Dry Closing in Real Estate: What is a Dry vs Wet Closing?

Published on September 28, 2023

Navigating the real estate market can be a tricky endeavor, especially when terms like "dry closing" and "wet closing" start popping up. Whether you're a buyer, a seller, or just an enthusiast trying to understand the complex world of real estate transactions, this comprehensive guide will shed light on the intricacies of both dry and wet closings.

What is a Dry Closing?

Dry closing in real estate, or sometimes termed "dry funding," is a type of closing where all the necessary documents are signed, but the funds for the home purchase are not disbursed on the closing day. In other words, a dry closing happens when the deal is seemingly "done," but no money has changed hands,, and the buyer does not yet have the right to move into the property.

Essentially, even after you close on a house, there may be a waiting period before all elements of the transaction are finalized. Dry funding is the method behind a dry closing, ensuring that funds are held until all requirements for the sale are met. It’s important to note that dry closings are legal in select states, meaning that the practice is governed by specific regional regulations.

What is a Dry Closing

What is a Wet Closing?

In contrast, a “wet” closing involves the immediate disbursement of funds once the closing documents are signed. At a wet closing, the buyer and seller leave the table with everything settled.

 There's no waiting period as seen in a dry closing; once the transaction concludes, the buyer has the legal right to the property, and the seller gets their money. Closing costs, the fees related to the sale or purchase of a property, are paid, and the property transfer is instantaneous

Why Do Dry Closings in Real Estate Exist?

Dry closings exist to keep the deal alive under certain situations. For instance, if there's an issue with the property's documentation, or there's a delay in transferring the mortgage funds, a dry closing can still happen. It ensures that even if there are minor hiccups, the sale can still happen and the funds will be transferred as soon as possible after the closing.

How Does a Dry Closing Work?

During a dry closing, both the buyer and seller agree that the closing can still happen without the immediate disbursement of funds. The closing documents are signed, the parties involved shake hands, but the actual transfer of funds and ownership is deferred.

Once the necessary paperwork has been reviewed and finalized, the funds aren't transferred right away. The lender holds onto the funds while waiting for the clear-to-close signal. This waiting period can vary based on state regulations and the specific conditions of the sale, but it typically lasts a few days. After the lender has verified that all conditions have been met, they release the funds to finalize the transaction.

Typically, the money is held in an escrow account until all the closing requirements are met. Once everything is sorted out – usually within a few business days – the funds change hands, and the ownership is transferred.

How Does a Dry Closing Work

Dry Funding States

Dry closings are not universally recognized across all states. While a dry closing allows for the documentation and agreement to be completed prior to the actual transfer of funds, certain states mandate that funds change hands at the time of signing, classifying these as 'wet states.'

States that Support Dry Closing:

  • Alaska
  • Arizona
  • California
  • Hawaii
  • Idaho
  • Nevada
  • New Mexico
  • Oregon
  • Washington

Note that the above list is not exhaustive, and the acceptance of dry closings can vary within jurisdictions of these states or may have changed over time. Additionally, some states might have unique provisions and specific conditions under which dry closings are permissible.

Due Diligence is Key

Whether you’re buying or selling in a dry or wet state, it’s essential to conduct thorough due diligence. Familiarize yourself with state-specific regulations, and always consult with a local real estate attorney or professional to ensure compliance and a smooth closing process.

Due Diligence is Key

Why Might a Dry Closing Happen?

Dry closings are relatively uncommon, but several circumstances can lead to this type of arrangement in real estate transactions:

  • Funding Delays: The most common reason is a delay in the mortgage funding. Financial institutions sometimes don't process the loan funds in time for the scheduled closing, especially if there are last-minute issues or discrepancies.
  • Documentation Problems: Sometimes, there can be documentation problems before the mortgage is funded.
  • Review by the Lender: Some lenders prefer to review closing documents post-signing, ensuring that everything is in order before releasing loan funds.
  • State Regulations: Some states allow only dry closings or have regulations that require wet closings under specific circumstances.
  • Buyer and Seller Agreement: In some cases, both parties might mutually agree to a dry closing. This is often done for convenience or to accommodate specific timelines.
  • Satisfying Conditions: There might be contingencies in the contract that have yet to be fulfilled. For instance, repairs that were agreed upon might not be completed by the closing date.

Remember, while a dry closing can serve as a temporary solution, it's essential that all parties understand the associated risks and that they work diligently to complete the transaction as soon as possible.

Pros and Cons of Dry Closings

Dry funding offers an added layer of security for both the buyer and the lender. By withholding funds until all conditions are met, it ensures that all parties are compliant with their obligations. Moreover, in states where dry funding is mandatory, parties have no choice but to adhere to this process. However, it's worth noting that dry closings may prolong the overall transaction timeline, which can be a point of contention for some buyers and sellers.

Advantages of Dry Closing:

  1. Flexibility: Dry closings offer a contingency plan when things get delayed.
  2. Assurance: Dry closings assure lenders that all their requirements are met before the mortgage funds are transferred.
  3. Speed: The closing process can continue even if there's an issue with the property or the loan funds.

Disadvantages of Dry Closing:

  1. Delay in Transfer: The buyer or seller might have to wait a few days before the sale is finalized.
  2. Uncertainty: Buyers want to get into their new home, and sellers want their money. A delay can cause anxiety for both parties.
  3. Legal Complexities: In situations where sellers have not legally sold their property but buyers have access, legal complications can arise.
Disadvantages of Dry Closing

Wet Closing: A Quicker Path

While dry closings serve a purpose, wet closings are usually what most real estate professionals aim for. With wet funding, once the documents are signed and the requirements are met, the funds have been approved, and the sale is deemed complete.

In the multifaceted world of real estate, a wet closing offers a swift and streamlined path to finalizing a property transaction. Here's a deeper dive into the intricacies of this process.

Immediate Fund Transfer

One of the hallmarks of a wet closing in a real estate closing is the immediate transfer of funds. There's no waiting period after all the documents have been signed. Once the stipulations are agreed upon, the buyer can promptly move into their new property, and the transition is seamless.

Advantages of Wet Closings

  1. Speed: The prime advantage of a wet closing is the speed at which the transaction progresses. Once everything's signed, sealed, and delivered, the home sale is finalized.
  2. Certainty: With money in hand immediately, sellers have the assurance of a completed transaction, eliminating the limbo phase that might exist in dry funding states.
  3. Clear Possession: For buyers, there's no uncertainty about when they can move into their new property. The keys are handed over, and they can embark on their new journey without delay.

Considerations and Challenges

While wet closings offer rapidity, they're not devoid of challenges:

  • Stringent Requirements: Often, because of the immediate nature of the transaction, lender requirements can be more stringent. Every criterion must be met before the closing can happen.
  • Potential Delays: If there's an issue or the seller doesn't meet all the conditions on time, it can potentially delay the closing. Since everything needs to be perfect for the transaction to proceed, any hitches can push the timeline.

What Should Buyers and Sellers Know?

Buyers and sellers should be aware that while dry closings offer a solution to potential hiccups in the closing process, they also bring their challenges. It's essential to have a knowledgeable real estate agent guiding you through, ensuring you know whether you're stepping into a wet closing or a dry closing.

Both buyers and sellers must agree to a dry closing. If the buyer may be moving into a new home before the funds change hands, sellers should ensure that the home purchase is legal and complete.

What Should Buyers and Sellers Know

Conclusion: Dry Closing in Real Estate

In the intricate dance of buying and selling homes, understanding the nuances of the closing process, from the role of the closing agent to the timing of the disbursement of funds, is crucial. Dry and wet closings are simply two methods of ensuring that even in the face of challenges, the dream of buying a home or the goal of selling one doesn't get derailed.

Whether you're a seasoned home buyer or just dipping your toes into the world of real estate, knowledge is power. And understanding the difference between dry and wet closings, and when each might occur, can make your real estate journey smoother and more predictable.

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