Real Estate License Exam: What Happens before the Closing
For the Real Estate License Exam, you’ll need to know about the things that happen between the time the sales contract is signed and the day of closing title when transfer of ownership of the property actually takes place. Activities after the contract is signed but before closing usually have to do with satisfying the terms and conditions of the contract and any terms and conditions the lender may set.
Prove marketable title
A typical real estate sales contract requires the seller to convey marketable title to the buyer, which means the title must be free from any reasonable doubts as to who the owner is and free from any defects. The objective of establishing a marketable title is to prove that no clouds are impeding clear title. A cloud is something that casts doubts on the grantor’s ownership of the property.
Clear title has been expanded to mean no problems such as illegal structures or unpermitted improvements to the property. The different ways the grantor may prove marketable title vary by state and may even vary by area within a state. In general, though, proof of good title can be accomplished in several different ways. Here are descriptions of the four most common ways:
Abstract of title: An abstract of title is a report of what was found in a title search, which is a search of essentially all public records related to the property’s title, such as previous deeds and liens. These records are usually found in the county recorder’s office or land records office of the county in which the property is located.
Although anyone can search the public records, during a title search, an abstractor (someone who searches through title records) or attorney researches the chain or history of the title from one owner to the next, looking for gaps in ownership or other factors that appear to cast doubt on the validity of the current owner’s claim to the property.
The abstract of title then is given to the buyer’s attorney to examine. When the buyer’s attorney is satisfied that the seller has marketable title, and issues an attorney’s opinion of title, the closing can proceed.
Certificate of title: A certificate of title is similar to an attorney’s opinion of title and may even be prepared by an attorney. It also can be prepared by a title company or an abstractor, the person who actually prepares the abstract.
The certificate of title is an opinion about the validity of the title but not a guarantee of title. In issuing a certificate of title, an attorney examines the public records but no abstract of title is prepared.
Title insurance: Title insurance can be purchased on its own or as a supplement to an attorney’s opinion of title or a certificate of title. Title insurance provides protection for the buyer, defending the new owner if any future claim is made against title to the property.
In many cases where a mortgage loan is involved, the lender requires a title policy that at least covers the lender’s portion of the purchase price. The owner may want to obtain an owner’s policy to cover his or her interest in the property.
Torrens system: The Torrens system is based on proper registration of the title. An abstract of title and a lawsuit to quiet title, which is where you can go to court to have the court declare that you have clear title to property, are filed with the appropriate authority or office, such as the county court clerk.
If approved, a certificate of clear title, called a Torrens certificate or Torrens certificate of title is issued by the court, which unlike the attorney’s opinion or an abstractor’s certificate of title, is considered to be proof of ownership. The Torrens system gradually is falling out of use in the United States, but some states or areas within states still use it.
Removal of liens
As part of a title search, the title company determines whether the property is subject to any liens. Liens are financial claims against the property. The owner/seller customarily removes all liens from the property prior to sale but under some circumstances the buyer may pay off the lien. If a lien isn’t satisfied before the closing date, liens usually must be paid off at closing with proceeds from the sale.
Title searches also make note of any other encumbrances on the property. Encumbrances are limitations on the owner’s use of property. They include liens but also can be an easement or a deed restriction. Generally the buyer accepts ownership of the property subject to these encumbrances. They normally don’t present a problem with the title to the property.
Meet the conditions of the sales contract
Although most contract conditions don’t normally affect title, note that before closing, the buyer completes all the conditions that have been put into the sales contract. So, if a sales contract has been signed and indicates that a mortgage loan has to be obtained and a home inspection by a home inspector or other professional must be completed, the buyer is responsible for completing these activities prior to closing.
Immediately prior to closing — usually that day or the day before — the buyer personally inspects the property. The agent selling the property or the agent working with the buyer often conducts this walk-through.