Buying an investment property is usually a stressful and lengthy exercise made up of many steps. But understanding each stage and what you can expect can help to ensure a smooth buying process. The last stage in the real estate investing process is referred to as closing or settlement. Real estate closing is when money changes hands and the seller transfers ownership to the real estate investor. Let’s take a look at what exactly happens at a real estate closing.
The 12 Steps to a Real Estate Closing
Here are the steps involved in closing a real estate deal:
1. Hire a real estate attorney
A real estate closing involves tons of paperwork. Since some of the legal jargon can be difficult to understand, it would be wise to hire a real estate attorney to peruse the real estate closing documents on your behalf. The attorney will also exclusively represent your legal interests at the closing. Hourly fees usually range from $150 to $350.
Related: When to Hire a Real Estate Attorney
2. Choose your settlement company
Besides an attorney, you will also need a real estate closing agent (also referred to as an escrow or settlement agent). This is the person who will handle document signing for both parties, confirm that the terms of the purchase agreement have been fulfilled, and at the end, make the payments, transfer the title, and record the deed. The choice of a settlement company should be made in consultation with the seller.
3. Open an escrow account
An escrow account prevents the property buyer or seller from being cheated during the real estate transaction. It is basically an account managed by a neutral third party (such as your escrow agent or a bank) where all the documents and cash related to the deal are kept until everything has been settled. After all the formalities are complete, the documents and cash will then be transferred from the escrow account to the buyer and seller.
4. Conduct a title search and get insurance
A title search involves examining public records to establish a property’s legal ownership and unearth any liens, encumbrances, or defects on the property. Having title insurance will protect you from hazards such as:
- Flawed records
- Ownership by another party
- Forgery and fraud
- Restrictive covenants
- Judgments or encumbrances against the property
The cost of title insurance will vary depending on the insurance provider you select, the state you live in, and the purchase price of the investment property.
5. Negotiate closing costs
Income property buyers usually pay as much as 5% of the purchase price in real estate closing costs. Real estate closing costs include fees such as application fee, origination fee, closing fee, HOA transfer fee, flood determination and monitoring fee, homeowners’ insurance, property appraisal fee, and private mortgage insurance (PMI). All these fees could add up to hundreds or even thousands of dollars. Negotiating will help you reduce or eliminate some of these fees before you proceed to closing.
6. Conduct a home inspection
A home inspection is very important for identifying any issues with traditional or Airbnb investment property. A thorough inspection should involve checking the condition of the basement, roof, heating system, interior plumbing, foundation, floors, walls, and electrical systems. You might also want to hire a specialist to conduct a separate pest inspection.
7. Re-negotiate the purchase contract
If the home inspection reveals significant problems with the real estate property, you can renegotiate the offer price to cover the cost of the required repairs. Alternatively, you could leave the price as it is and ask the seller to make the repairs. Even in a situation where the purchase contract states ‘as is’, you can still ask for concessions. If the seller is not willing to cooperate, you can always back out of the deal.
8. Meet funding requirements
When you signed the purchase agreement, you probably deposited earnest money to show your genuine interest and good faith in the real estate deal. In case the seller backs out, the earnest money is refunded to the buyer. If the buyer backs out, the cash will be handed to the seller as compensation.
To complete the transaction, you will be required to deposit additional money into escrow. Before signing the real estate contract, you should agree with the seller on what payments will be required at different times. If you don’t have such an agreement, the deal could fall through and you could lose your earnest money.
9. Review the closing disclosure
This is an important document that outlines vital details about your loan and lists the closing costs. According to federal law, your lender should send you the closing disclosure at least three days before closing. Take time to go through the document and check if the details are similar to what is on the loan estimate you received earlier. If there are any discrepancies, be sure to ask questions.
10. Get your documents together
The closing agent will give you a breakdown of what you need to bring with you to the closing. Here are some of the things you might be required to bring:
- Photo identification
- Your homeowners’ insurance policy
- A cashier’s check for the down payment and closing costs
- A list of your recent addresses
11. Conduct a final walkthrough
A few hours before signing the closing paper, you should walk through the investment property for sale one last time. You need to confirm that there are no new problems and that nothing included in the purchase contract has been removed.
12. Closing day
The real estate closing day is when papers are signed and the deal is finalized. This event is likely to be hosted at the office of the lender, an attorney, or the title company. Make sure your attorney is present to help analyze the fine print on all the real estate paperwork. You should especially ensure that the interest rate is accurate and that there is no prepayment penalty. Once all the documents are signed and the real estate closing wire transfer is done, the investment property will then be legally yours.
How Long Does a Real Estate Closing Take?
Once you’ve signed a purchase agreement with the seller, the real estate closing process could take 1-2 months. Unless you are planning to pay for the rental property in cash, it would be prudent to get mortgage pre-approval before you begin house hunting. Having a pre-approval letter will hasten the closing process, and give you more leverage when negotiating. You will also know how much you can afford when looking for an investment property. When you get pre-approved for a mortgage, you should get a loan estimate that outlines your loan terms, estimated payments, estimated real estate closing costs, and other loan considerations.
Whether you want to invest in Airbnb or traditional rental property, closing on a home may appear to be a very complicated and stressful task. However, if you do your due diligence and enlist the help of a real estate agent and attorney, closing on cash flow properties should be a smooth process.