The Closing Process in Real Estate Transactions

By Ciprian Morariu Published: February 28, 2024

Real Estate Transactions

Are you a real estate agent learning to learn a new trick of the trade? Maybe you are a homeowner or buyer ready to sell or purchase real estate soon.  

Irrespective of where you are in your real estate journey, it is important to understand a key subject called real estate closing. 

It is no surprise that a real estate transaction is a lengthy, complex, and time-consuming process. 

Navigating through the sale or purchase of real estate is an intimidating task for most consumers and a challenging one for real estate professionals. 

Finally, any property transactions end with the process of real estate closing. If you are new to the world of real estate, you might have come across this term already. 

In this article, we are going to discuss in detail what is a real estate closing and why you should care about it whether you are a real estate agent, a property owner, or a buyer. 

What is the Function of Real Estate Closing?

Closing in real estate is a legal term that refers to the act of transferring ownership rights from a seller to a buyer. 

The act of closing is assisted by several professionals, including real estate agents, closing agents, lawyers, and attorneys. 

Closing of real estate includes the disbursement of funds, signing of documents, and shifting of the property rights between a buyer and a seller. 

If in the event of closing not being done properly, it could result in significant financial issues and legal disputes. 

Worse yet, clients might have to face potential foreclosures and loss of property if the real estate closing process is not properly executed. 

Hence, it is a process which requires careful planning and attention to detail. It requires in-depth documentation, accurate information, and truthful representation of assets, finances, taxes, and related property papers. 

Typically, closing documents for real estate include proof of ownership, terms of agreement, affidavit of title, deed, bill of sale, tax declarations, and any financial documents related to the property.

Importance of the Closing Process

A real estate closing is the culmination of countless decisions, negotiations, considerations, and steps to reach a conclusion where a buyer and a seller agree to the transfer of property ownership. 

The reason why the closing process is important is multifold i.e. it involves financial, legal, and emotional aspects. It is a combination of a series of intricate steps put together to enable a seamless, secure, and transparent real estate transaction 

Firstly let us look at it from a financial perspective - real estate closing is the last and most crucial step of a real estate transaction and requires careful planning and thoughtful execution. 

Unless the buyer is paying for the property in cash, without proper financial planning and paperwork, it will not be possible to transfer funds from the buyer to the seller.

As the funds are generally stored in an escrow account, it is important to carefully review the disclosure document which entails the necessary financial details related to the transaction. 

Secondly, let us look at the importance of the closing process from a legal perspective. Since the closing stage is where the property is legally transferred from the seller to the buyer, it is a crucial step in the transaction. It is the step where an attorney ensures that all the legal documents and formalities are completed. 

At this stage of a real estate transaction, a closing attorney is involved who is responsible for preparing and verifying the title of a property is clear. This is done to ensure that a property are clear and is without any legal encumbrances. 

Therefore, the closing stage is also important in the legal sense as it ensures the protection of rights for a buyer and ensures that a transaction is compliant with state and federal laws.

Last but not least, let us understand the importance of the closing process from an emotional aspect. 

For the seller, parting with a property, especially a home is an emotionally difficult and draining decision. It is a pivotal point in their journey of life and therefore requires patience and diligence for all the parties involved in a real estate transaction. 

Parties Involved in a Real Estate Closing

Now that you know what is a real estate closing and why is it important, let us take a look at who is involved in the closing process. 

Typically, a real estate closing involves the presence and signature of many parties. However, all parties need not be present at the same time at the same place. 

These may or may not include – a closing agent, seller, buyer, title company attorney, escrow officer, home inspector, title insurance agent, and real estate agent

Additionally, during a real estate closing, you may also see the involvement of the following parties: 

  • Appraiser Officer
  • Lender
  • Title Company

In case you are wondering who is the closing agent in real estate and what exactly they do, here’s the summary - a closing agent is the one who is responsible for preparing the required documents for closing the transaction and facilitating the entire closing process promptly.

Real Estate Agent

Steps of the Closing Process

For many first-time home sellers and buyers, completing a real estate transaction may feel like a daunting and complicated journey. 

However, it is important to understand the different steps involved in the process to ensure a smooth and secure transaction. 

Let us take a closer look at how the closing transaction works and what are the steps of the closing process in detail below: 

Step 1: Contract Execution

The first step towards completing a real estate transaction is to ensure the closing contract is completed and shared with all the parties involved. 

This contract includes all the details about purchasing a property, including its purchase price, the timeframe for a buyer to respond, and any contingencies. 

It is also important for the contract to ensure compliance with state and federal laws. The closing documents for real estate must be in adherence to the jurisdiction of the state real estate authority.

Step 2: Opening an Escrow Account

After the contract is prepared and finalized, it is the responsibility of the property buyer to open an escrow account. 

Typically managed by the title company or a closing attorney, an escrow account is where the funds required to close the transaction are stored. It is the responsibility of the attorney or the title company to hold and manage all the funds until the transaction is completed. 

This account holds the earnest amount and it is where the lender or the financial institution transfers the mortgage amount required to complete the real estate transaction. 

After the transaction is completed, the title officer or the attorney is notified about the status, and the property buyer is required to transfer the funds to the escrow account. 

The transfer of funds must be completed within the stipulated period as mentioned in the contract. 

Step 3: Title Search and Examination

As the next step in the closing stage of a real estate deal, the closing attorney is required to ask for a title search related to the property. 

These include all public records related to a home, including deeds, wills, mortgages, divorce settlements, and other relevant documents. 

This step is a must to ensure that the ownership rights of the property are transferred from one party to the other without any discrepancies. 

Sometimes, various factors affect the smooth transfer of title of property such as unpaid property taxes.  

However, once the title search is legally cleared, a title insurance policy in the name of the buyer will be issued as protection against damages, liens, and future claims.  

Step 4: Home Inspection and Appraisal

Before signing the contract and transferring the funds, it is important to ensure that the property is inspected thoroughly. 

Many home buyers opt for a home inspection of the property by using the services of a home inspector to find out about any issues or defects. 

A home inspection is helpful to evaluate the physical condition of a property and to identify any existing or future defects, problems, or issues related to the functionality or appearance of a property. 

These could include - electrical hazards, pest infestations, and bacterial infections and if any of these problems are found, then the buyer has the right to request repairs or price adjustments in the final contract. 

Step 5: Securing Financing

If a home buyer is opting for a mortgage loan to finance their purchase, the financial institution or lender will require submission of the property’s appraisal. 

The appraisal report is a legal document used for evaluating the selling price or market value of a property. 

Typically, a real estate appraiser is responsible for reviewing the property and coming up with a fair evaluation of the estimated value of a home. 

In the case where the valuation of a property is less than the mortgage amount, the loan request might get rejected.

Step 6: Finalizing Closing Documents

After inspecting the property and finalizing the mortgage amount, the next step of the closing stage is to submit other key documents related to the purchase.

These include the property address, estimate of taxes, payment terms, promissory note, closing disclosure, deeds, bill of sale, title affidavit, and transfer tax declaration. 

Note that the deed must be signed by the property owner or the seller and the bill of sale should include any personal property associated with the home. 

Step 7: Closing Date and Time

After the contract details have been completed, agreed upon, and signed, the last stage of the closing process is to finalize the date when the closing will take place. 

Generally, it is the responsibility of the closing agent to finalize a date after discussing it with the seller, buyer, mortgage lender, and attorney.