Demystifying Real Estate Investing Part Four | Contract to Closing

These last few months we have been talking about demystifying real estate investing. In Part 1 we talked about buying with no money down, and I shared some information on down payment assistance programs.

In Part 2 we talked about Real Estate Investing for the beginner; Educating yourself on Real estate investing and studying properties on the market

Part 3  we discussed Finding Property and Running the Numbers

This is our final blog on this 4-part series on Demystifying Real Estate Investing from Contract to Closing. This is very often the part that turns a lot of people off to buying property. Although it has never bothered me, I think that is because I have always understood that it is simply a process of negotiating the contract under the terms acceptable to you or making the choice to walk away. Then if you move onto an executed contract just know that you will be gathering and supplying documents to your lender and closing agent all the way up to and often including the day of closing.

Once you come to terms with that fact it won’t bother you so much as you move through the contract and closing process. The better organized, unemotional and patient you are the smoother this will go. Perhaps in a future newsletter, we will dedicate a blog post to strategic contract negotiations. But I am not sure I’ll want to put all my secrets out there. You can refresh yourself on making offers by reviewing this page of my website on making offers.

https://secureinvestmentsrealty.com/buyers/#Offer.

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​I find one of the most important factors is that you go into it prepared to walk away and trusting that if it is to be, It shouldn’t have to be forced. To have this peace of mind you have to know what your bottom line is and the only way you can come to that is by running the numbers. We discussed this in Part 3. You need to know your cost for repairs, keeping in mind your down payment is typically 20%, closing costs detailed below are close to 3% of the loan amount, what your monthly expenses will be, and that they fit your goal or bottom line.

Keep in mind it is a delicate balance between being patient and walking away. This is one of the areas that an experienced Realtor will be very valuable and save you a lot of time, money and frustration. An experienced  Realtor will be able to advise you when you need to exercise patience or when you might want to think about walking away. Anyone or all of the parties often make it too personal letting their ego get in the game and in the way. It does often come down to a back and forth give and take. This can be too wearing for some and hits their last straw and all negotiations break down to the point no one will meet in the middle on that last $200.00 expense.

This is rarely because of the money but more likely because someone made it personal and feels taken advantage of by this point. But if you go into it less emotional and always boil it down to your bottom line, and stay away from hungry agents just needing to make a deal, then you can let reason be your guide and have a much smoother and more enjoyable and successful experience.

Ownership Name and Taking Title

You should decide ahead of time on how you will take the title of your future investments. Do you need to set up an LLC or are you just going to have the deed in your name? Talk to your trusted tax advisor about the tax implications and your attorney on the best way to protect yourself and make it easy to transfer ownership should you leave this beautiful world. I recommend creating an LLC or an estate. You may want more than one LLC as you build your portfolio so you limit your risk to just those properties in that LLC should a slip and fall or worse happen. Keep in mind you have to pay a yearly fee for renewing the LLC and you have to comply with tax filings for each so don’t go overboard. You can set the LLC up yourself by going online to:

Divisions of Corporations at Sunbiz.org https://dos.myflorida.com/sunbiz/

Then get your Tax ID at the IRS website at: https://www.irs.gov/individuals/international-taxpayers/taxpayer-identification-numbers-tin.

We named our LLC “Byrne & Haile”. As you can see you can be creative and name the LLC whatever you'd like as long as it's available on Sunbiz. Some people just name it the property address. Or if you have investments in other communities you may consider naming it after the community, city, etc. Think about what will make more sense in the long run if you're going to continue investing in property.

Shopping for the Loan

Now let's begin shopping around for the loan. If your doing a fixer-upper your likely going to go with a conventional loan versus an FHA or VA loan that would have stricter condition requirements. You can review these different loan types on our web site here https://secureinvestmentsrealty.com/buyers/#mortgageprocess

You may also want to refinance or pull equity out of another property to help with your future purchase. Either way, unless your paying cash, your shopping loan costs. I prefer to use as little of my money as possible instead of paying cash. Lenders like to see that you have capital behind you so if you can avoid it don’t use all your cash on one property

Roof Inspection

While the home inspector can certainly look for leaks or anything that is visually evident if the roof is on the verge of its life expectancy you may be required by the lender or insurance company to get a Roofing Contractor to provide you with a roofing inspection and report. The folks we use charge $165.00.

If the roof was not permitted when installed, they can also help you get the permit by first inspecting to make sure it was done properly and then applying for the permit for you. If a Seller and his roofing friend replaced the roof they may not have pulled a permit. Your lender won't go for that so be prepared.

You can look at the permits on a property by going to the property appraiser web site for that county. If you're in Alachua you will go Alachua County Property Appraiser and scroll down to the bottom under improvements

Septic Inspection

While some home inspectors may also do septic inspections, I find it best to use a company that actively works in the Septic repair and replacement business. Again, if you're getting advice from your agent you can avoid those companies that are just trying to sell you a new system. Make it clear you need the inspection because your buying the property and are not looking to install a new system until it needs it. You will want them to determine the following:

· Find the date that the tank was last pumped or pump the tank

· Check the sludge level with a “sludge judge” or a similar device

· The septic tank and drain field should be far from wells and streams

· Ensure that the system is large enough for the home that it serves

You can learn more about this here https://www.nachi.org/inspecting-septic-systems.htm

Four Point inspection

Typically requested by your lender and insurance company for homes over 25 years old. The four-point inspection verifies the age, specs, and condition of your roof, HVAC, plumbing, and Electrical. You can go here to review the form.

https://www.citizensfla.com/documents/20702/31330/4+Point+Inspection+PL/3d7e0270-2c1d-4a14-b2e6-3a796c675a7f

Loan

When your shopping a loan you’re comparing the things that are not fixed like the points and origination fee. The interest rates are going to be determined by your creditworthiness, length of the loan and the Feds rates. I find most lenders fees to be comparable so go with a trusted Lender and work to create a long-term relationship with them.

For the home we are buying we are doing a commercial loan under the LLC we set up for investment property.

Remember your going to have quite a bit of communication with your loan agent so make sure you pick one that you feel is organized, know’s their stuff and is a good communicator. The process can get complicated enough as it is without having difficulties here. Remember a lot of the success in a smooth closing comes from you. You will need to provide the lender with the following documents and be prepared to update them before closing:

Pay stubs or Profit and Loss – If you own your own business, they will need a current profit and loss statement. If you are employed through someone else they will want your most recent pay stubs. Tax Returns and W-9’s for the past two years

Mortgage statements - If you already own a home or other investment property, they will want copies of your most recent mortgage statements

Bank statements - The last two months' bank statements for all of your bank accounts.

IRA’s and 401K’s-  The last three months statements

Do not purchase any large items or apply for credit until you have closed without first talking to your loan officer.

Insurance

I do find this is one area that you can save money by having a good agent that often shops the market. You can reduce your premium by having higher deductibles. You will need to have the insurance paid for and in place for the day of closing. You're going to need a Dwelling and Fire Policy. If you later rent the property you will convert it to a landlord Policy. You don’t want to do that until it is rented. Insurance companies don’t like to lend on properties that will be vacant longer than 2 months so that is another good reason for a quick turn around on renovations. Once you finish fixing up the property, if you decide to hold it you can change the policy once you have a signed a lease and they move in.

If the property is on the water you're going to need flood insurance. You may also need it if you’re in a low lying area. It’s best to check what the flood status is before you ever make the offer because it will affect your monthly cash flow by having to pay both flood and dwelling insurance. I Have been able to save money by bundling my Dwelling and Flood policy together saving a little over $1000.You will find this information on the Fema website here:

 Check flood zone​