November 7, 2024 - Sonic Loans

In real estate, “closing” generally signifies the final steps in a property transaction, where funds are exchanged, documents are signed, and property ownership is officially transferred. However, not all closings are created equal. A “dry closing” is a type of real estate closing in which all required documents are signed, but the funds and property title do not transfer until later. While it might seem counterintuitive, a dry closing is often necessary due to specific circumstances that delay the completion of the transaction.

This article provides an in-depth look at dry closings, how they differ from traditional closings (often called “wet closings”), and why they might be used. We’ll also explore the pros and cons of a dry closing and situations in which one may be required.

What is a Dry Closing?

A dry closing, also known as a “dry settlement,” is a closing process in which all the documentation required to complete a real estate transaction is signed. However, the funds and title are not immediately transferred. In other words, the transaction is officially finalized once the money is disbursed and the title is recorded.

In states permitting dry closings, the parties agree to sign the necessary paperwork. Still, the finalization is delayed, often due to pending funds or documentation. This type of closing is relatively common in certain states. In contrast, others have stricter regulations that require the transaction to be fully completed at the time of signing, known as a wet closing.

How Does a Dry Closing Work?

In a dry closing, the buyer, seller, and sometimes the lender come together to sign all required documents, similar to a standard closing process. However, unlike in a wet closing, the transaction does not conclude on the signing day. Here’s how a typical dry closing process unfolds:

Document Signing: Both parties sign all necessary documents, including the deed, loan documents (if applicable), and other paperwork required by local laws and regulations.
Funds Not Transferred: The buyer’s funds and other financial resources (such as the lender’s) should be immediately disbursed. This means the seller still needs to receive payment at this stage, and the buyer must still obtain full ownership of the property.
Title Not Recorded: The title transfer is delayed since the transaction is still being determined. The title company typically holds onto the signed deed and other related documents until all conditions of the sale have been met.
Completion Upon Resolution: Once all necessary conditions are met—such as the disbursement of funds or the receipt of outstanding documents—the title is recorded, funds are released, and property ownership is officially transferred to the buyer.

This approach allows the closing process to move forward despite delays. However, it’s important to note that until the funds are fully transferred, the buyer does not have complete ownership rights to the property.

Dry Closing vs. Wet Closing

The primary difference between a dry and a wet closing lies in the timing of the transaction’s completion:

Dry Closing: The transaction is finalized after some time, as funds and property title transfer are delayed. This type of closing is commonly used in states that allow for some flexibility with the closing process.
Wet Closing: The funds are disbursed, the title is transferred, and the transaction is completed on the closing day. This method is typical in states with more stringent requirements, where all transaction elements must be finalized before the buyer and seller leave the closing table.

While a wet closing provides immediate finality, a dry closing offers flexibility, accommodating cases where funds may be unavailable or documents are delayed. However, buyers and sellers must understand that the transaction remains complete in a dry closing once all conditions are satisfied.

Reasons for a Dry Closing

A dry closing can occur for various reasons, typically related to funding, documentation, or logistics delays. Here are some common scenarios that may lead to a dry closing:

Funding Delays: Lenders may need additional time to disburse funds due to processing delays, verifications, or administrative issues. In this case, the parties may agree to a dry closing to keep the process moving forward while awaiting funds.
Outstanding Documentation: Sometimes, the buyer or seller may wait for specific documents to finalize the transaction. For instance, the seller may need time to clear a lien on the property, or the buyer may require extra time to verify certain aspects of the transaction.
Title Issues: If there are unresolved title issues—such as a pending release of lien or questions about ownership history—a dry closing allows the parties to sign all documents and pause the transaction until these issues are resolved.
Coordination with Other Transactions: If the buyer is selling another property to fund the purchase, the sale of that property might be delayed, affecting the buyer’s ability to complete the purchase. A dry closing accommodates these types of contingencies.

Pros and Cons of a Dry Closing

A dry closing offers advantages and disadvantages to both buyers and sellers. Here’s a breakdown:

Pros:

Flexibility: Allows the closing process to proceed even with outstanding issues, providing more time to address these concerns.
Reduced Pressure: Both parties can take the time to finalize the transaction without rushing through critical components.
Facilitates Complex Transactions: In cases involving multiple transactions or third-party approvals, a dry closing can help synchronize all elements.

Cons:

Uncertainty for Both Parties: The transaction is technically complete once the funds and title are transferred, which could lead to delays and complications.
Extended Liability for the Seller: Since the seller technically retains ownership until funds transfer, they may remain liable for the property.
Delayed Move-In for the Buyer: The buyer may need more time to take possession of the property, potentially affecting moving plans or interim housing arrangements.

States That Allow Dry Closings

Whether a dry closing is permitted depends on state regulations. Some states require a wet closing, where the funds and title transfer are immediate and simultaneous. States such as California, New York, and Texas are generally more flexible and allow for dry closings, though the exact regulations vary.

In states where wet closings are required, buyers and sellers must ensure that all funds, documents, and approvals are ready by closing to avoid legal or logistical issues.

Considerations for Buyers and Sellers in a Dry Closing

Both buyers and sellers should be aware of the implications of a dry closing and communicate openly about the expected timeline and any potential delays. Here are a few tips for managing a dry closing:

For Buyers: Ensure your funding is prepared and clear any contingencies with your lender. If delays are likely, work with your real estate agent and lender to estimate the timeline accurately.
For Sellers: Understand that a dry closing may mean additional time before receiving payment. Be prepared to handle any outstanding property liabilities and communicate with the buyer regarding timing and expectations.
For Both Parties: Keep lines of communication open with the closing agent, real estate agent, and lender to manage expectations. Having clear agreements and realistic timelines can help prevent misunderstandings and delays.

Conclusion

A dry closing offers flexibility and can be an effective solution when issues delay funds disbursement or the title transfer. While it’s not the ideal scenario for every transaction, a dry closing allows buyers and sellers to move forward with the process while addressing outstanding conditions. Buyers and sellers can better prepare for potential delays and confidently navigate the real estate transaction by understanding how dry closings work and why they’re used.

Thank you for reading! If you enjoyed this article and want to explore more content on similar topics, check out our other blogs at Sonic Loans, Sonic Realty, and Sonic Title. We have a wealth of information designed to help you navigate the world of real estate and finance. Happy reading!

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