Commercial Real Estate Closing Process
Closing the real estate transaction is essentially the completion of an investigation made or actions taken by either a single agent or title attorney before the actual issuance of the title insurance policy. While it is not the job of the title attorney or agent to cure any defect or complications with the title to the property, title attorneys and title agents nonetheless assist in this area regularly. Get to know more about the closing process of Commercial Real Estate (CRE) through the following steps:
Commercial Real Estate Closing Process
Establishing a plan – Developing a transaction plan is the foremost step. Such a plan must guide contract negotiations and the actions necessary for closing and post-closing. For example, in the instance that there are (a) zoning requirements, (b) availability of utilities, or (c) the confirmation of structural elements of a building, the plan as well as the purchase agreement must address those issues and be included as part of the closing requirements.
Assess the issues – It is essential to be prepared for problems that can arise during a commercial closing. Failure to understand and resolve these issues is one of the causes of transaction missteps. Risk shifting techniques, such as insurance with appropriate use of available commercial endorsements, can effectively mitigate transaction risks. An experienced commercial real estate attorney accustomed to available commercial endorsements can most often overcome title obstacles through effective contract drafting and the assistance of a professional title underwriter.
Opening an Escrow Account – An escrow account is one that a third party holds for the buyer and seller. As per practice, a commercial property sale involves multiple steps and is typically completed between fifteen (15) to ninety (90) days. Thus, to prevent fraud, it is necessary to bring a neutral third party. This third party can hold all the money and documents associated with the transaction until everything is resolved. Once all procedural and substantial formalities are over, the capital and records are transferred to the seller and buyer to an escrow account, guaranteeing a secure transaction.
Title Search and Title Insurance – A title search and title insurance provide peace of mind and legal safeguard. Title search and insurance ensure that when a person purchases a property, nobody can claim it afterward.
Title search refers to examining public records to ascertain a property's legal ownership and discover what claims are on the property. And on the occasion that there are claims, they may be settled before the buyer gets the property. On the other hand, Title Insurance refers to indemnity insurance that guards the holder against financial loss sustained from defects in a title to a property. Thus, it protects real estate owners and creditors against the uncertainty of loss or damage stemming from claims or title defects.
Coordinate all closing requirements – New issues often arise towards the end of closing, frequently because of the necessity of relying on independent third parties and providing certifications and property tours dated near conclusion. As the closing approaches, CRE brokers, CRE counsel, and all necessary buyer and seller representatives should remain available and ready to respond to the changing demands and circumstances.
Negotiate Closing Costs – Costs incurred from opening an escrow account to hiring a real estate attorney. These costs can, unfortunately, accumulate from zero to a million if you aren't cautious. Unfortunately, however, many services take advantage of consumers' lack of knowledge by charging exorbitant fees. Moreover, even fees for legitimate closing services are often subject to inflation.
Lenders most often charge junk fees, i.e., fees which the lender imposes upon the borrower at the closing of the mortgage. These fees are not expected by the borrower and are not clearly explained by the lender. As a result, these fees can accumulate to an enormous bill. Junk fees include administrative fees, application review fees, appraisal review fees, ancillary fees, processing fees, and settlement fees.
Ensure proper Interest Rates – Interest rates – including those offered on the mortgage – are often unstable and often subject to change. In addition, these interest rates are subject to multiple factors, namely: geographic region, property type, type of loan applied for, and the applicant's credit score. And so, it is advisable to lock in the interest rate for the loan in advance. This prevents you from being at the mercy of market fluctuations, which could cause rates to rise before you finalize your property purchase. Even a small rate hike can significantly increase your monthly payments and the amount of time it takes to repay the mortgage.
Accost the Funding Requirements – You most likely deposited earnest money when signing the purchase agreement. Earnest/option money is a deposit made to a seller to reserve the item for the given period. It indicates the buyer's good faith, seriousness, and genuine interest in the property transaction. On the chance that the buyer backs out, the earnest money is forfeited in the seller's favor as payment for the period within which the seller may sell the property. Conversely, if the seller backs out, the money is returned to the buyer.
To complete your purchase, you'll have to deposit additional funds into escrow. Failure to do so can lead to the sale getting cancelled, with the earnest money going to the seller.
Title and Closing Paperwork – Before the transaction is finalized, the buyer and seller must accept the title report and complete the closing documents. These documents may include the assumption of leases, deeds, environmental reports and assignments of liability, zoning disclosures and warranties, and anything else that has been agreed upon to close the transaction.
In the sale process, the title company will provide a report of the current state of the property's title. After this report is made, the buyer needs to review it and file any objections carefully. The seller is also under a limited timeline to respond to these to go through with the sale.
When all issues with the title are cleared up, a final title report is made. Both parties will need to analyze for final approval before moving forward with other closing documents, such as Zoning/ Building Jackets, Environmental Reports, and Deed transfer with title affidavit, as well as assignment and assumption of any leases.
Understanding the Paperwork – Paperwork is essential to closing the property deal. Despite there being a plethora of legal terms, one should read it themselves. And on the instance that one does not understand any legal terms, he/she should hire an attorney for their review and help smooth out any issues with the transaction.
In conclusion, while it may seem that the closing process is a lot of work, it is worth the time and effort to get things in the proper order before signing anything that one does not understand. While real estate brokers and other entities can and will help during the process of the transaction, they can’t ensure that the transaction is problem-free. Hence, it is up to you to ensure that the transaction is free from possible one-sided transactions and dealings before closing the Commercial Real Estate Transaction.
Even after outlining all the information above, buying and selling CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at https://linktr.ee/PhillTomlinson. #LeveragedCRE