Chapter 9
IN THIS CHAPTER
Understanding the elements of a deed
Finding out about different kinds of deeds
Examining several ways to legally describe property
Discovering what happens before, during, and after a title closing
Your job as a real estate agent all comes together when ownership of a piece of real estate goes from one person to another. You’ll probably get paid only if ownership of the property is transferred as a result of a sale or an exchange. By the way, another term that means the same as transferred in real estate language is conveyed, and I use the two words interchangeably. From the real estate agent’s perspective, after a deal has been reached, a few more steps still need to be taken by either or both the agent and attorneys to change ownership of the property from one person to another.
This chapter gives you important information about how ownership of property is transferred from one person to another. I talk about the documents that are needed, such as the deed, and how property is described so that no mistakes can be made about who owns what. And I discuss a process called title closing, where ownership of the property actually goes from one person to another.
The deed is an extremely important piece of paper, a document that transfers title to a property from one person to another. It’s important not only because it transfers title, but also because until you convey title to someone else, it serves as proof of your current ownership. It also serves as a permanent record of your ownership.
In this section, I give you information about what specific factors and terms must be included in a deed to make it valid, and I talk about some other language in the deed that can affect how you use the property and spell out some information about different types of deeds for you. This section also includes some information about how real estate is described so that no one can question who owns what.
Habendum clause: The habendum clause, which contains the words “to have and to hold,” further defines the rights being granted to the grantee. (For those of you who’ve already tied the knot, the habendum clause may sound a little like you’re getting married again.) The words in the habendum clause must agree with the words in the granting clause.
The inclusion of a habendum clause may vary from state to state.
Grantor’s signature: The grantor must sign the deed for it to be valid. Usually, if more than one person owns a property, all the owners must sign. In some states a husband or wife who owns property by himself or herself may have to have the spouse also sign the deed even though the spouse does not have title to the property. An attorney-in-fact can be permitted to sign the deed in most states. An attorney-in-fact is someone who is appointed by a power of attorney, which is a legal document signed by someone giving another person authority to act on his or her behalf, in this case to sign the deed. An attorney-in-fact doesn’t necessarily have to be a lawyer. In some states, a third party must sign the deed stating that the grantor actually is the person who signed the deed.
If the grantor is a corporation, other rules may apply. A resolution by the corporate board of directors or the majority of the shareholders usually is necessary to convey property owned by a corporation. One or more duly authorized corporate officers must sign the deed. (See Chapter 7 for more about ownership by a business.)
Acknowledgment: An acknowledgment is a way of proving that the person who signs a deed signed it voluntarily and is, in fact, who he says he is (or who she says she is). An acknowledgment normally is witnessed and attested to by a notary public, before whom you produce evidence of your identity and indicate that you’re signing the deed of your own free will.
An acknowledgment technically is not required for a deed to be valid; however, in most states, a deed without an acknowledgment cannot be recorded in the official public records. You can find out more about recording a deed in “Recording the right documents,” later in this chapter, but remember it is usually not necessary to record a deed for the transfer of title to be valid. It’s an awfully good idea but not mandatory.
General warranty deeds, which sometimes are called the full covenant and warranty deeds, provide the greatest protection and warranties by the grantor to the grantee. The warranties, which are usually called covenants, are listed here in the order in which they usually appear in the deed.
Special warranty deeds contain only two warranties. The first is that the grantor has title to the property. The second is a guarantee that nothing was done to affect the title during the grantor’s ownership, and if a problem did exist, the grantor will correct it. The differences then between a special warranty deed and a general warranty deed are the number of warranties and the fact that the grantor takes responsibility for things that happened only during his ownership. In some states, the special warranty deed is known as a bargain and sale deed with covenants against grantor’s acts.
Because of the limited warranties, people acting as third parties — that is, they don’t actually own the property they are conveying — sometimes use special warranty deeds. The executor of an estate, for example, uses a special warranty deed to convey property belonging to an estate or trust.
The distinguishing feature of this type of deed is that it has no warranties. That the grantor has full title to the property is implied. Essentially it gives no protection to the grantee. This type of deed sometimes is used in foreclosure and tax sales. You can read about foreclosure in Chapter 15. Warranties can be put into the deed to make it similar to the special warranty deed, and in that case, it’s referred to as a bargain and sale deed with covenant against grantor’s acts.
The quitclaim deed provides no warranties to the grantee and gives no implication of how much or how good the grantor’s title to the property is. It conveys to the grantee only that much ownership interest that the grantor may have. Quitclaim deeds often are used to clear up a cloud on the title. A cloud on the title is something that makes the title less than complete, like someone appearing to occupy the property without the owner’s permission, or indicates that some other ownership interest may exist, like two properties abutting a private road with both claiming ownership of the road. Quitclaim deeds sometimes are used for uncomplicated transfers of property ownership within a family.
A trust deed, which sometimes is called a deed of trust or deed in trust, is used to convey ownership by a trustor to a trustee for the benefit of a beneficiary as security for a debt. Here’s an example: Party A, the trustor, borrows money from Party B, the lender, and then signs a trust deed conveying ownership of the property for which he borrowed money to Party C, the trustee, a third party. The lender is the beneficiary. If Party A pays all the borrowed money back to the lender, Party C then reconveys the property back to Party A. If Party A fails to repay the debt, Party C sells the property and gives the money to the lender to pay off the debt.
On a related note, a reconveyance deed is used to reconvey title to property from a trustee back to a trustor after a debt for which the property is security has been paid off.
A trustee’s deed is given by a trustee when ownership of property held by a trust is conveyed. Say, for example, that a young child owns property held in trust until he reaches legal age. The trustee of the trust can use a trustee’s deed to convey that property to someone if the trust decides to sell the property.
Describing the boundary lines of a piece of land as accurately as possible in a deed is extremely important. Why this is so important is simple. When you get to the end of your land, you find yourself about to step onto someone else’s land. Contrast that with owning a car. I know what my car looks like, and I know where I park it. No doubts exist about where the car begins and ends. Not so with real estate. (By the way, throughout this section I use the terms land, property, and real estate interchangeably.) Property descriptions of the kind we’re talking about and the kind typically used in deeds are descriptions of the boundaries of the land but don’t include any descriptions of the buildings on the land.
All property owners would want to know exactly what they own but it is especially important because many government land use regulations that govern what you can do with your property involve the size, shape, and boundary lines of the land. Read more about this in Chapter 8. Accurately describing your property is equally as important when transferring title from one person to another. The grantor needs to know exactly what he or she is selling, giving away, or exchanging, and the grantee needs to know exactly what he or she is getting. This property description usually is referred to as the legal description of the property. Legal descriptions are prepared in one of three standard ways that I describe in this section. A few math questions that relate to a property’s description may be included on the exam. I also discuss the measurement of elevations for property descriptions and clue you in on two ways that you can’t describe a property.
The metes and bounds system of legal description uses specific locations, distances, and compass directions to describe the boundaries of a piece of property. Starting at what is known as the place or point of beginning, the description follows a line or curve in a specific direction for a precise distance to another point. At that point the direction changes and the boundary line is then laid out again in a specific direction for a precise distance.
A simple metes and bounds description might then read:
From a place or point of beginning 100 feet North to a point then East 100 feet to a point then South 100 feet to a point then West 100 to the place or point of beginning.
Turning points especially in older descriptions of the boundary lines often refer to natural features like a rock or a stream. Sometimes the boundary of someone else’s property is used as a reference. But property owners change, rocks move, and streams dry up. Over time natural and ownership references have been replaced by artificial markers placed permanently in the ground or simply by points known to the surveyor. Sometimes marking only the place or point of beginning is sufficient rather than marking every turning point. The term monument describes any point in the surveyed boundary that is noted on the survey. Monuments, which usually are turning points, can be man-made or natural. The term monuments may also refer to actual man-made physical markers placed on the land during a survey.
The metes-and-bounds description is clearly stated in the deed. On a large property, with a boundary that features many twists and turns, a metes-and-bounds description can be lengthy. The description also can be used to draw a map referred to as a survey map or simply survey. A survey is the actual determination of a property’s boundaries on the ground. A survey map or sketch is a representation or drawing of the property’s boundaries, sometimes showing structures that are situated on the property.
The metes and bounds system of describing property boundaries is the oldest property description system in the United States. It remains the primary way of describing property boundaries in the eastern part of the country, particularly in the states that formed the original 13 colonies.
The rectangular survey system, often referred to as the government survey system, is based on a system of lines that form rectangles and squares throughout the United States. The first sets of lines respectively are called principal meridians, which run north and south, and baselines, which run east and west. The principal meridians and baselines are based respectively on lines of longitude and latitude. Just in case you were out the same day I was in high school, longitude and latitude are imaginary lines that divide the earth through the north and south poles (longitude) and run parallel with the equator (latitude). Principal meridians, baselines, and where they intersect (cross each other) are used as the basis for formulating property descriptions in this system. They are the starting points for describing a property’s boundaries. The following is a list of helpful terms:
Because of the curvature of the earth, the lines in the government survey system are only theoretically straight. Imagine trying to draw straight lines on a rubber ball. Although the lines start out the same distance apart, they get closer together as you get near one or the other end of the ball. Correction lines and guide meridians were established to correct this problem in the government survey system. Correction lines occur at every fourth township line or every 24 miles north and south of the baseline. The guide meridians occur every 24 miles east and west of the principal meridian. An area bounded on two sides by guide meridians and on the other two sides by correction lines is called a government check, check, or quadrangle, which is 24 miles square, meaning each of its boundaries is 24 miles long. A government check represents an area that measures 576 square miles. Remember that although these correction lines and guide meridians are the way the government deals with the issue of the earth’s curvature, it isn’t the way the government survey system describes land. In reality, because of this earth curvature issue, many sections and townships vary from their exact area measurements. A system of fractional sections and government lots are parts of standard practice to account for these discrepancies.
So how does the system describe land? Using principal meridians and baselines as points of reference, land areas are divided by two kinds of lines, township lines and range lines. Township lines, which run east and west, parallel to baselines, are horizontal parallel lines that form township tiers. Think about two lines running from left to right across this page about an inch apart. The range lines run north and south parallel to the principal meridians. These range lines form ranges. Think about two more lines running up and down the page on top of the first two lines, also about an inch apart. You got it: Tic tac toe. Where the two range lines and two township lines intersect, they form a township. Now the way it really works is for this page to be filled with the lines going up and down and right to left so that you have many townships. The township is the basic unit of measurement in the rectangular survey system. The area created by the intersection of a township line and a range line is a township. The townships are consecutively numbered by their location within the intersection of multiple range lines and township lines. The boundary of each township is six miles long, so a township contains 36 square miles and is described as being 6 miles square. These townships are not the same as political subdivisions.
Each section of 640 acres can be divided into halves and quarters called, get this, half sections and quarter sections. These divisions mean just that, for instance a quarter section always contains 160 acres, or a fourth of the total 640 acres in a section. See Figure 9-2. Specific directional references are needed in the actual description to locate a particular piece of property but for finding out how large a particular piece of property is, only the fractions matter.
A full rectangular survey system property description might read:
The SW ¼ of the NE ¼ of the NW ¼ of Section 6, Township 4 South, Range 5 East of the Third Principal Meridian. (This description refers to a 10-acre parcel of land.)
The description probably would include the state and county in which the property is located and use abbreviations so in the example Township 4 South would be T4S. Whenever properties have irregular boundaries, the land may be further described using one of the two other systems described in this section.
The last of the methods for preparing legal property descriptions is known by various names, including the lot and block system, the recorded plat system, the recorded map system, the lot block tract system, the recorded survey system, and the filed map system. You can find out the name commonly used in your area when you take your prelicensing course. Regardless of which name you use, the essentials are the same, and it’s the system that’s usually used in conjunction with a new subdivision, or a large piece of property that has been divided into smaller pieces usually to sell or develop separately.
A map or plat or sometimes plat map (they are all the same — don’t you wish these guys could agree on what to call things?) of the subdivision is created, showing the boundaries of each (usually numbered) lot or parcel of land. If the subdivision is large, it may be divided into blocks or sections, each of which is then divided into lots. For example, you can have Lot 2 in Block 1 or Lot 5 in Section A. In a very large subdivision you might see all three terms used, with the subdivision first divided into sections; then the sections divided into blocks, and then the blocks divided into lots. Each lot has a metes and bounds description on it (see “Meeting your boundaries: The metes and bounds system,” earlier in the chapter). This method is the only way a surveyor can look at the map and lay out the boundaries of the property on the actual property. So in reality, the lot and block system is a hybrid that makes use of another system.
After the surveyor draws the map, it must be filed in the local records office. The property owner, attorney, or surveyor usually files the map. If the map were of a new subdivision, then the local zoning, planning or other government officials would already have approved the subdivision. The records office goes by various names in different states and locales, but it generally is part of county or local government. The map is filed in the county (or municipality in at least one state) where the property is located and is kept on file as a public record. The filer is given a record of the filing that includes the filing date and may be marked with a specific reference number given to the map that refers to the document, what type of document it is, the book (sometimes called liber, which is Latin for book) in which it’s kept, and the page number. This reference number helps anyone who wants to locate the map in the records office.
Now how does this work to provide a legal description, say to convey a property? Here’s an example. Buyer A wants to buy Lot 3 in Block 2 of the subdivision I’ve been talking about, which by the way happens to be named Mary’s Subdivision after the subdivision developer’s daughter. (Don’t laugh! That sort of thing goes on more than you’d think.) So now the developer has a deed prepared that includes a property description that reads something like “Lot 3, Block 2, on the final plat of Mary’s Subdivision, filed in the Office of Land Records of Washington County (State), as plat map number 12345, filed on May 15, 2017.” Slight variations may occur in these descriptions, but you get the idea. All deed descriptions always refer back to that recorded plat map.
In surveying work and in preparing property descriptions, measuring or describing space as up in the air or describing an area below the ground surface for subsurface rights sometimes is necessary. As a property owner, you can sell or lease your air rights, or the airspace over your land or building. (For more about air and other ownership rights, see Chapter 6.)
Datum is a point, line, or surface from which elevations are measured. An elevation is a vertical measurement either up or down. Datum for the entire United States is defined by the USGS as the mean sea level in New York harbor. Individual cities, however, may establish their own datum.
Benchmarks are permanent markers established by the federal government to aid surveyors in their work. They exist throughout the United States. Benchmarks are known reference points from which surveyors can work to establish property boundary lines. They are used primarily for ground level locations of distances and directions for property lines, but they’re also used together with a datum to measure elevations, for example, to do a condominium description.
Title closing is a point in time during a real estate transaction when all of the business of transferring ownership of a piece of property is finished and title to the property is conveyed by the grantor to the grantee. Title closing can be either a relatively simple process or extremely complicated. Complications often crop up because of problems with the title to the property. In the world of real estate brokerage, problems at closing can be the result of something so trivial as the owner of the property not mowing the lawn just before the closing. This section is not about those kinds of problems. Instead, it’s about issues that can occur with the title to the property.
Let me give you a timeline here to put this section in perspective. Typically after all of the looking and talking and negotiation, when a buyer and seller agree on all the terms of the sale, especially price, they sign a sales contract. Essentially the seller (grantor) agrees to sell the property at a certain price to the buyer (grantee). (For more about sales contracts and other types of contracts, see Chapter 11.)
A number of things happen between the time the sales contract is signed and the day of closing title when transfer of ownership of the property actually takes place. Activities after the contract is signed but before closing usually have to do with satisfying the terms and conditions of the contract and any terms and conditions the lender may set, whenever a mortgage is involved in the transaction. One main thing that occurs during the period between contract signing and closing is the title search, which is a look at the records of title transfers between previous grantors and grantees to determine whether any prior claims are on the title to the property.
Abstract of title: An abstract of title is a report of what was found in a title search, which is a search of essentially all public records related to the property’s title, such as previous deeds and liens. (You can read about liens in Chapter 8.) These records are usually found in the county recorder’s office or land records office of the county in which the property is located. Although anyone can search the public records, during a title search, an abstractor (someone who searches through title records) or attorney researches the chain or history of the title from one owner to the next, looking for gaps in ownership or other factors that appear to cast doubt on the validity of the current owner’s claim to the property.
The abstract of title then is given to the buyer’s attorney to examine. When the buyer’s attorney is satisfied that the seller has marketable title and issues an attorney’s opinion of title, the closing can proceed. Although you won’t be doing a title search, these are public records and as such can be examined by anyone. Some expertise is needed to look for title issues in the deeds and related filings — like liens — but you can look through previous ownership of the property simply by working backwards from the current owner. Smith, the current owner, is the grantee from Jones the grantor. But one deed back, Jones becomes the grantee from the previous owner, and backwards in time you go.
Title insurance: Title insurance can be purchased on its own or as a supplement to an attorney’s opinion of title or a certificate of title. Normally issued after a title search, title insurance provides protection for the buyer, defending the new owner if any future claim is made against title to the property. In many cases where a mortgage loan is involved, the lender requires a title policy that at least covers the lender’s portion of the purchase price. This coverage is called a lender’s or mortgagee’s policy. The owner may want to obtain an owner’s policy to cover his or her interest in the property.
Title insurance covers various defects according to the laws of the state in which the company issues the policy. The American Land Title Association sets standards for standard and extended coverage. Standard coverage policies insure against things like forged documents, improperly delivered deeds, and incompetent grantors. The standard policy is based on what is found in the public record. The extended-coverage policy, in addition to the coverage in the standard policy, insures against defects that may be found by an inspection of the property, such as someone claiming ownership or rights in the property by virtue of their use. (For more about adverse possession, see Chapter 10.)
A title company may pay the owner of the property on a claim and then pursue action for damages against some other party. Through the right of subrogation, the title company is entitled to the same rights as the person it insures, which means that after it pays the owner, the title company can then pursue whoever may be responsible for the title problem, say a prior owner, collect, and keep the money it gets.
The removal of liens is another activity that takes place before closing. As part of a title search, the title company determines whether the property is subject to any liens. Liens, which are discussed in Chapter 8, are financial claims against the property. The owner/seller customarily removes all liens from the property prior to sale but under some circumstances the buyer may pay off the lien. If a lien isn’t removed or satisfied through payment before the closing date, liens usually must be paid off at closing with proceeds the seller receives from the buyer.
Title searches also make note of any other encumbrances on the property. Encumbrances, which are discussed in Chapter 8, are limitations on the owner’s use of property. They include liens but also can be an easement or a deed restriction (also covered in Chapter 8). Generally the buyer accepts ownership of the property subject to these encumbrances. They normally don’t present a problem with the title to the property.
This chapter is about transferring title and all the things that affect that transaction. Although most contract conditions (such as obtaining a mortgage or having a home inspection done) don’t normally affect title, note that before closing, the buyer completes all the conditions that have been put into the sales contract. So, if a sales contract has been signed and indicates that a mortgage loan has to be obtained and a home inspection by a home inspector or other professional must be completed, the buyer is responsible for completing these activities prior to closing. By the way, neither of these things is mandatory nor must they be put in the contract. You can pay cash for a house (well, maybe you can but I can’t) and you don’t have to have it inspected. Immediately prior to closing — usually that day or the day before — the buyer personally inspects the property. The agent selling the property or the agent working with the buyer often conducts this walk-through.
When the big day finally arrives, the buyer, seller, attorneys, and you, the agent, meet to close on the title to the property. By the end of the day, the seller has some money and the buyer owns some property. The people who come to a closing, the roles they play, and the specific activities and papers that are signed vary greatly from state to state and even from area to area within a state. I discuss the people, roles, activities, and documentation that are most important and common, because they are what exam writers like to ask questions about.
The Real Estate Settlement and Procedures Act (RESPA) has to do with closing on the mortgage, which happens at the closing, and simply means signing all the paperwork necessary for the bank to give you, the borrower/buyer, the money that you don’t have for very long because you give it to the seller, and for you to give them the mortgage. You can find out everything you need to know about mortgages in Chapter 15 where you can also read about the Truth in Lending Act (TILA), which governs certain aspects of consumer lending. Both of these acts are designed to protect consumers who borrow money
RESPA is a federal law designed to protect consumers who borrow money through a federally related mortgage loan (loans that are sold on the secondary mortgage market, which you can check out in Chapter 15) to buy residential properties, including condominiums and cooperative apartments. Some of the activities required by RESPA and TILA take place before the closing, specifically provision of the Loan Estimate form to the borrower. Combined actions under both laws also affect the closing itself, particularly the preparation of the closing statement, so I include the discussion of RESPA and TILA here. The Federal Consumer Financial Protection Bureau administers the closing provisions of the integrated RESPA and TILA. It has four distinct requirements:
There are a few consumer protection regulations for the Truth in Lending Act (see more on this in Chapter 15) and RESPA that have been combined specifically with an eye toward protecting people who are obtaining loans to buy a house. The creditor or mortgage broker must do the following:
Proration is the allocation of certain expenses between the buyer and the seller. A variety of costs are associated with buying and selling a piece of property. The principal cost is, of course, the purchase price paid by the buyer to the seller for the property. Part of the settlement at closing is accounting for all the costs and fees in addition to the purchase price, making sure they are paid, and allocating them appropriately to the buyer or seller. In some states the attorneys or a representative of the title company (sometimes called a closer) handle this accounting; in others, it falls to the real estate agent. No matter where you are, you need to know something about this.
Although this list is fairly complete, your state may have specific fees that are required or a particular type of transaction may involve additional fees. The fees and charges are accounted for within the closing statement as debits and credits according to who pays and who is owed.
In many places, real estate agents either calculate prorations or help attorneys or title companies with the calculations. In other places, attorneys or title companies handle the whole thing. Whatever the particular practice in your area, you’ll probably see some questions about proration on the state exam. I take you through examples of an accrued item and a prepaid item, starting with the simple tax example that I’ve been using with one slight change. (For more proration math practice, check out Chapter 18.)
The annual real estate taxes on a property are due each year on December 31 in arrears (for the year just ending). In this case, the date is December 31, 2017. The property is sold on June 1 of that year (June 1, 2017). The taxes are $1,200. Who owes what to whom?
First of all, you know that the taxes are paid for the entire year, or annually, in one payment. Then you know that they’re paid in arrears, which means use it first and pay after (at the end of the year). You also know that the seller owned the property during the first five months of the year and the buyer owns the property for the last seven months of the year. Aha! I may have caught you on that one. Look again at the closing date. The math is pretty straightforward.
Because the buyer owns the property on December 31, 2017, and therefore has to pay the full $1,200 in taxes for the entire year (all of 2017), the seller owes the buyer $500 for the period of time the seller lived in the house. Therefore, the $500 is a credit to the buyer and a debit to the seller. This appears in the closing statement. The $700 is not included in the closing statement, because it doesn’t accrue until after the closing, when it becomes a debt of the buyer who of course has to pay it ($700) plus the $500 to the city for taxes for the whole year.
This problem tells you that the taxes are paid once a year at the beginning of the year for the whole year ahead. That year of use of the property is divided between the buyer and the seller, who share the tax payments, yet the seller (current owner — before closing) already has paid taxes for the full year.
This amount is a seller credit and a buyer debit.
Look at a couple of the steps in this problem closely. The four months that you multiply the $300 by are the four months (September, October, November, December) that the buyer will own the house. The 13 days is likewise the part of the month of August that the buyer will own the house (remember that I used the 12-month year, 30-day month method). So the buyer owns the property for four months, 13 days and needs to pay the seller the share of the taxes for that period of time.
Not all prepaid items have to be divided up. For example, a home heated with oil often has fuel left in the tank when the house is sold. For example, suppose 300 gallons of oil were purchased and paid for by the seller sometime before the closing, and the seller has used some of the oil he paid for. The remaining oil is essentially sold to the buyer, who of course will use the rest of it after she moves in. In this example, the cost of the remaining oil in the tank will be calculated and will become a debit to the buyer. There is no credit to the seller because he already used a portion of what he paid for. Similarly, in rental properties, security deposits, which in reality belong to the tenants but are held by the landlord/seller in trust, are turned over to the buyer.
At some point after the buyer and seller sign their names on a variety of documents, the seller (unless he’s done it already) signs the deed, which is given to the buyer or more likely the buyer’s attorney. Although some things have yet to happen after the closing, title, meaning ownership of the property, is conveyed when the buyer accepts the deed.
A process that’s common in some states is called closing in escrow, and it involves using a third party, sometimes called an escrow agent, to gather all the documents necessary for the closing and then forward them and money (as is appropriate) to all the parties involved. Sellers provide, among other things, a deed, evidence of title, information necessary for either paying off or assuming an existing mortgage, and any other documents necessary to provide a marketable title clear of all defects, encumbrances, and liens. The buyer provides funds for the purchase, mortgage loan documents if any are required, and hazard or other necessary insurance policies.
Escrow agents may be attorneys or representatives of a title or an escrow company. Real estate brokers can offer escrow services but not in transactions in which they’re directly involved.
You should find out if your state is one where closing in escrow is typical. If so, you may want to learn who can be an escrow agent, what the requirements might be, and any other information that might make for a test question or two.
A few things take place after the closing. Although ownership of the property changed from seller to buyer at the closing, the final closing statement needs to be prepared and a variety of documents need to be recorded.
Although the Closing Disclosure Statement would have already been delivered to the buyer/borrower, until the closing is complete and final costs are allocated, the final settlement statement can’t be prepared. The most common form of closing statement for residential properties is the Closing Disclosure Statement, required under the Combined TILA-RESPA Disclosure Rule, which is prepared at or just after closing. Copies of the statement are sent to the buyer and seller along with many other necessary documents. Closing statements can be prepared by anyone with all the appropriate information, but typically the buyer’s or seller’s attorneys or the title company prepares the closing statement. It’s primarily a financial document stating who owes what to whom and who has already given over money that will be distributed (typically deposit money paid when the contract was signed and being held by an attorney or real estate broker).
All documents relating to an interest in real estate need to be filed. Deeds, mortgages, liens, long-term leases (usually more than a year), and easements are typical documents that are recorded. The act of recording provides what is called constructive notice to the public. Constructive notice provides an opportunity for anyone who’s interested to research the records. These public records provide parties who have an interest in the property in some way — brokers, attorneys, abstractors, and the public — an opportunity to investigate the ownership of the property and possible encumbrances on the title.
Recording usually involves payment of a fee, or sometimes two, usually for the act of recording itself. Perhaps a dollar a page or some other amount is charged for actually processing the document. In addition, the recording office may also be the office to which the state and sometimes local transfer taxes are paid. This state transfer tax is mentioned in the list of possible closing costs in “Allocating expenses with proration,” earlier in this chapter.
Note: The number 510 is just that, a number and not a dollar amount. It’s the number of times the unit of $500 is contained in $255,000.
Many deeds don’t state the amount of consideration. They may state the price of the property as “$10 and other valuable consideration.” No, you don’t get to pay the transfer tax on the $10. You have to pay it on the total amount, and that leads to a neat trick you can use when you want to know what your brother-in-law paid for his house, but he won’t tell you. Take a look at the next problem, which is the reverse of the earlier example. I’ll do an obvious example first just to show you where I’m going.
If you look up the transfer tax paid on a piece of property and find out it was $2, then based on the transfer tax rate that I’ve been using ($2 per $500 of value), the value of the property is $500.
You see, all you did was find out how many units of $2 are contained in the $1,020 total transfer tax that was paid, and because each unit of $2 represents $500 of the sale price, the final step is to multiply.
If a mortgage is being assumed, that is, the buyer takes over the existing mortgage of the seller, the amount of the mortgage balance may be subtracted from the sale price of the property when calculating transfer taxes. So in the earlier examples, if you assumed a mortgage with a $100,000 balance, you’d only pay transfer taxes on the remaining $155,000 in some jurisdictions.
Most of the questions you’ll see regarding this topic on an exam are definitional or fact-based. The examiners, at the very least, want to make sure you understand what various terms mean. This is especially true for the salesperson’s exam. At the broker’s level, you may have to wrestle with short cases that require an understanding and application of the material. However, even handling those types of questions starts with a basic understanding of what the terms mean.
1. Typical wording in the habendum clause would be
(A) “I hereby grant.”
(B) “In witness whereof.”
(C) “To have and to hold.”
(D) “$10.00 and other valuable consideration.”
Correct answer: (C). “I hereby grant,” “In witness whereof,” and “$10.00 and other valuable consideration” are other parts of a deed, but “to have and to hold” is typical language for the habendum clause.
2. The law that requires that a deed be in writing is called
(A) the statute of frauds.
(B) the tort reform act.
(C) the acknowledgment law.
(D) RESPA.
Correct answer: (A). The tort reform act has to do with civil suits. I made up the acknowledgment law. And RESPA has to do with federal requirements for closing title.
3. Whose signature is required for a deed to be valid?
(A) Grantor
(B) Grantee
(C) Both grantor and grantee
(D) Notary public
Correct answer: (A). The grantee must be named in the deed but does not have to sign. So that makes Answers (B) and (C) wrong. A notary public witnesses the acknowledgment. The acknowledgment is not required for a valid deed, only for the deed to be recorded.
4. What is the most likely explanation when you see the words “for love and affection” as the consideration in a deed?
(A) The grantor and grantee are related.
(B) The grantor and grantee want to keep the actual selling price of the property a secret.
(C) The grantor and grantee were represented by the same real estate agent.
(D) The grantor gave the grantee the property as a gift.
Correct answer: (D). The relationship of the grantor and grantee wouldn’t matter because it still can be a sale. If they wanted to keep the price a secret, they probably would use “ten dollars and other valuable consideration.” The nature of the representation in Answer (C) doesn’t affect the deed.
5. The guarantee of the grantor’s ownership of the property is called the covenant of
(A) quiet enjoyment.
(B) warranty forever.
(C) further assurance.
(D) seisin.
Correct answer: (D). You need to be able to describe each of the covenants in a sentence so that you can pick out the correct answer in a question like this. If it helps, remember that seize (the root of seisin) means to take hold of something.
6. A deed conveying title to property from a trust is called a
(A) deed of trust.
(B) deed in trust.
(C) trust deed.
(D) trustee’s deed.
Correct answer: (D). The first three answers have to do with using a deed to convey an interest in the property as security for a debt. Tough question.
7. The area of a section is
(A) 43,560 square feet.
(B) 80 acres.
(C) 160 acres.
(D) 640 acres.
Correct answer: (D). 43,560 square feet is the area in square feet of one acre (a useful number to know). 80 acres and 160 acres are portions of a section.
8. Which section is bounded on four sides by sections 10, 14, 16, and 22?
(A) 9
(B) 15
(C) 17
(D) 13
Correct answer: (B). A pretty standard exam question is locating a section within a township. If you read this question and then looked at Figure 9-1 earlier in the chapter, you cheated, because you won’t have that kind of crutch on an exam. Exam writers expect you to be able to lay out a township grid with all the sections properly numbered. Remember that every section within a given township is numbered the same way.
9. A title free from any defects is a good definition of
(A) equitable title.
(B) marketable title.
(C) certified title.
(D) insured title.
Correct answer: (B). You can find out about equitable title in Chapter 11. Certified title and insured title are close. A title usually is not certified or insured unless it’s clear of defects. But the definition of title clear of defects is marketable title.
10. What type of notice is provided by the recording of a deed in the public records?
(A) Actual
(B) Inquiry
(C) Constructive
(D) Real
Correct answer: (C). Constructive notice is provided by recording the deed. Actual and inquiry are types of notice. Real is not.
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