Avoid These 5 Common Mistakes to Make Sure Your Settlement Goes Smoothly
There are lots of things that can go sideways at settlement. We see it all the time. Realtors (particularly newer ones) make innocent mistakes that cause valuable deals to fall apart, or put them and their clients at risk.
Here are the top five mistakes we’ve encountered and how – with the right knowledge and insight – you can avoid them, ensuring that your settlements go smoothly and your clients are protected.
Mistake #1: Misunderstanding the flow of money.
Buyers and sellers are often unclear about how money moves and is distributed during the course of a real estate transaction. These are a few things you should make sure you know and your clients are aware of before you get to settlement.
1. The role of the title company
As the title company, we act as the escrow company, which is a clearinghouse for the funds that are transferred during a real estate transaction.
2. Potential settlement fraud
Recent wire fraud schemes are a big deal in today’s real estate industry. Criminals try to hack into title companies and brokerages to gain access to settlement money. And when they do, it can be very costly to all involved.
Despite the potential for fraud, wire transfers are still the preferred industry standard because they ensure the money is available the same day. To ensure no one is a victim of fraud, have your clients call the brokerage or title company directly to verify any wire transfers BEFORE sending them.
3. Prepare for common mistakes.
Cashiers checks vs. personal checks. Make sure your clients know which is required and who to make them out to. In situations where clients are completing a simultaneous settlement on the same day (selling one property and purchasing another), make sure they know that cashiers checks usually take a day to clear the bank and personal checks take 2-3 days. A better option for simultaneous settlements is to use a wire transfer.
Bring extra checks to the settlement. If the client is writing a personal check (which is allowed by many title companies for amounts under $3,000), remind them to bring extra checks in case anything changes at the settlement or a mistake is made, which is common during this high-stress time for buyers and sellers.
Remind client who their money is going to and who to make checks out to. A perfect example of this is “earnest money.” We recently had a buyer send in an earnest money check made out to Earnest Money, as though it was an actual person. Make sure your clients know that earnest money checks should be made out to the title company or brokerage firm, and specify where any other required checks are going as well.
Mistake #2: Not planning for a failed walk-through.
Educate clients on the give and take that’s needed during the walk-through. Help them to recognize that some issues with the property may not be addressed by the seller or that some buyers won’t budge on something they really want fixed.
A good option for addressing this may be to request a seller credit when a repair hasn’t been made or something new has been discovered during the walk-through, giving the buyer the option to take cash to complete a repair after settlement. Another option is to create an escrow agreementfor a specified amount and time, which allows time to get a clear idea of how much the required repair will cost.
In the end, if there’s still a struggle between buyer and seller, you can always come back to this question: “Do you think this is still a (good deal/the house for you) if you don’t get _____?”
Mistake #3: Allowing buyers to forgo title insurance.
Full disclosure: Prime Settlement sells title insurance and makes money from that sale. Here’s why we think it’s important though, no matter who is selling it.
If a buyer opts out of title insurance, they’re at risk for future financial liability for issues that may arise regarding their property title. That may seem vague, so here’s an example of risk that came up for a recent client of ours.
The client purchased a home and then received a letter from the District advising them that their deck, including an addition and the roof over the deck, plus the beautifully finished basement, were not properly permitted when built. As a result the District demanded the proper building permits be obtained for the basement, and that the deck (including the addition and roof) be removed. The cost for this was over $500,000!
The homeowner, who purchased the home in large part because of the renovations that the developer had completed, was now responsible for the remediation because they didn’t have title insurance. A title insurance policy insures the homeowner against loss related to forced removal (in this case, of the deck, addition and roof) or remediation due to lack of building permits.
You can avoid issues like this by educating your clients on the benefits of buying a title insurance policy:
- Title insurance is a one-time fee that covers the owner for the sale price of the property as long as they own it.
- If your client obtains a mortgage, most lenders require a title insurance policy for the loan. If a client is already purchasing a policy to protect the lender, it only makes sense that they would also purchase a policy to protect themselves in the case that a title issue comes up.
- It also covers omissions of the title company. For instance, the title agents are responsible for ensuring the property is transferred to the buyer without any mortgages, tax liabilities or liens, but there are things we don’t typically check for – like building and development work for permits inside the property, including renovations, lot grading, work orders or stop orders.
- Title insurance also kicks in when unforeseeable errors in title cause loss, such as fraud, forgery, or inconsistent paperwork in the land records.
While these situations may seem rare, in cases like the example I gave above, it can save hundreds of thousands of dollars and a legal battle if title errors or permit issues come up after settlement. Like any other insurance, it’s protection against the unforeseeable and is absolutely worth the upfront expense.
Mistake #4: Failing to manage client defaults.
It doesn’t happen often, but sometimes a buyer decides they want to default on their contract, despite all contingencies being met and no seller default. Maybe they’ve found another house they’d rather have or maybe they’ve got a “bad feeling” about the house they’ve committed to purchasing. Whatever triggers this desire to default, it’s your job to manage it as best you can.
Instead of waiting until settlement to address client defaults, start at the beginning of the process.
- Clearly explain to your client the consequences of default as soon as you start talking about making offers.
- Explain to your buyers that once a contract is signed and earnest funds have been exchanged they can’t just walk away from the transaction and get their money back.
- Make sure they also understand each of the contingencies available to them and how they would each affect the transaction should they not be met. Then, once they have chosen which contingencies to include in their contract, explain again the consequences of those specific contingencies.
- Remind them at each step along the way that if they default on their contract they will put their earnest funds at risk.
Client defaults are never fun to manage and often lead to litigation. If spending a little more time explaining defaults and contingencies to your clients can spare the time and effort of dealing with a default down the line, it’s well worth it!
Mistake #5: Not addressing special circumstances for unwed buyers.
Handling a title for unwed buyers can be complicated. Each couple’s situation requires a great deal of consideration and requires the couple to answer some tough questions – questions they don’t always want to address in the thick of love or don’t have easy answers for.
Because of this, it’s important to discuss financial details as early in the process as possible. We recently had a couple referred to us after discovering they wouldn’t both be able to be listed as borrowers. Because of their complicated situation (one had heirs, the other didn’t; one had more money, the other had more income; one had good credit, the other did not), I recommended they place their property in a revocable trust. But because they didn’t start this process until they were already in settlement they had to back out of their first deal (thankfully they had an inspection contingency that allowed them to do so) and wait for another acceptable property to come along.
You can avoid a situation like this by asking the right questions when you have unwed buyers purchasing property together. If it looks early on like they may be bringing different assets to the table, you can refer them to a settlement/trust & estate attorney before ratifying a contract (or even finding that perfect property) and we can help them get an agreement in place that will ensure they’re both protected.
Ultimately, communication between you and your clients is the key to avoiding any of these mistakes. So practice having open and frank conversations about these tough topics with your clients and you’ll avoid watching your real estate deals crumble when you get to the settlement table.