Avoiding Closing Chaos
Humans are forgetful creatures who tend to leave things all over the place. Keys, glasses, phone chargers, wallets, E-ZPasses, iPads. We’ve all been there. The same can be true of the documents and other items that are required for a closing. Despite checklists and Post-its on the computer monitor, closing necessities, both big and small, often fall through the cracks. When an attorney drops the ball before a closing, it’s stressful for all the participants and delays abound. Here’s a list of the five main causes of closing chaos and how insure that potential problems are avoided.
Lock, Stock and Lease
There is nothing worse than getting a call from the seller’s attorney a week before a co-op closing, sheepishly disclosing that he or she forgot to order the stock and lease from the pay-off bank. Banks can be notoriously slow in producing the co-op collateral documents. It can take thirty days or longer for a bank to retrieve the documents or to declare the documents lost. Even when there is a mortgage contingency, the stock and lease should be ordered as soon as possible to insure that the documents will be available when the parties are ready to close. When a closing is adjourned for several weeks while the parties wait for the stock and lease to finally show up, unintended consequences start to kick in. Rate locks can expire, and worse, a purchaser may be obligated to vacate his or her current residence by a date linked to the original closing. In today's lending environment, never give a bank an excuse to withdraw its funding as a result of an unexpected adjournment.
Federal law requires a withholding of ten percent of the purchase price if the seller is a foreign citizen within the meaning of The Foreign Investment In Property Tax Act. To avoid this issue, the seller can deliver a “Firpta Certification” at closing indicating that the seller is not a foreign citizen, so that no withholding is required. Despite the fact that this document is always required at a real estate closing, it never ceases to amaze me how many attorneys show up at a closing without bringing the required form for the seller to complete. In most cases, the form gets faxed over to the closing and the requirement is satisfied. In one recent situation, however, the documents were executed in advance and the seller was not present at the closing. An hour before the closing, the seller’s attorney had his client running through the airport lounges in Los Angeles trying to find a fax machine to deliver the document in time for the closing.
A Matter of Trust
Many co-ops and almost all condos allow the purchaser to take title to the apartment in the name of a trust. When trust ownership is permitted (as well as ownership by other business entities), there will be any number of other documents that the co-op or condo may require in order to permit title to be held by an entity and not by the individual purchaser. Those documents will include a personal guaranty by the beneficial owner, an occupancy agreement, opinion of the counsel as to the validity of the trust and other security documents to insure that the trustees of the trust will meet the economic obligations of ownership. Those documents must be prepared and reviewed in advance by counsel for the co-op or condo. In some cases, the documents will require modification or revision. Each co-op or condo has slightly different documents. Trusts can originate from different states and outside counsel may not be comfortable with some of the draconian requirements that are often imposed. When a purchaser is permitted to take title in a business entity, it is essential that all of the required documents be attended to soon after the contract is signed.
New York State of Mind
When a seller is not a New York resident, or has not lived in New York as his or her primary residence for two out of the past five years, New York State will require an estimated capital gains tax payment to be made at the closing. The transfer tax document required at closing, called the “TP-584”, will require the seller to certify whether or not he or she is a resident of New York. If the seller cannot make that certification, or does not qualify for an exemption, the estimated capital gains tax payment has to be collected and paid to New York State, together with the form calculating the payment that is due. When the seller’s attorney does not determine the seller’s residency in advance of the closing, and if the seller is not a resident of the state, the closing checks usually have to be redone to provide sufficient funds for the estimated capital gains tax payment. In one recent situation, the seller’s residency was not determined until the seller’s attorney asked the seller to sign the residency certification on the tax form at the closing table. Fortunately for the purchaser, the seller was selling at a loss, so no capital gains tax payment was due. Had the seller recognized a profit on the sale, the closing fire drill would have been underway, with the purchaser scrambling to find a nearby bank to redo the closing checks.
Part and parcel of the co-op transaction is the ubiquitous lien search that discloses outstanding UCC-1 loan filings, judgments and other liens. Where there have been several refinancings by the seller, sometimes the new bank neglects to file the termination of the old bank’s UCC-1 filing. In some cases, the old filing has expired and is no longer effective, but that’s not always the case. Even if a filing has expired, it does not necessarily mean that the prior bank’s loan has been paid in full. When the lien search is not carefully reviewed, and an unexplained UCC filing appears in the report, the closing can be delayed if a termination for the additional filing is not delivered at closing. Addressing this issue at the closing is usually a disaster, as it is often time consuming to obtain the required termination of a prior UCC filing, particularly if the prior bank has merged with another lender.
Residential Realty: Double Check Everything
Pre-closing transaction requirements and deliverables is the best way to avoid unnecessary delays and to insure a speedy closing. When a disheveled attorney shows up at a closing and appears to be looking at the file for the first time, the other participants commence the closing prayer circle. Focusing on the above issues should minimize the need for a higher power to complete the transaction.