THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Saturday, October 26, 1996 TAG: 9610250455
SECTION: REAL ESTATE WEEKLY PAGE: 04 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY CHRIS KIDDER, SPECIAL TO REAL ESTATE WEEKLY
LENGTH: 180 lines
Closing: It's the point in a real estate transaction when all the details of the deal come to fruition. Ownership transfers from the seller to the buyer.
The mortgagor and mortgagee finalize their financial commitment. Money changes hands. Whether you're the seller or the buyer, the wait is over; it's time to celebrate.
But put the champagne on ice for a minute while you read through the mountain of paperwork a typical real estate closing (or settlement) entails. Keep a clear head as you sign your name to those contracts, addenda, settlement statements and deeds.
This is also a point of no return where mistakes and omissions can be costly.
Both Virginia and North Carolina are wrestling with issues that affect how real estate closings are handled. Although the issues are different, decisions in either state might cost consumers more money. Consumer benefits from the proposed rule changes are being debated.
The typical residential closing involves a meeting of sellers, buyers and their agents. ``Agents'' typically means any real estate agents involved in the deal and an attorney representing the buyer and lender or a title company as a disinterested third party handling the money and paperwork for all parties.
Sellers occasionally hire their own lawyers. And, in some cases, a representative from the lender may also be present.
In North Carolina, buyer's agency is a relatively new practice, so most real estate agents still represent the seller; in Virginia, it is common to have both a buyer's agent and a seller's agent present at closing.
Third party closings are common in Virginia. In North Carolina, they are rare in residential real estate settlements because the law requires attorneys to prepare and certify most of the settlement documentation.
The settlement meeting itself is more tradition than legal requirement. Closings can - and do - take place with one or more of the parties absent. When buyers and sellers live outside the area, as is often the case with resort properties, the sale is usually consummated without ceremony by real estate agents and attorneys or a third-party closing agency.
The important work needed to close a real estate deal has already been done at the time of closing.
Title to the property being sold has been searched and any defects noted; a survey defining the property has been completed; terms of sale and its financing have been agreed upon; title insurance secured, and a statement divvying up taxes, assessments, settlement costs, attorney's fee, brokerage commissions and other expenses prepared.
Generally, because of lender requirements, the average home buyer is required to rely on professionals to perform this work. At closing, the buyer and seller - or their agents - sign off on what's been done.
In the typical residential closing, a buyer will be given a couple dozen different documents - 50 or more pages of paperwork - to read and sign. The documents are wordy (by legal necessity), sometimes irrelevant (but required by the federal government anyway), and filled with enough heretofores, thereins and whereofs to put any Elizabethan playwright to shame.
Even a speed reader would be hard-pressed to read and comprehend every page under the circumstances of the settlement meeting.
The most costly and damaging mistakes that can occur at closing involve deeds, liens and the quality of the title search.
A defective title could mean that a buyer doesn't own his or her property. An overlooked lien could give another party the legal right to sell the property to satisfy the debt of a previous owner.
An incorrect property description might change the physical boundaries of the property purchased; at worst, it could invalidate the entire transaction.
Title insurance typically covers the insured property value when a loss due to defective title is incurred, but it does not cover other costs associated with the loss. And, in any case, many home buyers carry only enough title insurance to cover the lender's investment.
Few buyers (or sellers) are trained to do title searches or property surveys; few know enough about double-entry bookkeeping and real estate practice to prepare a settlement statement. Consumers trust the professionalism and accuracy of their closing agents because they have little choice.
Exactly whom consumers should trust in these matters is at the heart of debates currently underway in both states.
This month, the Virginia State Bar Council recommended that the Virginia Supreme Court rule that only attorneys can supervise real estate closings. A majority of council members agreed that a real estate closing involves the practice of law, and while the recommendation would not require lawyers to be physically present, they would need to be available to answer questions.
This recommendation, if adopted by the state court, would overturn a 1981 rule specifically allowing non-lawyers to handle closings. Since 1981, title companies have gained an increasing share of the settlement market.
Under the 1981 rule, title companies - which are normally involved in the real estate transaction as the provider of title insurance policies - and other third-party lay agencies are allowed to do title searches, issue an opinion of title upon which an assurance of good title is based, prepare settlement statements and disburse funds.
The company's fee for this service is generally paid by the buyer. If Virginia adopts the lawyers-only rule, it will be one of the few states to do so, although others, including North Carolina, have a de facto lawyers-only closing practice. Title company and other lay agency closings have been the rule in Western states for many years.
Proponents argue that the rule change will give consumers added protection. They argue that there is well-established precedent making attorneys both ethically and financially responsible for errors in real estate transactions. According to some, lay agencies aren't legally bound to act in the consumer's best interest.
Jarrett Shaffer of Shaffer Title & Escrow, Virginia Beach, one of the first Tidewater firms to enter the third-party closing market, disagrees. Title companies are required to carry errors and omissions insurance, he says; lawyers aren't and often don't.
Statistics may not exist to support the idea that lawyer-supervised closings have a lower loss ratio than non-lawyer closings. Lawrence Kirwin, Corporate Development Services in Philadelphia, compiles loss information for title insurers but says he knows of no source tracking title losses in this manner. There are too many variables.
``An attorney is not going to protect the consumer anymore than a title company would,'' says Shaffer. ``We're in our 7th year of doing settlements and, to date, there's been no claim against us.''
But many title company representatives believe that title insurance premiums are indicative of past losses. And that North Carolina's premium rate of $2 per $1,000, the lowest in the nation, is due in large part to the state statute requiring lawyers (and only lawyers not associated with the title company) to issue opinions of title.
Opponents of the Virginia rule change say it will create a lawyer monopoly and drive up the cost of closings without good cause.
The controversy in North Carolina concerns whether an attorney may represent the buyer, the lender and seller at a real estate closing.
This issue, a legal ethical question, parallels recent rumblings in the real estate profession over agency disclosure. With the encouragement of the National Association of Realtors, North Carolina now requires real estate agents to give prospective customers a written statement explaining representation.
According to Woody Harrison, an attorney member of the North Carolina Land Title Association, North Carolina lawyers will probably end up with a similar disclosure requirement for real estate closings.
State law doesn't specify whether an attorney can represent both buyer and seller (although it does specifically allow joint representation of the buyer and lender).
Common practice has attorneys preparing deeds for sellers, providing settlement statements reflecting sellers' debits and credits and paying off sellers' mortgages to provide clear title to buyers.
``It was assumed you could do it as long as no conflict of interest was apparent,'' says Harrison.
It is generally agreed that this practice saves everybody time and money - until buyers and sellers become adversaries, at which point attorneys need to clarify for which side they work. But lawyers disagree about the need for step-by-step instructions from the state on how to carry out this ethical responsibility.
The N.C. State Bar issued opinions this year aimed at clarifying this issue. The rulings were written with the assumption that buyers and sellers are always adversaries but allowed that attorneys could, as an accommodation to the buyer, provide services to sellers without providing them with legal representation.
The opinions caused an uproar among the state's real estate lawyers who charged that the clarifications raised more questions than they answered. The opinions were withdrawn shortly after they were written.
At a real estate closing, argues Harrison, the seller and buyer are usually not adversaries: Everyone's goal is to have the settlement go as smoothly as possible. In most cases, terms of the sale and financing have been worked out before the attorney is brought into the transaction and the seller doesn't need legal advice at this point.
The withdrawn opinions would lead to more sellers demanding separate - and unnecessary - representation, says critics within the legal profession. Even attorneys fear that involving other lawyers will only escalate costs and time.
State Bars (regulatory agencies in both states that license attorneys, not to be confused with State Bar Associations, which are trade organizations representing a voluntary membership) are not directly accountable to the public and it's rare when their deliberations get much public scrutiny.
Both state's real estate settlement arguments rest, publicly at least, on one premise: Doing what's best for the consumer. But consumers might prefer the position taken by the Virginia Association of Realtors on the lawyers-only rule recommendation.
``We support choice in the settlement process,'' says VAR lobbyist Teresa Thomson. ``We feel it should be the consumer's choice.'' ILLUSTRATION: [Cover, Color illustration]
JANET SHAUGHNESSY
The Virginian-Pilot by CNB