Complete Guide to Real Estate Tax Liens and Foreclosure Deeds Learn in 7 Days Investing Without Losing Series_5 doc

Setting the sails for the closing date As you work through all of your due diligence tasks, it’s vitally important that you keep an eye on the day that your contract says you’re supposed to close. If you know that you won’t be able to complete all of your due diligence tasks or you have encountered problems and need more time to resolve them, you have a few choices to make. You have the following three options: ߜ You can back out of the deal, especially if the problems you encountered make this deal a bad one. ߜ You can get an extension of time to complete your due diligence. ߜ You can strive to complete your due diligence and set the sails for the closing date. The goal here is to get to a point in giving this deal the green light or the red light. If you’re giving the green light, assume the following: ߜ The physical inspection due diligence is complete. ߜ The financial inspection due diligence is complete. ߜ The legal inspection due diligence is complete. ߜ You have satisfied every contingency clause in the contract. ߜ You have completed your renegotiating with the seller and everything agreed on is in writing. 116 Part II: Getting Started Making Deals 11_174913 ch06.qxp 11/21/07 4:32 PM Page 116 Chapter 7 Closing Your Deal In This Chapter ᮣ Understanding the basics of commercial closing ᮣ Minding the details before signing the paperwork ᮣ Knowing what to expect on closing day ᮣ Taking ownership of your property T his is the day you’ve been waiting for: The day when you finally get to close your deal! Whether this deal is your first or your tenth, every clos- ing day is special. All those hours spent negotiating, late evenings spent crunching the numbers, long days spent walking through and assessing the property, sleepless nights spent waiting for loan approval, not to mention all that time spent dealing with your partners and handling investors — all of it is scheduled to come to an end on closing day. This day should be one of cel- ebration and accomplishment. Ultimately, closing your deal is the beginning of a new investment in a great property, in your bright future, and in your hardworking team. In this chapter, we tell you where getting to the closing table actually begins, we help you decide when to pull the trigger, and we help you identify when a deal is a real deal. We also help you dodge those inevitable delays in closing. Finally, we explain what’s involved in taking legal ownership and what crucial steps you need to take immediately after closing. Residential closing versus commercial closing Q: What’s the difference between closing on a single-family residence and closing on an 80,000-square-foot shopping center? A: Very little. If you’ve closed on a house, you’re familiar with the nuts and bolts of closing your first commercial property. The basics of a residential closing — such as opening an escrow account, handling deposits, dealing with closing costs, obtaining title insurance, transferring titles, and moving buyer and seller monies — also take place with the closing of a commercial property. 12_174913 ch07.qxp 11/21/07 4:33 PM Page 117 The Anatomy of a Close In order to really understand how a deal gets closed and how you get the keys or a big check at the end, it helps to look at what a commercial deal entails — from the signing of the contract to the closing day. The following big-picture view helps you get a handle on what takes place with the person making the offer, the escrow/title company, the lender, and the attorney: 1. The buyer makes an offer to purchase and, if the seller likes the offer, the seller accepts and signs it. Congratulations, you’re officially under contract! 2. The buyer opens escrow with an escrow/title company or attorney and sends in earnest money as a deposit to the escrow holder. 3. The buyer starts the financing process with his lender and sends nec- essary documents to the lender to qualify both the property and himself (and/or his partners). 4. The buyer does his due diligence (such as reviewing the property’s financial statements and other property-related information as set forth in the contract) and does a physical inspection of the property. 5. The buyer examines the title and removes contract contingencies. 6. The buyer and seller satisfy any remaining obligations as set forth in the contract. 7. The buyer finalizes the loan with the lender by getting an official letter of commitment from the lender. 8. The buyer reviews the closing statement and finalizes any final clos- ing instructions with the escrow company. 9. On closing day, the buyer signs the closing paperwork with the escrow company and makes a down payment. 10. The deed is recorded, monies are disbursed, and the buyer gets the keys. Congratulations, your deal is closed! Closing 101: The Basics of Closing a Deal If you’re brand new to buying and selling real estate, you probably have all kinds of questions regarding the critical stage of closing a deal. Not to worry: Where you have questions, we have answers. Read on. 118 Part II: Getting Started Making Deals 12_174913 ch07.qxp 11/21/07 4:33 PM Page 118 What is an escrow and who is an escrow officer? An escrow is a neutral, impartial third party that serves others (the buyer, the seller, the lender, the real estate agents, and the attorneys) in a property transfer. An escrow officer is the central point person throughout the closing process. Her duties include all the following: ߜ Clearing outstanding liens held against the property ߜ Disbursing monies to all parties ߜ Handling the in earnest deposit, the down payment, the loan documents, and the closing fees associated with the property transfer ߜ Minimizing the chance of fraud when the money and the property are transferred ߜ Obtaining payoff amounts of loans associated with the property ߜ Obtaining title insurance ߜ Ordering the title search and examination for the title report ߜ Preparing and issuing the final closing statements ߜ Recording the deed after all deal and legal obligations have been satisfied ߜ Returning signed loan documents to the lender The escrow officer is also sometimes referred to as the escrow holder, the title officer, the closing agent, the closer, or the settlement agent. In the eastern half of the United States, attorneys are commonly used to close deals and they often act as the escrow company. What is title insurance? After you have legal title of the property, you’re considered the owner. But what happens if the title came to you with a lien against it? What if the liens against the property total thousands of dollars? That’s where title insurance comes into play. Title insurance insures you against such things as liens, undiscovered liens, improper recording of deeds, and other things that could negatively affect the title. The protection period of the title insurance extends backward, which means that it insures you against losses from the past ownerships of the property. And the insurance is in effect as long as you own the property. 119 Chapter 7: Closing Your Deal 12_174913 ch07.qxp 11/21/07 4:33 PM Page 119 If the person you’re buying the property from already has title insurance, you can’t have the current owner transfer his title insurance to you, even if it’s brand new. You have to buy new title insurance yourself. Who pays for the cost of title insurance, the buyer or seller, depends on what’s customary for that city. Some lenders give you a choice of whether to buy title insurance. We recom- mend that you buy title insurance even if you’re sure there’s nothing wrong with the title. Some title problems can be so bad that they can cause the title to be deemed “unmarketable.” This kind of situation is exactly what title insurance protects you against. Some people think that if they paid cash for the property, they don’t need title insurance. Just because you have a grant deed with your name on it doesn’t mean that you have clear title. Do I need an attorney for my closing? All of our East Coast closings were completed through a real estate attorney. On the other hand, all of our West Coast closings were done by escrow/title companies. So whether you need an attorney for your closing depends on where your property is located. Look and see what’s customary in your state or city by asking an experienced local real estate agent. Attorneys commonly handle commercial real estate closings. And having the help of an attorney is advantageous, because so many things can go wrong during a closing. With all the complex language that’s used in closing paper- work, an attorney can help you wade through it all. When you hire an attorney to step into the shoes of an escrow company, the attorney will do the traditional escrow company duties, plus they’ll also ߜ Coordinate the closing date and help keep the buyer and seller sides and the lender on track ߜ Help review all documents for accuracy ߜ Personally attend the closing ߜ Write up any needed contract amendments Don’t hire your family attorney to close your commercial deal; instead, hire a real estate attorney. Real estate attorneys, unlike general attorneys, are trained to understand zoning, real estate laws, bylaws, environmental restric- tions, tax issues, and entity issues, among many other small legal — but important — details that can come back and bite you on the rear end. 120 Part II: Getting Started Making Deals 12_174913 ch07.qxp 11/21/07 4:33 PM Page 120 Do closing costs differ in commercial real estate? Folks always want to know whether closing costs are an issue in commercial real estate (just as they are in residential real estate). The quick answer is yes. And there are two main reasons for this: ߜ Typically, commercial real estate deals are bigger than residential single-family deals. The fees that are calculated based on the size of the deal, such as title insurance, are larger in scale. ߜ Commercial closing involves a few more third-party costs that are larger. For example, a new survey generated on a single-family property could cost a few hundred dollars and is only necessary if a lender requires it. For a large apartment complex, however, the survey could cost tens of thousands of dollars, and commercial lenders nearly always require a survey. Similarly, an appraisal report for a single-family home will cost around $500 and take one week to deliver, but for a shopping center, it may easily cost $5,000 and typically take three to four weeks to deliver. As a general rule, you can expect commercial closing costs to be about 3 per- cent of the purchase price. This figure is just a quick estimate, though. If you want a more specific figure, call an escrow company and ask for the typical closing costs incurred. Note: You’ll have to give the escrow company a pur- chase price, or at least an estimation of a purchase price, in order to receive an estimate. Closing costs are always negotiable and never etched in stone. Some closing costs may be customary for the city you’re in, but they’re still negotiable. Closing costs are usually spelled out in the purchase contract; if not, they should be. Negotiate with the seller by having him pick up some or most of the costs, or have the seller credit you a certain dollar amount at the time of closing for closing costs. The only nonnegotiable closing costs pertain to the loan (such as transfer taxes and recording fees). Is it better to close at the end or beginning of the month? If we had to name one real estate question that starts bar fights, this is it! We don’t want to start a fight, so we make the case for both and let you decide which one is most beneficial for your unique situation. For the most part, the choice comes down to reducing your out-of-pocket costs at closing by paying less in prepaid interest on your mortgage. Or you can get credited for almost a full month’s rent at closing. Your choice. 121 Chapter 7: Closing Your Deal 12_174913 ch07.qxp 11/21/07 4:33 PM Page 121 Here’s an example to guide you: If you close on June 2, for example, you prepay 28 days of interest to cover June’s interest. In this case, you have to bring more cash to the closing than if you had closed three days earlier, on May 31. And your first mortgage payment would be due August 1. Your August 1 pay- ment includes the interest payment for July. On the other hand, you would also receive 28 days of rent (prorated and credited to you at closing), plus all of July’s rent without having to make a mortgage payment in July. If you close on June 29 instead, you prepay one day of interest to cover the last day in June. Your first mortgage payment would be due August 1. Your August 1 payment includes the interest payment for July. The main benefit is that you minimized out-of-pocket costs at closing. Of course, this helps investors who are coming close to running out of cash after closing. You would also receive July’s rental income without having to make a mortgage payment in July. Being able to collect one month’s rent and not having to pay the month’s mortgage is a big benefit to either scenario. You’ll be able to start off with a sizable savings account or have the capital to do immediate improvements, if needed. How long does it take to close a commercial deal? We knew you were going to ask how long a closing takes. Patience is a virtue, my friend! Here’s our answer: Commercial closings can take two to three times longer than residential closings. And the simple reason is this: You’re buying not only a piece of real estate but, in the lender’s eyes, a business as well. The lender is lending you millions of dollars to operate an income- generating entity. Therefore, the amount of time and effort everyone spends to confirm the integrity of the “business” takes an average of two months, maybe longer on more complicated deals. Chapter 6 is dedicated to the subject of due diligence and gives you the scope of work that’s required in a commercial closing. As you’ll see, it takes time to get your arm around the whole deal. So give yourself a minimum of 45 to 60 days to close your deal. The Big Picture Show: Questions to Ask Yourself Before You Pull the Trigger Before you start ordering everyone around to finalize their duties and obliga- tions for closing, you need to do a couple of things. Start by thinking about 122 Part II: Getting Started Making Deals 12_174913 ch07.qxp 11/21/07 4:33 PM Page 122 the big picture. Why are you purchasing this property? How will you make a profit? Is your plan doable? Do others agree with your plan? Most likely, you had big plans and dreams for this deal when it first went under contract — is that dream still alive this late in the game? Odds are, you found out some things — some good and some bad. Are you ready and willing to pull the trig- ger? The following sections can help you decide. What are my exit strategies? An exit strategy is your means of earning a profit on your property. You can have an exit strategy to sell, or you can have an exit strategy to refinance. Or you may just want to hold the property for a monthly income. Even though they’re all different, all exit strategies get your profit out of the property. Know your exit strategies inside and out, but hold them loosely. Don’t force one just to make yourself right. Have an exit strategy designed before you make an offer on a property. And before you close, come up with multiple exit strategies. Why? Because market conditions may change, loan parameters may be altered at the last minute, problems with the property’s title may appear at the 11th hour, or your personal life may shift in some way. If you’re stuck on only one exit strategy and you aren’t flexible, any change in the deal’s circumstances can kill the deal, even though it may still be a good opportunity. Are my investment goals being met? After spending, say, three months to get your newest deal headed toward a closing, do you stand a chance of meeting your investment goals? After months of due diligence and weeding out the good, the bad, and the ugly, does this deal still make you tons of money? Those are the million dollar questions, aren’t they? Because these questions are obviously worth a lot, don’t take them lightly. Here are four safety checkpoints to consider: ߜ What’s your time frame? From what you know now about this deal, is the time frame for your exit strategy still valid? Will you be able to exe- cute your exit strategy quicker or will you have to delay it? If you delay it, how much longer will it be? ߜ Is your profit what you expected? Now that you’ve studied this deal inside and out, is the profit that you projected still there? Do you see an even greater potential? Do you see any hurdles on the road to cashing in? ߜ Does your loan work? A big part of understanding the big picture is knowing exactly what type of loan you’re getting. You should know your 123 Chapter 7: Closing Your Deal 12_174913 ch07.qxp 11/21/07 4:33 PM Page 123 monthly payment, interest rate, loan term in years, prepay penalty, and amortization period at this point. ߜ Did your tax guy or gal approve? Have you run your exit strategy sce- narios by your tax advisor for any possible tax issues? Can she validate your strategies and give you a thumbs up? If you can nod your head “yes” confidently to these four safety checkpoints, then what are you waiting for? Pull that trigger! Sweating the Details before Signing on the Dotted Line As the closing nears, you want to adopt a certain type of attitude — an atti- tude that may save you thousands of dollars in mistakes and miscalculations. So what’s the attitude we’re referring to? Being pesky! Question every figure on every document. Double-check any math. Don’t assume anything. Take nothing for granted. Sweat the details. Being a pest will save you not only money, but precious time and headaches as well. The title work A title examiner will research the property’s chain of title. The chain of title is the history of ownership going all the way back to the original owner. It shows an exact description of the property, dates of purchases, loans put on the property, liens, and encumbrances. The title examiner’s primary goal is to ensure that the seller has clear title to the property before selling it. The examiner does the following: ߜ Looks for defects in the title, such as: • Easements • Delinquent taxes • Judgment liens • Mechanics liens • Pending lawsuits • Restrictions • Tax liens ߜ Confirms the current owner and the property description ߜ Determines how the title company will issue title insurance 124 Part II: Getting Started Making Deals 12_174913 ch07.qxp 11/21/07 4:33 PM Page 124 Defects make the title “unmarketable” and stop the seller from legally selling the property. So defects must be cleared from the title before the seller can sell the property. However, in some instances, the buyer may agree to move forward with exceptions to the title. Have your real estate attorney review the title work; if it’s found to be clouded in any way, work to get it cleared within the time constraints on the purchase contract. A good commercial purchase contract will have a title contingency clause in it. This means that the title has to be delivered “clean” within a certain number of days, or the contract is null and void. Make sure your contract has this contingency. The closing instructions and closing statement Closing instructions are just that: written instructions for the escrow officer, explaining how the transaction will take place. The closing instructions spec- ify who pays for what costs, who gets what disbursement (and when), and when the recording takes place. The instructions should also list all the con- ditions to be met prior to the closing (such as inspection report findings and work to be completed), items to be credited or prorated (such as rents, taxes, insurance, or repair credits), and the closing costs that the seller and buyer will be paying. The closing statement, which is also known as a settlement statement, is legally referred to as a HUD-1 settlement statement. If you’ve purchased any kind of real estate before, you’ve seen a closing statement. It’s the official form used to show all fees, charges, and commissions. It lists the final tally of what the buyer and seller are paying for, including the following: ߜ Appraisal fees ߜ Escrow fees ߜ Loan origination fees ߜ Loan payoff amounts ߜ Notary fees ߜ Premiums for hazard insurance and title insurance ߜ Prepaid interest ߜ Recording fees ߜ The principal of the new loan 125 Chapter 7: Closing Your Deal 12_174913 ch07.qxp 11/21/07 4:33 PM Page 125 [...]... stressed when they do 12_ 174 913 ch 07. qxp 11/21/ 07 4:33 PM Page 1 27 Chapter 7: Closing Your Deal On closing day, expect to sign a stack of documents, and expect small mistakes and miscalculations to take place Expect that some of the documents will need to be reprinted And expect to spend at least an hour signing and reverifying all the paperwork What’s on a closing statement? The document at the center... different lender ߜ The closing: The lender, the borrower, and the closing/escrow company all work together to finalize a closing of the transaction Final loan documents are drawn and sent to the closing/escrow company After you review and sign the final loan documents, the transfer of the property takes place Keeping things moving without incident The biggest deal-killer we had early on in our career was... 12_ 174 913 ch 07. qxp 136 11/21/ 07 4:33 PM Page 136 Part II: Getting Started Making Deals 13_ 174 913 pt03.qxp 11/21/ 07 4:33 PM Page 1 37 Part III Funding Your Deals: Financing and Lending 13_ 174 913 pt03.qxp 11/21/ 07 4:33 PM I Page 138 In this part n Chapter 8 of this part, you find out how to get approved for conventional financing Or, if you like the idea of getting creative and buying commercial real estate. ..12_ 174 913 ch 07. qxp 126 11/21/ 07 4:33 PM Page 126 Part II: Getting Started Making Deals ߜ Transfer fees ߜ Various taxes We fill you in on the closing statement in greater detail in the later section “What’s on a closing statement?” Ask to see and review the closing statement at least 48 hours before the closing There is a 50/50 chance that the closing statement includes a mistake The... on my friends 14_ 174 913 ch08.qxp 140 11/21/ 07 4:33 PM Page 140 Part III: Funding Your Deals: Financing and Lending The Commercial Lending Process in a Nutshell There’s a lot to wade through in the world of commercial lending, but developing an understanding of the processes and jargon definitely pays off as you begin making decisions in what could possibly be your biggest financial investment ever Personally,... closing is the final closing statement, which is also called the HUD-1 settlement statement The closing statement is important, so in this section we explain what’s on it The closing statement for commercial real estate is the same form that’s used in closing residential single-family home transactions It lays out the charges in getting the transaction closed (see the earlier section “The closing instructions... the preceding section It’s basically your final tally on what’s transferring dollarwise between the buyer and the seller and what each side is responsible for in fees, charges, and taxes ߜ Mortgage and deed of trust: You’ll be signing the originals Many other loan documents are included in this package as well 12_ 174 913 ch 07. qxp 11/21/ 07 4:33 PM Page 129 Chapter 7: Closing Your Deal ߜ Escrow instruction... instance, you risk losing your earnest deposit money, hundreds of hours of time, and thousands of dollars spent on inspections and reports And, to top it all off, your investment goals could be shattered So keep on top of everything involved with the lending process Remember: This is YOUR deal Differences between Commercial and Residential Lending When it comes to real estate, sales are broken up into... not in your favor, something missed from the closing instructions, or just a plain old typo That’s why you want to see it early, rather than an hour before closing: You then have time to request that the mistake be fixed And the more people who review the closing statement, the more mistakes you’ll find So have your attorney, your real estate agent, and your escrow officer study it And don’t forget to. .. staying on top of your lender, your deal will probably fizzle out because of the lack of follow-through, either by you or your lender 141 14_ 174 913 ch08.qxp 142 11/21/ 07 4:33 PM Page 142 Part III: Funding Your Deals: Financing and Lending Here are some ways of keeping your deal momentum going strong: ߜ Pay close attention to the financing contingency period in the purchase contract The financing contingency . closed! Closing 101: The Basics of Closing a Deal If you’re brand new to buying and selling real estate, you probably have all kinds of questions regarding the critical stage of closing a deal. Not to. your family attorney to close your commercial deal; instead, hire a real estate attorney. Real estate attorneys, unlike general attorneys, are trained to understand zoning, real estate laws,. Ultimately, closing your deal is the beginning of a new investment in a great property, in your bright future, and in your hardworking team. In this chapter, we tell you where getting to the closing table