Comercial closing v. Residential closing
We’ve identified 6 key differences between a commercial real estate closing and a residential real estate closing.
- Use of entities. Commercial real estate transactions involve entities, rather than individuals, in the ownership of real estate. For example, your company’s LLC will likely be the entity purchasing new office space rather than you personally. Commercial real estate is rarely owned by individuals because of the desire to limit potential liability. Investors and lenders try to isolate risks associated with their investment to the property. Ownership in an individual’s name would tie an investment property to the individual’s credit.
- Escrow. Commercial real estate closings are typically more formal than residential real estate closings. This is due to the higher cost of commercial real estate transactions and the various documents provided by investors other than just the buyer and seller.
- Title and survey. Title to commercial real estate is more complex. Additionally, commercial real estate transactions require an ALTA survey to be completed. The ALTA survey shows property boundaries, improvements, easements, rights-of-way, and other elements impacting the ownership of land.
- Pre-closing diligence. Much of the negotiation and work surrounding the negotiation must be done and agreed upon prior to closing. The purchaser must raise any objections to the zoning, title, survey, and tenant leases prior to closing.
- Inapplicability of RESPA. Prior to the Real Estate Settlement Procedures Act (“RESPA”), lenders, real estate agents, construction companies, and title insurance companies were giving “kick-backs” to one another, which subsequently inflated the cost of commercial real estate transactions. RESPA prohibits this behavior. However, RESPA does not apply to commercial real estate transactions because the act only applies to loans secured by a mortgage on a one to four family residential property.
- Closing documents. Both closing processes will include:
- Quitclaim deed. A document that transfers legal title to the property from the seller to the buyer. A quitclaim deed only gives the buyer the interest the buyer actually possesses at the time of transfer.
- Non-foreign affidavit. A document confirming that the seller is not a foreign person. (Foreign sellers need Tax Identification Numbers to request reduced tax withholding when selling real property.)
- Title affidavit. A document that explicitly states the status of various legal issues affecting the property.
Unless your business is purchasing raw land, a commercial closing will also include an assignment and assumption of leases. This document clarifies that the obligations the seller has under the leases has been passed to the buyer and it is a useful tool for notifying tenants that the property has been conveyed.
Things 1st time home buyers should know
- Your budget. You should work with a financial advisor to figure out how much money you can borrow for your new home and how much you can afford each month in mortgage payments. It’s important to note that those two figures might be different- sometimes your credit will allow for you to borrow more than your budget can afford.
- The difference between pre-qualification and pre-approval. Mortgage lenders have the ability to either pre-qualify you or pre-approve you. Pre-qualification requires you to submit very little information about your finances, often times resulting in a pre-qualification figure that is inaccurate. However, a pre-approval figure is based on more substantive financial information and thus, is a more reliable estimate of how much you can borrow. Pre-approval figures also place you in a better position to negotiate and indicate to sellers that your offer is solid.
- Your credit score. Your mortgage company will run a credit report on you, but it’s helpful if you also have access to this information.
- What type of mortgage to consider.
- Fixed rate mortgages. Over 75% of all home loans are fixed rate mortgages. The interest rate remains the same throughout the entire life of the loan. The biggest advantage of this type of mortgage is certainty - the homeowner knows exactly what the interest and principal payments will be for the life of the loan. Fixed rate mortgages are usually structured to last for a 15, 20, or 30 year period.
- One year adjustable rate mortgages. This is a mortgage loan in which the interest rate changes based on a specific schedule after an initial “fixed period.” This type of loan is considered significantly riskier because your mortgage payment can change from year to year in dramatic amounts.
- What a purchase agreement is. The purchase agreement sets the amount of the buyer’s offer and typically includes extra details such as which appliances stay, who pays closing costs, and when the buyer will take possession of the home. Most buyers also offer “earnest money,” which is typically a deposit equivalent to 3% of the purchase price of the house. This indicates their level of seriousness about the property.
- Getting the home inspected. Every buyer should have their potential home inspected. A licensed inspector should provide you with a detailed report listing the following items and recommending repairs:
- heating and cooling systems
- plumbing and electrical systems
- structural integrity of walls, floors, ceiling, roof, and foundation
- possible insect infestation
- condition of gutters, spouts, insulation and ventilation, major appliances, garage, etc.
- Purchasing homeowners insurance. You must purchase homeowner’s insurance. You cannot obtain a mortgage without it.
- Closing costs. Closing costs are the fees associated with the mortgage that are charged by lenders and third parties. The closing costs are traditionally paid by the home buyer, however a different structure can be stipulated in the purchase agreement. Closing costs are typically between 2% - 5% of the purchase price of the home.