When buying a property or selling an asset, the paperwork can seem overwhelming. One of the most important documents in the closing process is the preliminary settlement statement. This document is provided by the title company one to two weeks before closing and provides financial details outlining the costs, fees and credits buyers and sellers can expect to pay or receive at closing. In this blog, we’ll outline what to look for before officially finalizing a deal.
A preliminary settlement statement will include:
- Purchase price of the property: The amount the buyer agrees to pay and the seller agrees to accept before the transfer of ownership.
- Loan amounts and payoffs: These monies reflect how existing debts are being settled and how financing is being used. The loan amount refers to the new financing being secured by the investor to help fund the purchase of the asset, while the payoff is the repayment of an existing loan that the seller has on the asset. Sellers must pay off all liens and loans before transferring clear title.
- Prorated property taxes: These are divided between the buyer and seller and are a standard part of closing to ensure both parties pay their fair share. The seller will pay taxes for the portion of the year before closing, while the buyer pays their portion of the year after closing. When it comes to triple net leases (NNN), if tenants pay taxes under leases, the buyer and seller should prorate based on economic benefit, not just calendar days.
- Title insurance fees: The title insurance fees are the cost of protecting the buyer (and sometimes the lender) against defects in title, such as liens, encroachments or ownership disputes. However, unlike residential deals, title fees in commercial transactions are often negotiated — who pays what may be laid out in the purchase agreement.
- It’s important to always review the title commitment and endorsement requirements in advance as unexpected endorsement costs can add thousands to the settlement charges.
- Escrow fees: These are charges paid to a neutral third party, like the title company, that manages the closing process. Title holds the money and documents, in trust, until all conditions of the sale are met.
- Commissions: These payments are made to the brokers who help facilitate the sale of the property. These fees are typically exchanged at closing. They are often negotiated on a flat fee or custom basis, and not always as a percentage of the sale price. Commercial brokers may have different standards or co-brokerage agreements.
- Any credits or concessions: The financial incentives or adjustments in the transaction are often used to sweeten the deal. They appear on the settlement statement and can benefit either the buyer or seller, depending on the agreement.
- Estimated cash to close (buyer) or cash proceeds (seller): The bottom-line numbers. They show what the buyer needs to pay and what the seller walks away with at closing. It is a summary of all debits and credits from the transaction. This is the net amount of money after accounting for prorations such as tenant deposits, rent rolls, CAM reconciliations, etc.
During the review period, the buyer’s representative or legal team must examine all the information, as there may be missing details or information that must be corrected or changed. Mistakes can happen, mostly because of a part of the agreement that the title company is not aware of. It’s important to iron out any issues and ensure all questions are answered ahead of signing the final settlement statement. Working with a trusted team of real estate professionals removes the guesswork and ensures a smooth closing process.
4 reasons why a preliminary settlement statement matters
1. Transparency
It gives both parties a clear picture of what they’re financially responsible for, helping to prevent surprises at closing.
2. Error checking
Verifying the accuracy of the information is paramount. Ensuring that all the information on the settlement is true provides a chance to review and fix potential mistakes. Error checking matters because it avoids financial losses (calculation discrepancies of taxes, rent etc., can potentially shift hundreds of thousands of dollars). It prevents legal disputes, ensures contract compliance, and lender and title company requirements, while preserving trust and reputation, which means everything in commercial real estate.
3. Budget planning
For buyers, it helps confirm how much cash is needed at closing. For sellers, it estimates their net proceeds after all costs are deducted.
4. Legal and lender requirements
Lenders often require a preliminary settlement statement to ascertain all fees are properly disclosed, plus it’s a step toward the legally binding final closing disclosure.
Landmark Title’s team of professional commercial escrow and title officers manages the closing process, which includes preparing the preliminary settlement statement. Landmark Title works with CRE brokers, real estate investors, developers and builders on both commercial and residential real estate transactions. Dedicated to personalized service, the Landmark Title team is readily available to answer questions. Get in touch here to learn more.