Understanding the National Mortgage Settlement

There is much confusion over who is legally entitled to choose the closing agent - the buyer or the seller. The importance of this choice can often make the difference between a successful closing and no closing at all.

The closing agent in a real estate transaction can be an attorney or a title company that does not have an attorney on staff.

Understanding the National Mortgage Settlement

Who Gets to Choose the Closing Agent in Real Estate Investing?

Most states will allow individuals who are not attorneys to close real estate transactions and issue title policies for the property covering the closing. While it may be legal for anyone to close these transactions, the quality of service, cost and credibility of the title insurance can vary greatly.

While many title companies that do not have attorneys on staff are highly competent, the investor is paying the same, or perhaps more, for the same work with limited recourse. An attorney doing the work has his license at stake and most carry malpractice insurance where a claim may result in a payout for damages if something happens.

I have closed with title companies that couldn't do certain types of transactions because their title company wouldn't insure the property. An attorney on the other hand used a different title company and closed in just days.

Not all title insurance policies are equal and it is very important that as a buyer, you read the title commitment before the closing to see what exclusions or exceptions there are to the policy. You may be shocked but the time to fix any issues is before you close. I strongly suggest that you review the lien letters the closing agent gets back to see what code liens or open violations exist that could be a deal killer.

It is very important to choose your closing agent so you have an inside track to exactly what is happening in the transaction. Your attorney will tell you because you are his client. An opposing attorney or closing agent will likely not tell you because you are not his client.

Whatever the cost of the title policy the issuing agent gets between 70% and 80% as a commission. This amount can be more if the agent charges in excess of the minimum rate (promogated rate) as prescribed by the state. So, besides the closing costs on a closing statement (HUD-1), if the title policy costs $1,000 the issuing agent will make an additional $700 to $800+.

What many investors don't realize is that there does not have to be a closing agent to issue a title policy. There can be as many as three entities involved in any transaction, the closing agent, the escrow agent and the title agent. The easy way to find out is ask your attorney how you can get him to be the title agent even if there is another closing agent.

Realtors are often emotional and mentally stuck in the way they do business because of their training and may actually tell you something is illegal when it isn't. They may strongly believe what they are telling you but their foundation is two weeks in a classroom getting ready to take a state examination.

Realtors, unless licensed as attorneys, are not allowed by law to practice law, or give legal advice. But sometimes they do in good faith and to get the transaction closed, they may over-stepped their boundaries.

Most common is the issue of who the closing agent will be. Since they work with their attorneys or their company has a financial interest in a specific closing agent - this should by law be disclosed to the buyer and seller.

So who chooses and who pays for the closing agent?

The best possible scenario is for the opposing party to your side to pay for the title policy and its associated fees. This simply means that if you are buying a property, the seller pays. If you are selling a property, the buyer pays.

This choice is legal in every state if the contract so reads and you can make the contract read the way you want, if the opposite party agrees. They almost always do to get the deal, but if they balk, say you will split the fees/costs with them. In your investing career this simple choice will make you many extra thousands of dollars.

But what happens if someone else fills out the contract and tells you that it is the law that you have to pay and you can't choose the closing agent?

What is almost always the case is that what the state suggests is what is "usual and customary" for that county. In some areas, one county will suggest the buyer pay while in the next county, the suggestion is the seller pay.

The variations may be as simple as the courthouse records were destroyed so the county changed to suggesting the seller pay instead of the buyer paying. As always, the contract clauses over-ride whatever is in the contract so focus your attention on making additions to protect your position by adding clauses or addendums to the contract.

In summary, always seek legal advice on legal contract issues but do not be intimidated by legal-speak. Read and understand what you are signing before you sign anything and put clauses in your contracts to strengthen any specific position that is in your best interest.

Do not believe anyone who tells you something is the law that you have to do something with respect to the closing agent, unless your personal closing attorney concurs.

Finally, if the contract you are signing does not stipulate who the title attorney is, but only the closing agent, get your attorney to write a letter to the closing agent stating that you have chosen him as the title agent.

This way he will shadow your deal, get paid for it and he will tell you what charges and costs may be excessive on your HUD-1 Closing Statement.

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