The purchaser needs to make sure that the property is protected against hazard and liability claims, with insurance that is effective as of the date of the settlement. Hazard insurance protects against physical damage to the property, such as by fire, wind, and similar types of damage. Liability insurance insures against claims arising from personal injuries: A ceiling may cave in and injure people or someone may be injured by equipment being used in the construction process. Insurance coverage is very important for the purchaser; however, the various types of policies are confusing and complex, as are the costs associated with the purchase of various types of insurance coverage. The purchaser will be well served by establishing a relationship with a well-informed and trustworthy Lehi Utah real estate lawyer who can assist the owner meet the insurance requirements of the property.
The purchaser needs to make sure that all applicable utilities are transferred to the name of the purchaser, effective as of the date of settlement. Unlike water and sewer service, which typically conveys with the property, all other utilities—oil, gas, electricity, and telephone—do not. The new owner is not liable for any delinquent utility bills owed by the former owner, except for delinquent water and sewer bills. The purchaser should be protected from the seller’s delinquent water and sewer bills by the title insurance policy.
This step is understanding what happens at the settlement itself. Typically, the purchaser and seller appear at the settlement agent’s office at an agreed-on time to sign all of the settlement documents. Lenders typically send the loan documents to the settlement agent to obtain signatures, with instructions as to recording, disbursement, and related requirements. Again, depending on local custom, the lender’s representative may attend the settlement, or the settlement may be conducted at the lender’s office.
The settlement statement and the deed are the central documents presented, discussed, and signed at the settlement.
The Settlement Statement
The settlement statement is a one-page, two-sided document that details all income and expenses connected with the settlement. The settlement statement shows the transaction from the perspective of the purchaser (referred to as the borrower) in the left column and from the perspective of the seller in the right column.
The top half of the front page shows the expenses to the purchaser— acquisition price, total settlement costs, property tax, water and sewer adjustments, and so on. Because property taxes typically are paid for a six-month or annual period and a settlement is held at one time, the purchaser must reimburse the seller at settlement for property taxes paid in advance by the seller. For example, if property taxes are paid through December 31 and a settlement is conducted on October 1, the purchaser must reimburse the seller for the prorated portion of the taxes that cover the period from October 1 through December 31. Conversely, if the seller has not paid the property taxes because they are not yet due by the time of settlement, then the seller must provide to the purchaser a credit equal to the amount of the prorated, unpaid taxes. For example, if property taxes in the applicable jurisdiction are owed for the period from July 1 through December 31 but do not have to be paid until September 30 and the settlement is held on August 31, the seller would have to provide the purchaser with a credit for the prorated, unpaid taxes for the period from July 1 through August 31. The prorated taxes owed to the seller by the purchaser are reflected in the top half of the settlement statement in the purchaser’s (left) column.
In the bottom half, the settlement statement shows the amounts paid by or on behalf of the purchaser—earnest money deposit, acquisition loan(s), any loan assumptions, any credits (including property tax credits for amounts owed but unpaid by the seller), and the balance of funds needed to pay at settlement for all expenses listed in the top half. The reverse side details all settlement costs—loan fees and related costs, reserves, settlement company and title insurance charges, governmental recordation taxes and charges, and any other costs that need to be paid at settlement. The total of all such settlement costs is carried over to the top half of the purchaser’s side of the front page.
The right column of the settlement statement shows the seller’s transaction. The top half shows the amounts owed to the seller—the acquisition price, prorated property tax adjustments, and so on. The bottom half shows deductions from the seller’s proceeds—settlement costs to the seller (carried over from the reverse side), payoffs of existing loans secured against the property, the prorated property taxes unpaid by the seller, and water and sewer charges not yet paid by the seller (the process described for adjusting property taxes applies to water and sewer adjustments), any credits to the purchaser, and any other deductions. The bottom half then shows the balance to be paid to the seller. The reverse side details all settlement costs to be paid by the seller—real estate commissions, any loan-related costs that the seller has agreed to pay on behalf of the purchaser, any governmental transfer or related taxes or charges to be paid by the seller, and any other expenses to be paid by the seller.
If there is only a borrower and no seller, because the transaction is for a refinancing loan, a construction loan, or some other type of loan, the settlement statement is limited to the left side; the right side is blank. Otherwise, the settlement statement is completed as described above.
The settlement agent is responsible for collecting all necessary information from the purchaser, the seller, the lender(s), the government, and other relevant parties, and for reflecting the income and expenses accurately on the settlement statement in the appropriate spaces. Ideally, the settlement agent should provide a draft of the settlement statement to the purchaser and seller in advance of the settlement; at worst, the draft is provided at the settlement itself. The purchaser and seller then need to review the draft, determine whether it accurately reflects the transaction as they understand it, and ultimately agree on the exact numbers to be shown on the signed settlement statement.
The purchaser and seller must decide whether they want to reflect on the settlement statement other relevant aspects of the sales transaction, such as security deposit adjustments, proration of rents, repair credits or adjustments, and similar issues. For example, with the sale of occupied property, the seller must convey to the purchaser all security deposits plus applicable interest and prorated rents collected in the month of settlement. The sales contract should identify how to handle these matters; in that event, the sales contract controls. However, sales contracts often do not address such issues or, more often, address them in an imprecise fashion. As a result, the purchaser and seller must decide at, or shortly prior to, settlement how to handle these matters. With respect to security deposits, state or local law normally dictates at least some of the major requirements, such as the minimum interest rate to be paid on security deposits, what circumstances justify deductions from the security deposits, and so on.
Normally, the purchaser and seller decide whether to reflect the security deposit adjustments on the settlement statement itself. Typical reasons for showing them on the settlement statement include having the whole financial transaction detailed on one piece of paper and reducing the cash the purchaser must produce for settlement (the security deposits may be shown as a credit against funds the purchaser would otherwise have to produce). A typical reason for not showing them on the settlement statement is that, if the adjustments have not been fully calculated by the time of settlement, they can be finalized between the purchaser and seller after the settlement is completed without otherwise delaying the settlement.
Besides the settlement statement, the other key document signed at the settlement is the deed of conveyance, which may be a general warranty, a special warranty, or a quitclaim. A general warranty deed warrants that the seller/grantor generally has good title and conveys good title to the purchaser/grantee. A special warranty deed warrants only that the grantor had good title while the property was owned by the grantor. A quitclaim deed means that the grantor conveys only such title as the grantor has, which may not be good title at all.
As a practical matter, as long as the purchaser has a title insurance policy, the type of deed is irrelevant to the purchaser. It only has meaning to the extent that there is a claim and the title company seeks indemnification from the grantor. That is, as long as title is insurable, the title company will issue a title insurance policy regardless of the type of deed that’s used. The types of problems that would make a title uninsurable (again, regardless of the type of deed used) include a break in the chain of title, that is, a deed to a former owner which was from a party who did not have clear title to the property. For example, an owner dies and leaves the property to three sons, but the deed to the next owner is signed by only one of the sons. That would cause a break in the chain of title because the other two sons, who did not sign the deed, would still have an ownership interest in the property.
Another common type of defect that would make a title uninsurable would be a lien that was not released. The lien could be a deed of trust or mortgage, a judgment lien, a mechanic’s lien, or a tax lien. The deed of trust and the mortgage are discussed in the next paragraph. A judgment lien is a claim against an owner’s property, based on a successful lawsuit against the owner, which resulted in a judgment against the owner that required the owner to pay money to some other party. The judgment is filed as a lien if the defendant (owner) fails to pay the judgment creditor the amount of the judgment. A mechanic’s lien is a lien against an owner’s property filed by a contractor, subcontractor, or materials supplier, as a result of that party’s not being paid for improvements made to the property. Each state has its own judgment lien and mechanic’s lien laws, and the procedures and rights of the various parties differ according to the particular law. Finally, nonpayment of federal, state, or local taxes of any type (income, property, corporate, withholding, and so on) constitutes a lien against the owner’s property. Any of these kinds of liens, if not removed, would make a title uninsurable.
Other Settlement Documents
In addition to the deed and the settlement statement, the settlement agent will record all lender documents, such as the deed of trust and financing statements, and typically will have the seller sign a real estate transaction information return, a nonforeign affidavit, an owner’s affidavit, and a settlement statement addendum. Different jurisdictions use different types of lender security instruments. The most common are the deed of trust or the mortgage. They share the basic concept that they give the lender the right to foreclose on the owner/borrower if the borrower defaults under the terms of the loan. They differ primarily in the procedures that the foreclosing lender must follow and the rights granted to the borrower. In particular, foreclosure under a mortgage requires a judicial proceeding and foreclosure under a deed of trust is a nonjudicial proceeding.
Get A Real Estate Attorney
Utah real estate purchase requires many documents to be made depending on the nature of the property involved in the transaction. There is no one document that can be used for all real estate transactions. Each transaction is different. Never attempt to prepare these documents or use the forms that are available online. Always use the services of an experienced Lehi Utah real estate lawyer. Whether you need help with an easement, quiet title action, eviction, boundary dispute, partition action, lawsuits, litigation, or other real estate matter, we can help you.
Lehi Utah Real Estate Attorney Free Consultation
When you need legal help for a real estate matter in Lehi Utah, please call Ascent Law LLC (801) 676-5506 for your free consultation. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506