Monday, December 6, 2010

Why do we close at the end of the month?

I'm not breaking any ground by stating that more real estate settlements happen at the end of the month (defined as the last day or two) than any other time of the month. We're all well-versed in the stories and issues that come with end-of-month closings: courthouse recording offices backed up, lender packages not arriving in a timely fashion, settlement attorneys frantically scheduling and rescheduling to make the closing happen.

There are 20 days in a typical business month. If closings were evenly distributed throughout the month, 5% of the total would close on any given day, including - of course - the last day of the month.

In fact, 17%* of all settlements occur on the last DAY of the month!

That's a drastic increase in volume that puts on a strain lenders, title companies, recorders, couriers, brokers, and - ultimately - buyers and sellers.

In many industries, this kind of "cyclical strain" cannot be avoided. Christmas happens on December 25th, so rather than straight-lining their sales, retailers have to accept a crunch in November and December. Ocean City hotels can't count on robust sales in December and January, for obvious reasons. Even in real estate, we understand sales are better in the warmer months when homes look nicer and taking a ride to house-hunt doesn't require snow tires.

But why the monthly cycle in real estate?

I came up with a few:

  • A renter who closes mid-month will be paying rent and a mortgage for the remainder of that month.
  • A buyer's mortgage interest doesn't kick in until the beginning of the next month. (Except a borrower typically pays interest in advance at settlement for the days between settlement and the first mortgage payment).
  • A seller has already paid their mortgage for the month, and wants to "get what they paid for." (Except that a non-FHA payoff statement is good through a particular date, and the seller doesn't really pay any more than what's owed as of the "good-through" date of that statement).

So, unless we have a renter-buyer and/or a seller with an FHA mortgage, are there other reasons for closing at the end of the month? If not, why do we schedule them at the end of the month?

* According to our settlement schedule for Jan - Nov. 2010. Also, I cheated for August, and included the last 2 days of the month, as the 30th and 31st fell on a Monday and Tuesday respectively.

Flickr photo by Aarongeller