6.2 Real Estate Practice and Settlement

The Closing and RESPA

Settlement (closing) is the event where ownership and consideration change hands. The buyer pays the purchase price (usually with loan proceeds), the seller delivers the deed, liens are paid, and funds are disbursed. A closing agent—often a title company, escrow company, or attorney depending on the state—orchestrates the process.

Federally related mortgage loans are governed by the Real Estate Settlement Procedures Act (RESPA), administered by the Consumer Financial Protection Bureau (CFPB) under Regulation X. RESPA's purposes are to give consumers cost disclosures and to prohibit kickbacks and unearned referral fees among settlement service providers. Under the TILA-RESPA Integrated Disclosure (TRID) rule, the borrower receives a Loan Estimate within three business days of applying and a Closing Disclosure that the lender must deliver at least three business days before consummation.

That three-day rule lets the buyer compare final terms against the estimate—an exam favorite.

Title Search and Title Insurance

Before closing, a title search examines the public record (the chain of title) to confirm the seller holds marketable title and to reveal liens, easements, and encumbrances. The result is summarized in an abstract of title or a title commitment. Title insurance then protects against defects the search missed—forgeries, undisclosed heirs, recording errors—covering losses up to the policy amount. The exam stresses the two policy types:

Unlike most insurance, title insurance is a one-time premium paid at closing and covers events that occurred before the policy date, not future events. The lender almost always requires a lender's policy; a separate owner's policy is needed to protect the buyer's stake.

Deeds, Covenants, and Recording

A deed is the written instrument that conveys title. To be valid it generally needs a competent grantor, a named grantee, consideration, a legal description, words of conveyance (the granting clause), and the grantor's signature and delivery/acceptance. Deeds differ by the warranties they carry:

• General warranty deed — the strongest; the grantor warrants against defects arising at any time, even before the grantor owned the property. It carries five covenants: seisin (the grantor owns it), right to convey, against encumbrances, quiet enjoyment, and warranty forever.
• Special (limited) warranty deed — warrants only against defects arising during the grantor's ownership.
• Bargain and sale deed — implies the grantor holds title but gives no express warranties; common in foreclosures and tax sales.
• Quitclaim deed — conveys whatever interest the grantor has, with no warranties; used to cure title clouds or transfer between spouses.

Recording and Constructive Notice

Recording the deed in the county land records is not required for validity between the parties, but it provides constructive notice—the law presumes the world knows of a recorded interest. Recording establishes priority: a bona fide purchaser who records first generally prevails over an earlier unrecorded claim. Actual notice (what a party truly knows) and constructive notice together protect parties and determine lien priority.

Escrow, Prorations, and Brokerage Practice

During a transaction, the broker may hold earnest money and other client funds. These must go into a separate escrow (trust) account—commingling them with the broker's operating funds, or conversion (using them personally), is a serious license-law violation. The broker is a fiduciary over these funds.

At closing, recurring costs are prorated so each party pays only for the days they own the property. Items prorated include property taxes, prepaid HOA dues, rent, and interest. The seller owes costs up to and including (or through) the closing date depending on local custom; the buyer owes from the day after. A prorated item is a debit to one party and a credit to the other—if the seller has not yet paid taxes that accrue during ownership, the seller is debited and the buyer credited.

Real Estate as a Business

A salesperson (sales agent) must operate under a sponsoring broker, who is legally responsible for the agent's transactions and holds all client funds. Commission is negotiable and never set by law; it is typically a percentage of the sale price, earned when the broker produces a ready, willing, and able buyer on the seller's terms. The broker and agent split the commission per their independent-contractor agreement. Antitrust law bars brokers from conspiring to fix commission rates or allocate markets.

Closing Cost Allocation and the Settlement Statement

At the table, a settlement statement lists every charge as a debit (money a party owes) or a credit (money a party receives). Buyer debits typically include the purchase price, loan origination fees, recording fees, and prepaid interest; buyer credits include the loan amount and earnest money already deposited. Seller debits include the existing mortgage payoff, the brokerage commission, and any owed-but-unpaid taxes; seller credits include the sale price.

Customary cost splits vary by region: the seller usually pays the brokerage commission and owner's title policy, while the buyer usually pays loan-related charges and the lender's title policy, though everything is negotiable in the contract. A double-entry rule helps verify accuracy—a prorated item appears as a debit to one party and an equal credit to the other, so the totals balance.