Closing Disbursement Issues


Just when you are ready to celebrate the sale or purchase of your client’s home, the phone call comes. Sometimes it’s the settlement statement that hits you. The Joint Committee of the Cincinnati Area Board of REALTORS® and Cincinnati Bar Association has created a series of “what-ifs” designed to provoke discussion. The Committee has kicked around responses over the past several meetings and the following provides our thoughts on each scenario. What if it happens to you?

Scenario 1

You, the buyer’s agent, are involved in a difficult negotiation for a buyer. It has come down to a homeowner warranty and the listing agent suggests that the two of you share in the cost. She does not want her seller to know because her seller has not only refused to pay for the warranty, but has also told her that he does not want her to participate in the transaction in any way. She wants to do it “under the table” so that neither the buyer nor the seller knows about what happened. What would you do?

Committee Thoughts: “Under the table” has such a nasty ring, doesn’t it? There’s a reason for that! The buyer’s agent might sweetly suggest that the listing agent tell the seller he can “buy” his house back! If you do decide to split the cost, it must be disclosed to all parties and must appear on the settlement statement. Don’t be tempted just to get the deal done!

Scenario 2

Negotiations are going along rather smoothly on a home purchase when suddenly there is an impasse. The parties to the contract are $2,000 apart and the seller has graciously decided he wants the listing and selling agents to “chip in” the difference. You, the listing agent, are in the business of selling homes, not helping people fund their purchase. The selling agent reacts strongly saying she showed the home under a cooperative agreement in the MLS offering a set amount of compensation to the procuring broker and she knows that if this purchase does not work out (especially in this market), she will sell them something else. As the listing agent, how would you address this scenario with your customer? As the selling agent, what would you say to your client?

Committee Thoughts: The first response from the listing agent to the seller should be that the commission for the sale of the house was negotiated at listing time. This is certainly not the time to renegotiate that deal! As the selling agent, the MLS shows the set amount of compensation, so why should you take a hit on your commission. Both agents should contemplate the “24-48 hour rule” and take a step back from the deal. The listing agent should start showing the property again and the selling agent should start showing the buyer other properties. Time might heal the $2,000 difference between the parties!

Scenario 3

Betty Buyer, the purchaser for one of your listings, is working with Sam Slick (of Slick Loans) to get 100% financing. One of the many calls you receive from Sam is to suggest you convince your seller to increase the sale price and take back a “forgiveable” second mortgage. Sam explains that the appraiser has indicated that the comparables in the area are favorable and allow for a higher mortgage amount if he can justify it through a price increase. What should you do?

Committee Thoughts: Good old Sam Slick! Does this still go on? Committee’s first response was “Run!” Where to begin? The end lender must be aware of the “forgiveable” second mortgage and agree to it! Everything needs to be shown on the settlement statement. It doesn’t matter if that’s the way Sam has always done business! He may not be in business for much longer!

Scenario 4

You get through the crisis in Scenario 3 and when you get to closing, you notice that the final settlement statement does not match the draft you received earlier in the day. The earlier draft showed an entry on the seller’s side for $1,000 in repairs made payable to Rusty Nayls. Betty Buyer and your seller had agreed that $1,000 was to be set aside from the seller’s proceeds, made payable to Rusty, so the work could be done by Rusty after closing. Now, there is no entry for Rusty and the seller’s proceeds are $1,000 higher. The closing agent tells you she has cut two checks to the seller: one for $24,560.35 (the bottom line figure on the earlier settlement statement); and the other for $1,000. The closer asks your seller to endorse the check and make it payable to Betty. Is there a problem?

Committee Thoughts: Is there a problem???!!!! Assuming that Rusty Nayls is a contractor, why isn’t the check payable to Rusty? Does Betty have an uncle who is a handyman, can fix it cheaper and she can pocket the remaining money? If Betty is to receive a check, it must be listed on the settlement statement and must be approved by the end lender. The best thing to do—give Betty a crash course in Loan Fraud 101!

Scenario 5

That wonderful closing day is approaching and you, the listing broker, do not plan to pay the cooperating broker in an MLS-listed transaction, a commission at closing. The cooperating broker demands to be paid saying that he will instruct his buyer not to close. You suggest that the cooperating broker advise his buyer to seek legal counsel concerning any decision not to close and also recommend the cooperating broker seek legal counsel as well! It is the day before closing and the cooperative broker has just received the sample settlement statement and there is no commission listed for him! He circles the commission box, writes a reminder to you….”No commission, no sale” and faxes it to your office. What do you do?

Committee Thoughts: Wow! First, the offer of compensation to cooperating brokers in MLS does not require commission payment at closing. Next, is there a reason the cooperating broker is not to be paid at closing? Maybe the listing agreement provides that the seller will pay the listing agent outside closing? Maybe the deal is a short sale and the listing broker again is to be paid outside closing? Maybe the seller wants the settlement statement to indicate that their obligation to the listing broker has been satisfied completely by making full payment of listing commission owed, per the listing agreement, paid to the listing broker? Maybe the listing broker does not believe that the cooperating broker is the procuring cause? If you are a member of a Board of REALTORS®, regulations state that any commission dispute between brokers must be addressed by the Professional Standards Committee!

Scenario 6

And finally the dreaded final walk-thru the morning of the closing! The seller has moved out and in doing so has managed to tear a large portion of the flooring in the laundry room! The buyer (feeling a little buyer remorse) gets hysterical and wants the floor replaced. The seller, when contacted, says that the entire floor does not need to be replaced, but agrees to fix the tear. How do you handle this situation?

Committee Thoughts: This is best handled between buyer and seller and the very best solution is to get an addendum outlining the situation and fix, let the end lender know about the addendum and show everything on the settlement statement.

We hope these have not been real-life situations for any of you! However, these types of situations do come up on occasion and you need to be prepared to handle them in a legal manner. If a questionable proposal is made to you or your client, always remember that an attorney experienced in real estate issues is the best source of information regarding your specific situation. So, protect yourself by seeking legal advice. In closing, we offer this succinct thought…perhaps a golden rule! If it’s not on the settlement statement and hasn’t been approved by the end lender, there’s a problem!

June 2007
REALTOR/Lawyer Committee
Filisha Norman, CABR Chair
Sarah McDaniel, CBA Chair