Chapter 7 - Title and Closing Costs

I. The Nature of the Closing

The closing is the final stage of a real estate transaction where the title is officially transferred from the seller to the buyer. This is the "consummation" of the contract.

Who Attends and Their Roles:

• Buyer & Seller: The principals of the transaction.

• Attorneys: In New York, it is customary for both the buyer and seller to be represented by legal counsel to review documents.

• Lender’s Attorney: Protects the bank's interest and ensures the mortgage documents are executed correctly.

• Title Closer: Represents the title insurance company; they collect the deed, record documents, and ensure all liens are satisfied so the buyer receives clear title.

• Real Estate Agents: Often attend to ensure the process goes smoothly and to collect their commission check.

II. Title Evidence and Documents

Before closing, the buyer’s attorney performs a Title Search to examine the Chain of Title (the history of ownership).

• Abstract of Title: A condensed history of all recorded documents affecting the property.

• Title Insurance: In NY, lenders require a Lender’s Policy. Buyers are strongly encouraged to purchase an Owner’s Policy to protect against "hidden defects" (like a forged signature in the past).

• The Deed: The document that actually conveys the title.

• Marketable Title: A title that is free from significant defects or liens that would cause a reasonable person to reject it.

III. RESPA and Federal Disclosures

The Real Estate Settlement Procedures Act (RESPA) is a federal law designed to protect consumers by requiring full disclosure of closing costs and prohibiting illegal practices.

• Prohibition of Kickbacks: Under Section 8 of RESPA, it is illegal for a settlement service provider (like a title company or inspector) to give a "thing of value" to a real estate agent for referring business.

• Closing Disclosure (CD): Under the TRID rule, lenders must provide the buyer with the Closing Disclosure at least 3 business days before the closing. This allows the buyer to compare the final costs to the initial Loan Estimate (LE).

IV. Closing Costs: Who Pays What?

In New York, custom and law dictate how costs are split.

Seller Typically Pays:
State Transfer Tax: $2 per $500 of price.
Broker’s Commission: (Total fee).
Attorney’s Fees.
Recording fees to clear old liens.

Buyer Typically Pays:
Mortgage Recording Tax: (Varies by county).
Title Insurance: (Owner’s and Lender’s policies).
Attorney’s Fees.
Recording fees for the new Deed/Mortgage.
Appraisal and Credit Report fees.
Mansion Tax: (In NYC, if price is $1M+).

New York Specific Taxes:

• NYS Transfer Tax: $2.00 per $500 of the sales price (usually paid by the seller).

• Mansion Tax: A 1% tax (or higher in NYC) on residential purchases where the price is $1 million or more. Paid by the buyer.

• Mortgage Recording Tax: A tax on the privilege of recording a mortgage. In many NY counties, the lender pays a small portion, and the buyer pays the rest.

V. Adjustments and Prorations

Because some expenses are paid in advance (like property taxes) and others in arrears (like water bills), the parties must "prorate" these costs at the closing table so each person pays only for the time they owned the home.

• Credit to Seller: For items the seller prepaid (e.g., fuel oil remaining in the tank, property taxes paid for the next quarter).

• Credit to Buyer: For items the seller owes but hasn't paid yet (e.g., accrued interest on an assumed mortgage, unpaid water bills).

• Arithmetic: NY exam math usually assumes a 360-day year (12 months of 30 days each) for proration calculations unless otherwise specified.

⚠️ EXAM ALERT: QUICK FACTS

• $500 Property Condition Credit: If a seller fails to provide the Property Condition Disclosure Statement (PCDS), they must give the buyer a $500 credit at closing. Note: Legislative changes in 2024 have significantly limited the ability to "opt-out" of the disclosure by paying this credit; the form is now mandatory for most residential sales.

• Commission Payment: A salesperson can only receive their commission from their sponsoring broker. They cannot be paid directly at the closing table by the client or the attorney.

• The "3-Day Rule": If the Closing Disclosure (CD) is not provided 3 business days before closing, the closing must be delayed.

• Possession: Unless the contract says otherwise, the buyer is entitled to possession (and the keys) immediately upon the delivery of the deed at the closing.

KEY TERMS

Abstract of Title: A condensed historical summary of all the instruments (such as deeds, mortgages, and wills) and legal proceedings that affect the title to a particular parcel of real property.

Assessments: A charge against a specific parcel of real estate to help pay for a public improvement, such as a sidewalk or sewer, that directly benefits that property.

Chain of Title: The succession of conveyances, from some accepted starting point, whereby the present holder of real property derives their title.

Closing Statement: A detailed accounting of all funds received and disbursed at a real estate closing, provided to both the buyer and the seller.

Constructive Notice / Actual Notice: Constructive Notice is the legal presumption that information has been obtained through public records. Actual Notice is the direct knowledge that a person has actually acquired regarding a fact or a piece of information.

Credits: In a closing statement, an amount entered in a person's favor—either an amount they have already paid or an amount for which they must be reimbursed.

Debits: In a closing statement, a charge—an amount that a party owes and must pay at the closing.

Marketable Title: A title that is reasonably free from doubt and that a court would compel a purchaser to accept; it is free from significant encumbrances and defects.

Proration: The periodic and proportional division or distribution of expenses (such as taxes, insurance, or rent) between the buyer and seller at the time of closing.

RESPA (Real Estate Settlement Procedures Act): A federal law requiring mortgage lenders to provide borrowers with timely disclosures regarding the nature and costs of the real estate settlement process.

Reconciliation: The final stage in the closing process where the debits and credits for both the buyer and seller are balanced to ensure the math is correct.

Survey: The process by which boundaries are measured and land areas are determined; the resulting map shows the exact location of the land, improvements, and any encroachments.

Title: The legal evidence of a person's right to the ownership and possession of land.

Title Closing: The final step in a real estate transaction where the deed is delivered in exchange for the purchase price and the title is formally transferred.

Title Insurance: A policy that protects the insured (buyer or lender) against loss or damage due to defects in the title that were not discovered during the title search.

Title Search: An examination of the public records to determine the ownership and encumbrances affecting a specific parcel of real property.