The real estate market has been drastically affected by the COVID-19 pandemic. However, gap closings continue to be used in commercial real estate transactions and are likely to be used soon. They’ve already had a rather long tenure in the real estate industry and are predicted only to grow further.
They’re deemed a commercial real estate necessity, specifically because of the situations we’ve faced for the past 18 months. Any real estate agent you work with must understand the issues and virtues of gap closing.
What is gap closing in real estate?
Gap closings are transactions with an interval of time between the documents and funds being delivered, and the transaction is recorded. Like traditional closings, real estate agents issue a title policy to ensure the title is from the most recent title commitment date. The title insurance company insures the “gap” between the closing date and the date where documents are recorded.
Gap Closings are important as they let there be a gap or space for recording lags. In a “gap closing,” which is a more common method, all the parties deposit all closing deliverables, including the buyer’s funds, in escrow with the title company and the title insurance company issues insurance in favor of the buyer, whereby the title is now the buyer’s.
In gap closing, the funds are only released to the seller if all the conditions set in the contract are satisfied and completed along with the condition of the insurance company’s irreversible commitment to insure the buyer’s ownership.
Why does a gap occur in closing?
The Gap in recording may occur due to several reasons. Most important is that many states have a recording lag in which documents aren’t processed or recorded even after the documents are received. This “gap” can range from a duration of one or two days to several weeks.
In the event of the pandemic, this gap has only increased. Most offices, including the title company, are not working full-time, and if they are, that work is generally working from home, which comes with its own set of delays. These lags generally occur in commercial real estate transactions in which the customer or buyer is from another state and the property is another, and the seller is an entirely different state.
In such cases, the buyer’s title company generally convenes the closing in the state where the buyer is present. In these cases, this title company is responsible for all the data and documentation of the transaction.
What is a gap indemnity?
Since the title company is providing title insurance for the transaction, they request an indemnity. An indemnity is a sum of money used as financial compensation if anything goes awry with commercial real estate transactions or any transactions.
They’re more common in commercial real estate because these transactions are usually greater and riskier than other ones. The gap indemnity is generally requested from the buyer or seller to minimize the risk between a closing and the actual recording of the property.
What is a gap coverage endorsement?
The Gap Coverage Endorsement is issued as an endorsement of the commitment. It ensures the buyer or seller against any impediments recorded between the effective date of the commitment and the date the title company records the deed.
Some title companies provide this type of endorsement immediately, while others don’t. These are some of the most important factors you need to consider when looking into gap closings.
What is the risk in gap closings?
In gap closings, the main risk is that things can go very wrong between submitting documents and when the title insurance is recorded. New information may come out against the seller or the property that the buyer was not aware of. Such a situation could cause a fair bit of annoyance for the buyer and a significant challenge for the title company providing insurance. The burden will likely fall on the gap insurance company, and the buyer will have to settle for lower quality than initially discussed.
In the pandemic, there’s also the risk of an extended gap period that makes things more difficult for companies conducting title insurance. Many believe that gap closings are better for the current climate, but it also comes with a fair risk.
The benefit of gap closings is that certain states allow the clients to file their e-documents to be recorded. More and more states are likely to adopt these processes as it’s more convenient given the current climate. Additionally, the pandemic limits the idea of a record completing on closing day, which is why gap closings are likely to gain traction in the coming year.
Why are gap closings and gap coverage more common now?
The reality of the COVID-19 pandemic, the existence of a normal closing, is no longer a possibility. It is easy and more convenient for people to drop documents so that the government can tend to them as they see fit. It reduces the burden from both the buyers and sellers and leads to more work for title insurance companies for providence.
However, the buyers and sellers still have a certain responsibility to complete their documents and sign gap indemnities before submitting the documents, so they’re not wasting valuable time.
Who bears the risk in gap closings?
In most states, it is customary for title companies to bear the risk of real estate transactions. The title insurance company minimizes the risk posed by the gap by doing one or more of the following:
- Conducting a title rundown immediately before the transaction closes to minimize the size of the gap period.
- Sending the documents for recording either by personal or overnight delivery.
- Obtaining a gap indemnity from either the seller or the borrower to indemnify the title company.
In the event of COVID-19, in gap closing, title insurance companies may not want to accept gap indemnities and issue title insurance when the recording date is constantly shifting. There is also the added issue of a greater risk of intervening liens as the gap period lengthens. However, let’s say the title insurance company accepts the seller’s gap indemnity and is okay with issuing the title insurance, the buyer’s may not want to close the deal without having information on the tax liens of the seller and when it may have to pursue claims against its title insurance company to clear title of liens or defects.
The seller typically bears the greater risk that the title insurance company won’t follow through on issuing title insurance and that this condition precedent remains unsatisfied. However, even if this is met, the buyers still may not want to buy the title, given that the title insurance company won’t provide gap coverage.
Additionally, there is also some risk on the seller’s end. The title insurance company usually asks the seller to indemnify the title company between the checking date and the recording date. Yet, to provide a gap indemnity, the seller has to be financially capable. If the property is the only one the seller has, then the title insurance company will likely ask the parent company of the real estate owner for a gap indemnity.
Moreover, the buyer’s counsel needs to prepare a closing instruction letter to the title company prior to closing. This letter ensures that the title insurance company has to meet the buyer’s conditions that the buyer and seller agreed upon between the seller, buyer and the title insurance company. This practice ensures that the buyers will receive the property as agreed upon, and the seller and the title insurance company can’t intervene otherwise.
What are some things that buyers shouldn’t do after closing on a house?
The gap between closing and purchase is a difficult time to spend, but here are some things that you should not partake in after making a purchase.
- Do not check up on your credit report.
- Do not open new credit.
- Do not close any credit accounts.
- Do not add to your credit cards’ credit limit.
- Do not cosign a loan with anyone.
- Do not take out any payday loans.
- Do not ignore questions from your lender or broker.
- Do not forget to undergo a home inspection.
- Do not get on a renovation project yet.
How do I know when to close a real estate deal?
There are certain factors you should look into before you close a deal.
Know what you’re buying
Make sure you take your time and investigate the property thoroughly. This investment is the biggest investment you’re going to make, and it should be something you’re satisfied with.
What loan am I signing up for?
Typically, when you’re buying something like property. You’re likely taking out a loan. Understand the interest rates and the inner workings of the loan. If you’re taking out another mortgage, make sure you know how you’ll pay for it practically?
What are the financial aspects of this decision?
You need to know what bodies are involved, what processes are going to occur and how much money you will spend on your new purchase overall. Knowing this will help you prepare for the deal and understand the kind of money commitment you’re likely getting yourself into.
Are the utilities working?
It would be best if you had running water, electricity and gas in place. These are the most basic utilities that should be functioning when you buy a house or property. Ensure that you have addresses, account numbers and all contact information for the following:
- Utilities (electric, gas, water, trash)
- Property taxes
- Homeowner’s insurance
Was the contract followed perfectly?
You may have negotiated some things with the seller regarding the property, including repairs and refurbishments. Has the title insurance company ensured that these are followed? Have I been given the completed work? Have all the conditions been met, or is the seller trying to pull one over me?
What are my closing costs?
Closing costs are sure to annoy you immensely when you’re finally done closing your property, but as a reminder, here are some of the charges that you may have to pay.
These charges can and do vary widely, but don’t be surprised to see these charges:
- Escrow fees — Who will pay escrow fees (buyer or seller) is usually decided during the negotiation on the sale. Splitting these fees is common.
- Credit check — Yes, you have to pay for your lender to verify your loan-worthiness (seems like a cost they might absorb, but alas, no).
- Document prep fee — Again, one might assume that the mortgage and escrow companies could pay their employees to prepare your documents, but you get the honors once more.
- Title insurance — A lender won’t give you any money without guaranteeing its interest in the property. Title insurance covers you in the unlikely event that there’s a blemish on your property’s title history.
- Miscellaneous fees — A courier is employed to transport your paperwork from the title company to the escrow company. Money is wired from your lender to your seller’s account. Your lender incurs an underwriting fee and passes it on to you. Count on a few hundred dollars worth of “misc. fees.”
Gap closings can be a very long and arduous process, but they provide a fair bit of protection for all the parties involved in it. They protect the buyer, seller and the insurance company. Furthermore, they protect the buyer the most as the buyer can always opt-out of the deal if anything goes awry in the gap insurance process.
They are also convenient in the current climate of the pandemic as it allows for e-filings and doesn’t put an extra burden on the buyers or sellers for the recording of their documents. The title insurance company can easily transfer the titles to the buyer without excessive effort.
Gap closings can be a really simple way to close your deals if you learn to understand the process and take the proper measures to save yourself from any real fiscal damage.