Four Things That Must Be Done in Conjunction with the Closing
Once you have scheduled the closing date, the following four things must be done in conjunction with the closing:
1. Have all utility meters read on the day before closing. When you are closing on the purchase of a property under option, on the day before the closing, have all the public and private utility companies providing services that the property owner is responsible for paying read their meters. You must notify utility service providers that the property is under new ownership so that you do not get billed for utility services that were provided to the previous owner.
2. Have the property taxes prorated using the 365-day method. The only item that cannot be calculated and included on the HUD 1 Settlement Statement at the time it is signed by the optionor and optionee is the amount of the property tax prorations. Property tax prorations cannot be calculated until the actual sale date is known. However, I always stipulate on the settlement statement that the property taxes are to be prorated using the 365-day method. This method of proration is based on the assumption that every year has 365 days. For example, if the annual property tax bill for a small rental property is $4,200 and the seller owned the property for 270 days, the seller ’s prorated portion of the tax would be $3,108 ($4,200 ÷ 365 days = $11.51 per day × 270 days). However, if the property taxes for the current year cannot be ascertained, stipulate in the closing statement that any tax proration based on an estimate shall be readjusted on receipt of the tax bill.
3. Close the transaction on the last day of the month. If you are closing on the purchase of any type of rental property, I recommend that you close the transaction on the last day of the month. This way, you will be in possession of the property on the first day of the month when rental payments generally are due. And you can collect rental payments and initiate eviction proceedings against tenants who do not pay. In addition, closing the sale on the last day of the month eliminates the need to prorate rental payments.
4. Conduct a final walk-around inspection of the property on the day of the closing. On the day of the closing, do a final walk-around inspection of the property to double-check for any last-minute changes to the property that could adversely affect its value. I suggest that you do as I do and bring a camera along and look for:
* Condemnation notices posted on the property.
* Bodies of standing water on the property that cannot drain.
* Visible signs that the property is infested with termites or rodents.
* Visible signs of environmental hazards on the property.
* Code violation notices posted on the property.
Please listen to what I am telling you here about doing a final walk-around inspection on the day of the closing. I will never forget the time that I pulled up in front of a small commercial property one hour before the closing and was met with the pungent smell of raw sewage. Upon further inspection, I found a pool of sewage behind the building. Later on at the closing, I found out from the owner that whenever the municipal sewer line backed up into a section of old Orangeburg sewer pipe on the property, which had been ruptured by root intrusion, the rear of the property became an open sewer.
I took a couple of pictures of the mess with my Polaroid camera and headed off to the closing. Needless to say, I was not in the best of humor when I confronted the owner and showed her the pictures. Her response was: “Oh, I thought I told you about that; it only happens when the city sewer backs up.” I proceeded to calmly tell her that the deal was off unless I received a $1,500 sewer repair credit on the spot. She quickly agreed to reduce the sale price of the property by $1,500.
We went ahead and closed on the sale of the property, and I had the sewer line replaced with six-inch PVC pipe for $1,200. The point that I want to make here is that if I had not taken the time to do a walkaround inspection on the morning of the closing, I would have been out of luck. And my only recourse would have been to take my chances and file a lawsuit against the owner for failure to disclose this health hazard when she completed and signed a property disclosure statement at the same time she signed the option agreement.