July 1, 2015

Hatteras Island Real Estate:  Questions about Closing

My sense is that there is a somewhat common belief that once a buyer and a seller have entered into a contract for the purchase or sale of a property, most of the work has been completed for the transaction to close. In fact, there are quite a few activities that take place between the time a contract is finalized and the actual closing date. Here are some of the most frequently asked questions about closings and their answers.

Q: Perhaps the question that I hear most often is, “Do I have to be present for closing?”

A:  Here on the Outer Banks, most of the time, the buyer and seller live out of the area. Neither buyers nor sellers have to be physically present for the actual closing. In fact, a very large percentage of closings are transacted by overnight mail, supplemented in some cases by e-mail. Sellers are more likely to close “by mail.” Buyers sometimes like to come down and sign their documents in person on the day of closing and then stay in their new home for a few days.

Q: Do I need an attorney to close my transaction?

A: In North Carolina, attorneys licensed to practice law in the state close transactions for both buyers and sellers. This is in contrast to some other states in which title companies and/or non-attorney settlement agents provide closing services for purchases and sales.

Q: What is the difference between settlement and closing?

A: Settlement involves the delivery and execution of all of the documents necessary to complete the transaction, including receipt by the closing attorney of the funds necessary to complete the transaction. Closing, on the other hand, is the completion of the legal process which results in the transfer of  title to the property from the seller to the buyer, including, but not limited to, the recordation of the deed in the Dare County registry of deeds.

So, while the settlement date and the closing date often coincide, it is possible that the settlement and the closing could take place on two different days.

Q: Is the settlement date shown in the sales contract a hard-and-fast date?

A: While it is normal for settlement and closing to occur on or before the date specified in the contract, the settlement date, in reality, is a target date. Delays can occur for a variety of reasons, including finalization of the buyer’s loan.

If settlement does not take place by the settlement date in the contract, two options are common. The first is that the two parties execute an Agreement to Amend Contract, which extends the settlement date for a mutually agreeable time. The other option is that the contract contains an automatic 14-day grace period for settlement and closing if the delaying party is acting in good faith to complete the transaction.

Q: Buyers sometimes ask, “Do I need a survey?”

A: Technically, the answer is no, buyers do not require a survey to close their purchase, since lenders will not require a survey as a condition for making a loan. However, being conservative, I always recommend that buyers obtain a new survey if a current survey is not available from the seller. If the buyer decides not to get a survey, then I ask them to speak with their attorney so that they fully understand the ramifications of not having a survey.

A survey could disclose defects or problems with a property that are not a matter of public record, revealed by a title search, e.g., encroachments, setback violations, rights of way, etc. In addition, it is my understanding that title insurance companies will not insure a buyer against matters that could be disclosed by a survey unless the buyer obtains a survey.

Q: If a home inspection report reveals repairs that may be needed to a property, how is the repair process resolved between the buyer and the seller?

A:  Repair requests can be resolved in a number of ways. If the repairs are minimal, the buyer and seller may agree that the seller will make the repairs prior to closing. I urge extreme caution if this option is selected, since it presents the potential for the seller to make repairs in good faith and then, the buyer may not like the manner in which the repairs have been made. This can lead to another round of negotiations.

It is more common for buyers and sellers to agree on a financial settlement to accommodate repair requests. This solution usually involves the parties agreeing to a price reduction as reasonable compensation for the repairs, or the seller agrees to pay a portion of the buyer’s closing costs on lieu of the seller making any of the requested repairs.

Most lenders do not want to see a cash credit from the seller to the buyer for repairs on the HUD-1 closing statement, so this option is not used very often any more if at all.

Q: How is rental income addressed in the purchase/sale of a property?

A: Rental income is pro-rated between the buyer and the seller. The seller receives all rental income for rentals that have actually taken place through the day of closing. The buyer receives all rental income, including advance reservation deposits, for rentals that occur after the day of closing.

Q: What kind of taxes can a seller expect to pay as a part of the closing process?

A: There are two taxes that are most commonly associated with the sale of real estate in Dare County and North Carolina. The first is a Dare County excise tax known as the transfer tax on the sale of real property. This tax is equal to 1.0 percent of the selling price. The second excise tax is a state tax on the sale of real property. It is calculated by dividing the selling price of a property by $500.

Also, sellers should not forget that there may be income taxes on the sale of their property. Sellers are advised to consult with their accountant or other tax advisor to determine the impact, if any, of income taxes on the sale of real estate in North Carolina, including any income taxes that may be due to the state of North Carolina.

Real property taxes are pro-rated between the buyer and the seller through the day of closing. Likewise, homeowner association dues are pro-rated at closing.

Q: How are utilities handled at closing?

A: This question has a variety of answers, depending on the specific circumstances of a property. Often, either the buyer’s agent or the seller’s agent or both will take care of transferring the utilities from the seller to the buyer as of the day of closing after the deed has been recorded. In other cases, the seller may cancel the existing utilities, and the buyer will institute new services. If a property is in a rental program, it is extremely important to coordinate the transfer of utilities with the property management company so that rental guests enjoy a continuity of services.

Q: In addition to the financial aspects of a real estate purchase, what are some other considerations that a buyer should take into account?

A: As buyers confirm their understanding of the properties they are purchasing, it would be prudent for them to investigate, among other things, the number of bedrooms that the septic permit for the property will allow, the flooding/standing water history of the property, any erosion concerns associated with waterfront properties, the location of beach access paths/walkways, subdivision restrictive covenants, the development potential of nearby undeveloped properties, any restrictions on the availability of federal flood insurance, relevant zoning classifications, owner associations and dues, whether the street on which the property is located is state-maintained or a private road.

As you can see, there are quite a few details to consider between contact and closing. The good news is that buyers and sellers have experts available to support them at every step of the way. These resources include real estate brokers, attorneys, accountants, lenders, home inspectors, pest inspectors, surveyors, and insurance agents. All of these professionals have one goal in mind – to make the experience of buying and selling on Hatteras Island as pleasant and worry free as possible!

(Tom Hranicka is a broker with Outer Beaches Realty. Questions, comments, or suggestions for future articles may be sent to Hranicka at P.O. Box 280, Avon, NC  27915 or emailed to [email protected]. Copyright 2015 Tom & Louise Hranicka.  All rights reserved.)

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