In This Chapter

If you’ve made it to the closing table, you’ve come to the end of the road. Congratulations! This is the moment when you will legally sign over ownership (and the keys) to your home. Hopefully, a great deal of money will be deposited directly into your account or you will physically be handed a large check. But it’s also a bittersweet moment because, after the closing has concluded, you may not go back to that property unless as an invited guest.

While it’s rare, there are certain circumstances that may cause the journey in selling your home to extend beyond closing. We discuss some examples of those unusual scenarios. We also discuss how to prepare for closing, what actually happens at a closing table, important documents and fees, the tax implications of selling a home, and how to calculate your profit or loss on the sale (we’re assuming it’s a profit!).

We genuinely hope that closing day will be a joyful one for you, as well as for your buyers. It is a wonderful thing when the seller and buyer have a smooth deal, become friends, and stay in touch, particularly if the seller lived in the home for many years and feels a deep connection to it. The home will always be something that the two of you and your families will have in common.

The main thing that happens at the closing table is the transfer of ownership from you to the buyers. It is a legal transaction which is recognized, and recorded, by the local or municipal governments and state and federal governments, including the IRS.

When both buyer and seller are represented by attorneys (which we very strongly recommend), the closing typically takes place at the office of the buyer’s attorney. As the seller, you do not necessarily need to attend your own closing. It can take place in your absence, as long as you have presigned the necessary documents. The buyers usually need to attend the closing, as they must sign dozens of mortgage documents required by their bank or lender.

Closings can take up to a couple of hours or as little as 10 minutes. Much of the time is eaten up by getting all those signatures from the buyers on the loan documents. However, if the buyers have signed them prior to the closing as well, then the process will be much shorter. A closing can also be delayed if there are problems with the walk-through and the buyer and seller are having a hard time negotiating a resolution. We discussed some of these in Chapter 17.

Obviously, your biggest responsibility is to move out. This may seem obvious but you would be surprised how many sellers think that they can go back to the property after the closing to finish moving. Legally speaking, if a seller does that, it would be called trespassing. Ownership has transferred to the buyers after the closing is complete. We now cover the rest of your responsibilities for closing.

Most cities and towns require a seller to apply for a certificate that shows that the home may continue to be used and occupied in accordance with local law. If a certificate is required in your area, a seller cannot close on the property without one. The seller must typically have an inspection of his home done and pay a fee of approximately $10 to $100, and then he receives the certificate. The names of these certificates and the guidelines attached to them vary from community to community.

Here are some of the more commonly named certificates:

The first three certificates are typically given after a city or town official has inspected the property to make sure that everything on the exterior and interior of the home meets local building and safety codes. For example, if the front stoop has more than two steps and no railing, this can be a safety code violation. If the sidewalks are uneven, causing a tripping hazard, your home can fail this inspection. If the stove or clothes dryer are not properly vented, if the sump pump is not properly irrigated, or if there are more than two layers of shingles on the roof, you could fail the inspection and not receive a certificate. The building and safety codes vary by town and by state. In fact, some communities don’t have any requirements at all, only recommended codes. But if there are requirements in your area, until you rectify the problem and pass a new inspection, you cannot sell your home.

A smoke certificate is a blanket term used in communities that require a home to have working smoke detectors on every level, working carbon monoxide detectors on sleeping levels, and perhaps even a working fire extinguisher in or near the kitchen. The inspection for this type of certificate is usually done by the local fire department.

A zoning certificate is when the local government wants to be sure that your home will continue to be zoned appropriately for the location. For example, if your neighborhood has nothing but single family homes in it, it will be zoned as such. There may be no mixed-use zoning allowed in that location. This is when there may be a mixture of single family homes with multifamily homes, rental apartments, and even commercial or retail spaces. If you had turned your home into a multifamily while you lived there, but it is zoned solely for single family homes, then you are required to convert the home back to a single family before selling it. The inspector for this type of certificate can come from the zoning department, building and planning, or whomever the community designates.

And finally, if you are selling a condominium or co-op, there may be an additional inspection required by the board of directors. Their guidelines and requirements should be made known to you before you sell the unit.

You are required to pay off your mortgage and all liens when you sell your home. Because the bank or lender will no longer have equity (or ownership) in it, they will want and expect their money back at the time of the sale. You do not have to come up with the money and pay it off before the closing. The loan will be paid off as a result of closing. When the buyer pays for the home, those proceeds will be forwarded to your bank.

You may have other debt or liens on the home besides your mortgage. A common lien is a home equity loan or home equity line of credit (HELOC). This is simply another type of mortgage (also known as a second mortgage). This is when you already own the home but need an infusion of cash, so you “borrow against it.” Let’s say that you borrowed $200,000 when you first purchased the home, in the form of a mortgage. During your ownership, you may have needed some cash—perhaps to make a major improvement on the home. Let’s say that you took out a $50,000 home equity loan. Your debt went from $200,000 up to $250,000. If you believe that your home is worth $500,000, then you have 50 percent equity in it. You happen to own the home 50/50 with the bank.

Let’s say that home prices have fallen and it is now only worth $450,000. When you sell, you must still pay back the $250,000 you borrowed from the bank. The bank will get its money. If the sale price is $450,000, the bank receives the $250,000 owed on it by you. You receive only the $200,000 that is left over. You actually lose $50,000, probably more when you factor in the expenses involved with selling. This is why borrowing against a home can be financially dangerous to a seller. The bank always gets paid first. If you can’t pay it, it takes the home and you go into foreclosure.

Liens can be placed upon your home from many different sources. The IRS can place a lien on your home for failure to pay income taxes. The state, county, or municipality can place a lien on your home for failure to pay property taxes. A judge can place a lien on your home for failure to pay child support. Even a general contractor or a landscaper can place a lien if you haven’t paid him for a job. These liens come up when the buyer’s title search is performed so they will be found, and they must be cleared or paid off in order to sell.

You may pay taxes on the sale of your home. How much you will pay depends on the state in which you live, how long you lived in the home, the sale price, how much profit you made, your income, and your marital status. No matter what state you live in, there is at least one federal form that must be filled out at closing time in order to report the sale, even if you did not make a profit.

IRS reporting forms or tax forms are a requirement at a closing and are for reporting the gross sales price. No matter when you close on the sale, copies should be kept for when the estate files its income tax return.

Check with an accountant or financial advisor about what reporting forms are required by your own state government. Following is a sample from the state of New Jersey.

If you are not a resident of the state in which you are selling a home, or are a nonresident seller, then you may be subject to a state income tax being withheld from the gross sale proceeds.

The following tax declaration form (from the state of New Jersey) is used to verify the seller’s home state and primary residence. Their purpose is to track sellers to make certain that they file a nonresident income tax return and report the sale of a secondary property.

The two most common types of taxes paid on the sale of real estate are realty transfer tax and income tax (as a result of capital gains).

Some states impose the realty transfer tax, while others do not. It is a tax that is based on the sale price (the more you sell it for, the more you pay) and is paid to the state. Here’s a hypothetical example of how it works in one state. It is a rather complicated calculation:

So, if your home sold for $350,000, the realty transfer tax would be $3,875.

The income tax (often referred to as the capital gains tax) is what you pay when you make a profit on your home, or on the sale of just about anything you own, for that matter. But the sale of a home can bring profits in the hundreds of thousands for millions of Americans. So, the IRS takes it very seriously! And if you are selling a luxury home, your state may impose upon you a luxury tax, as well.

The tax laws are always subject to change. But, as it stands in late 2008, it is as follows:

Note: if you are selling a home as part of an estate sale for a deceased loved one, see Chapter 12 for specific tax implications.

If the buyer borrows money, then both the seller and the buyer must sign a settlement statement (mandated by the U.S. government) that discloses all the charges, fees, credit, debits, taxes, assessments, commissions, attorney fees, and anything else associated with the transaction.

The settlement statement is also known as the HUD or RESPA Statement. Here’s why: the document is a requirement made by the Department of Housing and Urban Development (HUD). The legislative act that made it law is called the Real Estate Settlement Procedures Act (RESPA).

The law reads:

For more information on closing or settlement procedures, visit www.hud.gov.

The seller may need to pay credits to the buyer for a variety of things, including:

The buyer, on the other hand, may need to make payments or credits to you, the seller, for the following areas:

With the exception of the commission, many of the fees that you may have heard about in a real estate transaction are actually paid by the buyer, not the seller. Those fees are title services, appraisals, mortgage application fees, inspections, ordering a new survey, and insurance.

You will have your own set of fees and charges associated with the sale. They must all be paid at or before the time of closing. The primary seller’s fee is the real estate commission, which is likely to be between 5 and 7 percent of the total sale price. On a $350,000 home, a 5 percent commission would be $17,500. As illustrated in Chapter 3, that commission is split between two real estate agencies: the listing agency and the agency representing the buyer (selling agency). A significant percentage is taken off the top by the agency before giving what’s left to the individual Realtor. After the Realtor pays taxes and expenses, she will probably take home less than one third of the total commission.

Other fees include:

The deed is the document that establishes ownership. The names of each and every owner are printed on it. A husband and wife may live in a home together, but if only the husband’s name is on the deed, the wife does not own the property, and technically has no legal rights to it. If the couple divorces, she may sue and go after the home or a portion of its value. However, the asset is considered to be her husband’s as long as his name alone remains on the deed.

Affidavit of title actually transfers ownership. Do not confuse this with the title on a car or the title on a boat. It’s not the same thing. This is a document that is most often prepared by the seller’s attorney and given to the buyer for the purpose of recording the sale with the state or local government. People often envision this to be a very old piece of paper with frayed edges. In actuality, a brand-new affidavit of title is prepared each time the property changes owners.

Determining whether or not you will make a profit or suffer a loss is a matter of mathematics. After you know what your profit is, you can then know how much of it you’ll be taxed on, otherwise known as taxable profit.

The last thing that happens at a closing is a sort of ceremonial thing, and that is handing over the keys to the buyers. Don’t forget to bring them! Even though most buyers have the locks changed right away, it is almost always a touching moment at a closing. It is an emotional act for both the buyers and the sellers, particularly if the buyers are first-time homeowners and the sellers happen to be retiring. That gets us every time.

Technically, once the closing has concluded, the seller is absolved of all responsibility associated with the property. There are only three scenarios in which there may be an ongoing liability or any connection to the buyers.

Sometimes, an issue cannot be resolved in time for the closing, but both parties wish the closing to take place anyway. In this case, money from the proceeds will be held in escrow, or in a trust account of a disinterested third party. It can be the trust account of an attorney, an accountant, the real estate agency, the title company, or the bank. The key thing to remember about money that is held in escrow is that it cannot be taken out of the account and given to either party until both parties give their consent. If the dispute continues for years, then that money will also be tied up for years.

Money can be put into escrow over significant or major disputes or over small or petty ones. The bigger ones include finding an open mortgage or unpaid lien, a leaking in-ground oil tank which may have been removed but the contaminated soil has not yet been hauled away, or an owner named on the deed cannot be found for signatures. These kinds of issues are usually known well in advance of the closing, so appropriate arrangements can be made and everyone involved is forewarned.

Escrow money held for petty issues usually crops up at the final walk-through, where the buyer may feel that an agreed-upon repair was not made, the home has been left in a filthy condition, or there is unwanted debris on the property. Most of the time, these things can be resolved on closing day through a physical action or by the seller offering a last-minute financial credit to the buyer. But sometimes the buyer and seller cannot come to an agreement over the minor issue. In this event, either the closing gets delayed or escrow money will be held. Many attorneys would rather delay the closing than to put money in an escrow account over something so minor, relatively speaking.

Even though the seller is legally relieved of any liability on the home after he has sold it, the buyer always retains the right to file a claim or civil lawsuit. However, it is very difficult for the buyer to win such a case. She would likely have to prove that the there was a hidden latent defect with the home which the seller not only knew about, but may also have taken steps to actively conceal from the buyer.

Two stories come to mind. In the one case, a local buyer discovered a leak in the brand-new ceiling that the previous owner had featured in the listing when he marketed the home just a couple months earlier. The buyer called a contractor, who then had to tear open a section of the new ceiling. Inside, just above the ceiling, was a pie plate which had been carefully placed below a leaking pipe to catch water. The previous owner then installed a new ceiling around it and promptly put his home on the market. That buyer may have a case because the seller appeared to willfully conceal a known defect.

In another case, the furnace died one week after the closing. The new homeowner called a plumber. When the plumber arrived, it turned out to be the same one that the seller had used. The plumber said to the new homeowner, “I was here just two weeks ago and I told the seller that this furnace was about to go any minute.” And sure enough, he was right. The point here is that, especially in this example, the buyer has clear evidence that that the seller withheld knowledge of a hidden latent defect. A claim or lawsuit could possibly prove successful. But, without clear evidence, it’s very hard to prove that the seller knew of, and concealed, flaws in the home.

Use and occupancy agreements are called U & O agreements for short. It means that the buyer and seller have made an agreement whereby the seller can stay in the home for a period of time after the closing has taken place. The buyers become the new owners and the sellers—in effect, they become “tenants.” They have granted the sellers the right to use and occupy the premises.

These agreements often happen when the sellers cannot move out fast enough for the buyers, yet the buyers want to close anyway—usually because their locked-in mortgage loan rate is about to expire. U & O agreements can be complicated legally, financially, and emotionally. The sellers may treat the home as though it is still theirs, the buyers soon feel cheated out of access to their new home, an appropriate monthly rent may be difficult to establish, and if the sellers refuse to vacate, a whole new set of problems arise. If you need a U & O agreement for your home, proceed with care. They can be wonderful, when they work out. But, when they don’t, it can get ugly.