Day 42 – Anatomy of A Deal – Part 8 Closing the Deal
Today is day 42 in our drive for $60,000 in 60 days through real estate investing. Today we are going to continue our series on the anatomy of a deal. If you remember in previous episodes we talked about the following:
For today, we are going to continue our series on the Anatomy of A Deal. To recap, we have talked about the following in the first 5 parts of this series:
- Part 1 – Finding Properties and Qualifying Sellers
- Part 2 – Analyze the Numbers
- Part 3 – Analyzing a Wholesale Deal
- Part 4 – Analyzing a Rehab
- Part 5 – Analyzing a Rental Property
- Part 6 – Present Your Offer & Negotiate the Deal
- Part 7 – Financing the Deal
Today in Part 8 we are going to talk about closing the deal. At this point you’ve found the property, negotiated with the seller and you’ve gotten the property under contract. Once your offer is accepted you and the seller will likely have to meet certain contingencies contained within the contract. It may seem a little overwhelming because many times there can be a lot of details to address, but if you put together a checklist as we describe below, you should be able to handle most any closing.
- Generally with any closing, there are four main documents that will guide the closing process:
- Purchase Agreement
- Loan Commitment
- Title Insurance Commitment
- Closing Statement
The title company you work with will prepare all of the documents prior to closing, but it is important to understand each of the documents so you can review them appropriately.
The purchase agreement is the sales contract that outlines the real estate transaction. It will contain the purchase price, along with all the contingencies that must be met in order for the transaction to be completed. Some contingencies you may include are the following:
- Financing Contingency – if the buyer cannot obtain financing the deal will not transact
- Inspection Contingency – inspections can include pest inspection, hazardous material inspections (lead based paint, radon, etc.), home inspections, or any other item you wish to inspect on the property.
- Lease Review Contingency – If you are buying a rental unit you will want to review the current lease as well as the rent rolls associated with the property.
- Income / Expenses – Again if you are buying a rental property, you will want to review all the income and expenses associated with the property.
Within each purchase agreement you should put these performance contingencies into your calendar so you can manage them appropriately. Failure to perform on any or all of the contingencies could result in the loss of your earnest money deposit, or legal action by the seller forcing you to close according to the contract.
If you are obtaining financing on the property, the loan commitment document will spell out the terms and conditions of the loan. It will disclose things like the amount financed, interest rate, payment term, upfront fees, prepayment penalties, and the conditions that must be met to obtain the financing. The conditions of the commitment may include:
- Paying off existing debt
- Obtaining an appraisal
- Securing insurance
- Clearing title
- Providing funds for closing
Again, you will want to put these conditions into your calendar to make certain you meet all of the conditions for the financing before the closing.
Title Insurance Commitment
The title insurance commitment discloses a property’s owners of record, any liens or judgments against the property, real estate taxes due, and any other documents required to ensure that clear title is being conveyed for the real estate transaction. You should be sure to discuss the title report with your title company to understand what items if any will need to be addressed to clear title before closing. Also, be sure to double check the legal description on the title report matches the property you are purchasing. This way you can guard against receiving title to the wrong property at closing.
The closing statement (sometimes referred to as the “HUD Statement”) is the document that lists all of the costs for all of the parties involved in the transaction. You will want to review this statement prior to closing to make sure there are no mistakes. Normally the title company should be able to provide this statement 24-48 hours prior to closing.
Use a Checklist
Below are lists of things you should plan on doing along with the approximate timing. With any closing you will want to make a checklist of all the items you must perform on to ensure you do not default on the contract.
Do These Things Immediately Once The Contract is Signed
- Pursue financing
- Review contract for performance dates and make a checklist
- Make copies of the contract and distribute to the seller, title company, broker, etc.
- Talk to the title company to determine a closing date
Do These Things One Week Before Closing
- Order insurance for the property
- Review title insurance commitment
- Review the closing statement
- Notify utilities of change in ownership
- For Rental Properties prepare a letter to tenants announcing the change in ownership and/or begin to market the property for a tenant
- If you will be working with a property manager, contact them
- Arrange contractrors to begin work on the property
Do These Things the Day Before Closing
- Do a final walkthough on the property
- Obtain a certified check for the funds required at closing (normally made payable to the closing agent’s escrow account.
Do These Things at the Closing
- Sign all documents
- Deliver certified check to closing agent
- Obtain keys and garage door opener(s)
- Obtain copies of leases, warranties, and service contracts in place
And that’s it, by making a checklist on your calendar, you should be able to handle any closing.