The closing of a real estate sale is the final chance to make sure that you fully understand everything about the sale and what terms and conditions are contained within the documents for the sale and your mortgage. Unfortunately those are often long and boring documents, mostly filled with enough dry, legalize to put you to sleep. Many people make the mistake of not reading them at all, trusting in the agents involved to catch anything amiss. That is a mistake.
Many times I’ve set through closings where it is obvious that the homebuyers haven’t read anything and are just signing or initialing where ever the closer tells them to sign. What they may not understand is that some of the agent parties involved will see nothing amiss in terms and conditions that protect their company’s interests, sometimes to the potential detriment of the homeowner. Take the example written about in this recent story in the RealtyTimes daily news feed - Insurance Proceeds May Not Go To The Homeowner If Disaster Occurs. In this case the home buyer didn’t read through the mortgage documents or they didn’t understand the fine print about what happens to the insurance claim money in case of a disaster.
Closing documents often harbor other surprises that may be overlooked by the buyers or even sometimes the sellers. There may be easements or encroachments called out in the Title Policies that the buyers don’t understand. There may be mineral rights agreements (leases) in place that don’t extinguish just because the property changes hands and the buyers need to understand them and what rights for future use of the land were signed away by previous owners with those leases. There could be covenants in place that restrict the future use of the land. All of those things should be in contained the closing documents somewhere. The title policy that the homebuyer gets also defines what the title insurance company is responsible for and what they will not be responsible for insuring. Read that section carefully and understand what your risks are if a defect on title comes up later that may not be covered under the policy.
Mortgage documents in particular often harbor very onerous terms and conditions, most having to do with things that protect the interests of the lender and define how any default by the borrower will be handled. There may be lots of terms and conditions in the mortgage that allow the company to seize the property if you are caught doing anything illegal at the property or get caught-up in delinquent tax issues. You might be surprised just how intrusive the lender allows itself to become in your life to protect their interests.
Another document that is associated with closing on a property; but, which is not a part of the closing documents, is your insurance policy. Many people just read through the ad literature from the insurance company or just take their agent’s word for it that the policy properly covers them. Most people assume that if the 100-year storm ever occurred in their area and flooding occurred in their home that they would be covered – not so. Almost all regular homeowner’s policies exclude flooding caused by water entering the home from outside sources. You likely would be covered for a burst pipe in the basement that flooded the basement, but not for excessive rain causing flooding, even if the flooding backed up into your basement from the sewer. The insurance companies sell separate flood policies for those external causes; however, almost no one ever buys those separate policies, especially if they are not in a “flood plain” area.
If the property that you are buying is being sold by a lender as the result of a foreclosure there will also be a lengthy Seller’s Addendum to the original offer that contains lots of potential pitfalls for the buyer, as well as pages of denial of any responsibility for anything to do with the property by the seller. While the majority of the legalize in these “Sgt. Schultz” documents (I know nothing!) is there to shield the lender/sell from future liability lawsuits, some of may be describing things about the condition of the property or the rights being passed on in the deed to the property that the buyer needs to carefully read. You are basically holding a liability umbrella over the seller when you signed those documents; so don’t expect to go back looking for relief from the seller if you discover something bad later.
As the seller, you may have obligations that you don’t realize in those documents, too; especially if there is any post-closing occupancy involved. Make sure that you understand what you can and cannot do after closing, when you become a tenant in the buyer’s property and what recourse the buyer may have if you do any damage while occupying the house after closing. Keep in mind also that your old insurance policy won’t necessarily cover you during this period, so check with your insurance agent about converting to a renters policy for the time that you intent to stay.
The bottom line from all of this is that it is your obligation, whether you are the buyer or the seller to read the documents that you sign during the process and at closing. You cannot depend upon the various agents involved to do all of that work or to necessarily see anything wrong in the terms and conditions contained in those documents. They are not signing them- you are!
