By: Barry Dorans
When you purchase a business, commercial property or even a home, the last step is called a closing. Occasionally, I am asked why there is such a thing as a closing.
When you buy something that is mass produced, for example a cell phone, it is a fairly straight forward process. You check out reviews, compare pricing and eventually select the one you want, agree with pricing, pay for it and its yours. When you are buying a business, commercial real estate or even a home, they are not mass produced and the amounts involved are much larger so you need to take several steps to protect yourself.
The first step is to have a written contract that spells out exactly what you should be getting and what you are paying. That contract will normally give the buyer some time to do an investigation to make sure it is what it seems to be. That is called a due diligence or inspection period. When buying a home, the buyer hires an inspector to conduct an inspection of the home to see if there are any obvious defects that need to be accounted for. In buying commercial real estate, you can likewise hire inspectors but you also may want to check with the local governing body to see if there are any changes in the roads that may impact suitability of that location. When buying a business, you will likely want to have the books and records reviewed to make sure the business is as described. If things are not as they appeared, typically the buyer has the right to opt out of the deal prior to the end of the inspection period.
Once the inspection period has ended, it is time to do the final steps to prepare for closing. There are certain steps that are followed to minimize the risk that either side will be damaged. For example, in a real estate closing, the title company will check the real estate records to make sure that the person who is selling the home actually owns the home. A survey may be done to confirm that the home, the driveway, the swimming pool are all on property owned by the seller and not on a neighbor’s property.
As a final step, a closing occurs. Again, if you were buying an inexpensive item from a store, you would simply hand the money to a clerk, the clerk would hand you the goods and you would leave and be on your way. Since the dollars involved are much larger and the chance that someone could be cheated is higher, the buyer does not give the money directly to the seller, nor does the seller give the deed directly to the buyer. Instead, the buyer and/or its lender gives the money to the attorney who deposits it into their trust account. The seller or seller’s attorney then delivers the deed to the buyer’s attorney. Once the buyer’s attorney confirms that he has everything so that both sides will be protected, he makes a final confirmation that the property is still owned by the seller, he records the deed transferring the property to the buyer, then releases the money to the seller.
So, in the big picture, a closing is a series of steps designed to minimize the risk to the parties. Note that a closing does not eliminate all risks. For example, while the title records may make it appear that the seller owns the property, it is possible that a prior deed had been forged. To protect themselves against that loss, the buyer and lender often obtain title insurance. Lately, there have been a number of scams involving wiring of funds. The buyer may receive a hacked email suggesting that he wire the closing funds to what he thinks is the closing agent but instead is an unrelated third party. Whenever you receive wiring instructions by email, always follow up with a phone call to a number you know is from the right person. There have been numerous occasions locally where people have lost large sums of money by falling victim to hacked wiring instructions.
If you have any questions about a closing, whether it is a business, commercial real estate or residential real estate, be sure to consult with an attorney.