To assure a smooth closing, REALTORS® should begin planning for the closing when the property is listed and the offer to purchase is drafted. Keeping good internal timelines and checklists will minimize unintended obstacles that could postpone or jeopardize closings. The following Hotline questions have been asked and answered about closing issues.
Escrow agreements
The buyer went on the pre-closing walk-through and it was discovered the seller had not completed repairs according to the terms of the offer. The parties want an escrow agreement for the work to be completed. Can the broker hold the funds and do they need a written escrow agreement?
According to Wis. Admin. Code § RL 18.07(1) a broker may, with a separate agreement prepared by the parties or an attorney, place funds in escrow to be held after closing. A well-written escrow agreement will minimize difficulties in fulfilling the terms of the post-closing escrow. Real estate licensees are not authorized to draft escrow agreements, therefore, the broker may recommend the parties use the services of an attorney or draft their own agreement. Paying an attorney to draft the agreement may be money well spent to assure the agreement adequately identifies the intent of the parties and covers both the fulfillment of obligations and non-compliance by either or both parties. Because an escrow agreement should be drafted for the specific needs of parties in that transaction, agreements from other transactions should not be copied for use in subsequent transactions. See § RL 18.07 at legis.wisconsin.gov/rsb/code/rl/rl018.pdf.
What is the broker’s obligation to assist the parties with the escrow agreement after closing? Do the agents have any agency relationship requirements or duties after the sale has been completed?
License law provides that only the duty of confidentiality extends past closing. Otherwise the provision of brokerage services is concluded when the transaction closes. It will be up to the parties, or their legal counsel, to assert their legal rights per the terms of the escrow agreement.
Fuel prorations
A property sale is to close tomorrow. The seller has brought up an issue with the propane fuel proration. When the seller purchased the fuel, the seller’s cost per gallon on a prepaid basis was half the price of the current cost. The seller wants to prorate based on the higher amount. Is that proper?
The language of the old offers did not specifically address this issue –thereby leaving parties with the need to insert specifuc provisions and the dollar amounts they wanted to use. The 2011 WB-11 Residential Offer to Purchase closing proration section states, in part, that the fuel shall be prorated at closing, based upon date of closing values. The parties are cautioned to consider using alternate values if applicable. In addition, if it would be difficult to have fuel readings the day of closing, the parties may provide another approach in the offer. If date-of-closing values cannot be satisfactorily obtained, the fuel proration may be computed using average rates, per diems or other amounts.
Closing statements and HUD-1
Is a listing broker required to prepare and provide closing statements detailing both the seller’s costs and the buyer’s costs or can the title company assume this responsibility?
At the time of the closing, the listing broker is required per Wis. Admin. Code § RL 15.03 (legis.wisconsin.gov/rsb/code/rl/rl015.pdf) to ensure that a complete copy of the seller’s portion of the closing statement is delivered to the seller and a complete copy of the buyer’s portion of the closing statement is delivered to the buyer. These closing statements shall accurately account for all funds received and paid by the broker in connection with the transaction. Although the licensee is not required to prepare closing statements (that job may be delegated), it is prudent practice to do so in order to ensure accuracy. By completing a closing statement and comparing it to the HUD-1 provided by the title company or closing agent, licensees will likely minimize errors at closing.
If a seller cannot attend closing or wants to pre-close, can the agent/broker sign the HUD-1 for them?
The Department of Regulation and Licensing has disciplined brokers for signing contracts on behalf of buyers without proper authorization. The underlying issue is whether authorizing the broker to sign on behalf of the party protects the interest of the public. Because signing on behalf of the party is not part of general real estate practice, the broker may place the seller in a position where there is a challenge to the enforceability or validity of a document not signed by the party. That risk is substantially eliminated if the seller gives the broker a limited power of attorney which gives the agent specific authority to sign certain documents. With a power of attorney there remains a risk for miscommunication, and liability for the broker undertaking such activity. Whether the broker wants to risk the potential liability for such activity is a question for the broker’s attorney. The broker may also wish to review the company’s errors and omissions insurance policy to see if the policy would cover any claims relating to such activity.
Agents at closing
Does the broker need to attend the closing or can the salesperson who handled the negotiations attend solo?
Per Wis. Admin. Code § RL 17.08 (www.legis.state.wi.us/rsb/code/rl/rl017.pdf), the broker-employer must supervise the activities of any licensee employed by the broker-employer. Whether the broker-employer and or licensee attend a closing is a matter of company policy. The broker-employer is responsible for the actions of any licensee attending a closing regardless of whether the broker-employer is there. There are pros and cons for a licensee attending closing. A licensee attending closing must be cautious not to engage in the unlicensed practice of law if legal issues arise. A broker may, upon the request of the parties, draft an amendment to reflect any last-minute closing table argreements. When deciding whether to postpone or proceed with closing the parties should be referred to legal counsel.
Search and hold
The broker has a listing and the closing is set for Friday. When the title work came in it revealed that the seller has a second mortgage on the property. The seller had not disclosed this mortgage to the broker and, given the purchase price, there are not enough funds to pay the first and second mortgagees and the other liens. What can be done to prevent this?
At the time of the listing, the listing broker may ask the seller to complete the WRA Listing Questionnaire Regarding Title Issues to avoid being surprised by liens and additional mortgages just before closing. The questionnaire is designed to identify early in the transaction, many different title issues that could have an impact on closing. In addition, requesting a search and hold from the title company is helpful in case the seller has forgotten or is concealing relevant information. Having this information from the beginning gives the seller more time to obtain the funds necessary to satisfy the liens and mortgages and have a successful closing.
The Provision of Merchantable Title subsection of the residential offer indicates that the title commitment delivered to the buyer must show merchantable title “subject only to liens which will be paid out of the proceeds of closing and standard title insurance requirements and exceptions, as appropriate.” Thus, if a seller provides a title insurance commitment that has liens and the seller cannot pay them at or before closing, the seller is apparently providing a commitment that is not acceptable for closing. In the Title Not Acceptable for Closing subsection, the buyer can object to the seller in writing and the seller has 15 days to correct the situation. If this is not done, the seller is at risk of losing the sale.
More information about title issues is available in the February, 2011 Legal Update, “2011 WB-11 Residential Offer to Purchase” and Wisconsin Real Estate Magazine article, “Short Sales and Title Insurance”.
The buyer feels the listing agent should have disclosed the liens that could not be satisfied. What are the broker’s disclosure obligations regarding the seller’s liens on the property?
Brokers are required to make timely written disclosures of material adverse facts. When there is information that indicates that a party to the transaction is not able to or does not intend to meet his or her obligations under the contract, then the issue constitutes an adverse fact. If a party to the transaction were to so indicate, or if a competent licensee would generally recognize this fact is of such importance that it would affect a reasonable party’s decision to enter into a contract or would affect the party’s decision about the terms of the contract, the fact is both adverse and material. If this fact is both adverse and material, then Wis. Admin. Code § RL 24.07(2) requires the broker to timely disclose the fact in writing to all parties to the transaction, even if the client would direct the broker not to disclose. If the broker was aware of the seller’s financial issues disclosure would have been appropriate.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.