Definition
A closing statement (also called a settlement statement) is a detailed financial document prepared at the conclusion of a real estate transaction. It itemizes all costs, credits, prorations, loan charges, and net proceeds for both buyer and seller.
Purpose
The closing statement ensures transparency by clearly showing:
- Purchase price
- Earnest money deposits
- Loan amounts and lender fees
- Title, escrow, and recording fees
- Prorated taxes, rents, and utilities
- Net cash required from buyer
- Net proceeds to seller
Common Forms
- HUD-1 Settlement Statement: Historically used in many transactions.
- Closing Disclosure (CD): Used in most consumer mortgage transactions under federal regulation.
- Commercial Settlement Statement: Customized version used in investment property deals.
Prorations
Prorations allocate income and expenses between buyer and seller as of the closing date. Common prorations include property taxes, prepaid insurance, rents, and utility expenses.
Why It Matters to Investors
- Capital accuracy: Confirms actual cash-to-close and equity invested.
- Return calculations: Final costs impact basis and projected yield.
- Audit trail: Serves as permanent financial documentation.
- Risk control: Identifies unexpected fees or misallocated credits.
Common Pitfalls
- Incorrect prorations
- Unverified payoff amounts
- Double-counted deposits
- Unreviewed lender fees