms you may have used in the past. Maryland and Virginia recently changed their laws. Powers of attorney take some planning. An original, signed, witnessed and notarized power of attorney must be delivered to the settlement attorney at or before the settlement.
●What should I watch out for as seller? Make sure the payoff amounts of your loans are close to what you were expecting. They will always be higher than you expected. Why? Because interest is paid in arrears, and even if you have been studiously reading your statements each month, you probably have not factored in the accrued interest. Review the deed to make sure that your name is spelled correctly and that it correctly reflects how you held title.
●What should I watch out for as buyer? A buyer who is borrowing funds should expect to sign an average of 100 pages of lender’s legal documents. If you are a “reader” and wish to actually read these legal documents before signing them, you must let your lender and settlement attorney know in advance so copies of the basic forms can be sent to you in advance for you to read at your leisure. No one will appreciate you sitting in the settlement room reading the minutiae. Although there are literally dozens of documents at the settlement table for you to sign, the main documents to read carefully are: the deed, truth-in-lending disclosure, the promissory note and the deed of trust and all riders.
A final note about releases. After you have successfully navigated your way through the for-sale-by-owner gantlet, you have one more task: making sure a one-page document, called a certificate of satisfaction, gets recorded in your county’s land records. This document comes from your lender and must be signed and notarized, and only the original can be recorded. Until it is recorded, your loan will continue to cloud title.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord and lender. This column is not legal advice and should not be acted upon without obtaining legal counsel. Jacobs can be reached at email@example.com.