Property Investing: The Road to Close
TL;DR - Once you’ve reached a deal with a seller, you need to officially close on the property before it’s yours. Before you close, you’ll conduct due diligence and complete a variety of pre-closing tasks. After you close, there are some helpful post-closing tasks that’ll help you in the long run!
Congrats! You’ve found your dream real estate property. Not only that, but you’ve agreed to terms with the seller!
Whether this is your first real estate deal or your tenth, you’re not done yet.
Now that there’s a deal in place, it’s time to close.
Closing is one of the most important aspects of real estate investing. It’s where you’ll ensure that you’re making a sound investment - that this property really is the right choice for you!
So let’s break down how to make this process go as smooth as possible.
Property Investing: The Road To Close
What is Due Dilligence?
Imagine this scenario.
You check out an investment property and fall in love. It’s comfortably in your price range, fits all of your needs and wants, and is in the PERFECT area.
So you put an offer in and - wow! - it gets accepted.
You’re so head-over-heels that you wire the downpayment to the seller and close on the spot.
The keys are in your hand and you can’t help but feel intense joy and satisfaction with yourself.
But as you prepare it for tenants, you notice something…
Bugs? Surely not. On closer inspection… they’re termites!
So you hire a professional to fix the issue, but they tell you it’s impossible. The bugs have been infesting your new property for quite some time and it’s the equivalent of a car being totaled.
Now, this is a nightmare scenario. But it is possible. That’s why due diligence is so important.
Before you close on a property, you’ll get a chance to fully inspect it. To make sure that it’s as great as you believe it is.
You can hire professionals to check every little nook and cranny. They’ll tell you exactly what’s wrong with the property, how much the fixes will cost, how much the property’s worth, and if there are any secrets the seller left out.
You’ll pay an earnest deposit to confirm to the seller that you’re serious about buying the property. Most the time, your inspection period (due diligence) is 30 days and the time to close is 60 days. But you can add an extra clause in your deal (for more earnest money) that gives you an additional 30 days to ensure everything is up to your standards.
This earnest money is generally unrefundable, unless certain contingencies are met/broken. So make sure you’re really interested in this property. You can always back out of a deal if no contract is in place.
So now that you know how important due diligence is, you’ll want to do a few things before you close.
Let’s talk about what steps you should take during your inspection/pre-closing period.
Pre-Closing Tasks
This is some of the most important work you’ll do throughout the property buying process.
It’ll cover all your bases so you know you’ve made an amazing investment. Or it’ll save you a ton of money if there are any hidden faults with the property.
Financing and Escrow
One of the biggest reasons real estat deals get held up is because of financing.
So to save yourself massives amounts of time, get pre-approved for financing before you start the home-buying process. And once you’re conducting due diligence, contact your lender right away.
At this point, you’ve already given the seller a strong commitment to buy the property and have some sort of contract in place. Let your lender know about this and any future developments throughout the due diligence process.
You’ll want a written preliminary approval from them to secure financing ASAP. Once you have this - as long as the title and appraisal clear - you’ll be approved for your loan.
Next, set up an escrow account.
An escrow account allows you to deposit funds that will be used for a future transaction. The account is handled by a third-party.
The escrow will ensure that both you and the seller are covered during any future transactions. Funds will only be transferred once certain requirements and processes are fulfilled.
You can put your earnest money/downpayment/miscellaneous fees into your escrow and notifty the third-party when you want to transfer the funds to your seller.
Hire an Attorney
Let’s face it - legal proceedings can be boring.
Reading the fine print of documents, knowing all the local and national laws/regulations, and implementing personal protection so that the government doesn’t come knocking at your door.
You could figure all of this out yourself and risk a ton…
Or you can hire a professional.
An attorney will protect you from the eyes of the law and make your life easier. Definitely a must-have for huge deals like these.
Side note: You can even hire a real estate-specific attorney.
It is worth noting that some states in the US are “attorney” states, and some are “title” states. This just means you will either work with an attorney or a title company to close your transaction.
Title Inspection and Title Insurance
Just like a car, properties have titles that declare legal ownership of them.
And just like a car’s title, property titles can be faulty or missing. You want a clear and marketable title so that you’re the certified owner of your new property. Make sure your attorney adds this as a contingency in your purchase contract (if it isn’t already included).
Depending on your state, either a title company or attorney has to do this title examination for you.
It’s also worth buying title insurance. We never buy properties without title insurance.
Title insurance will cover you if anything happens to be wrong with your property title.
Your lender will require you to buy them lender’s title insurance, but you can also buy owner’s title insurance for yourself.
Home and Pest Inspection
That termite scenario we described earlier? This is what’ll save you from that.
You’ll hire a professional inspection company to conduct a physical check of the property. It’ll cost you a few hundred dollars, but can potentially save you thousands.
For a thorough inspection, have the utilities on. The inspection company will check out the plumbing, electrical, and HVAC systems. These can develop really pricey fixes if not detected early on, so protect your future money.
A pest inspection will ensure that you don’t have any unwanted critters lurking around your humble abode. Nobody wants to find out that termites are eating away their walls after spending $50,000 on a new property.
Renegotiate Your Offer
Using the information you now have about any issues with your potential investment, change the deal to reflect additional costs that were uncovered.
Will you have to pay $10,000 for termite protection? Ask the seller to pay for it or to factor it into the deal.
Massive crack in the basement foundation? Either get a massive discount, have the seller fix it, or walk away.
If a seller is unwilling to negotiate with you after huge fixes become apparent, then this is your chance to walk away from the deal. Hopefully this doesn’t happen to you - but be prepared.
Finalize Financing
You’re super close to closing! But you need to make sure you have the money to purchase the property.
As soon as you’ve conducted your due diligence, notify your lender and get them to schedule an appraisal ASAP. This is one of the last processes that most lenders require before guaranteeing your funding.
Once the appraisal is completed, your lender will give you a loan based on the value of your prospective property.
Turn on Utilities
Utitlies can take a while to activate, so make sure to do this as soon as you can.
You want them on in your name, not the old property owner’s.
Schedule Necessary Contractors
If you want/need fixes done to your new property, this is the time to get the ball rolling.
Contractors can be pretty busy. Especially during peak times like the summer. Hiring them in advance will make sure that you’ll get your rehabbing done when you want it done.
Final Walk-Through
This is your chance to review any changes or fixes that you requested from the seller. You’ll also be able to make sure that nothing has been damaged since you last saw the property.
Ensure that all contingencies have been met and that you haven’t been skimped out on.
Review and Sign Closing Documents
The documents you’ll want to review are:
Certificate of Title
Title insurance binder
Deed
Closing Disclosure Statement
Financing documents
Most people wait until the day of closing to review and sign these documents, but you can complete them beforehand. In fact, this will allow you to really take your time and soak them up.
Your attorney can assist you with understanding any legal terms or jargon.
Pay and Recieve the Keys
After all the closing documents are signed, it’s time to pay up!
Release your funds from your escrow account to the correct people and now the property is yours. Congrats!
Get any keys, garage door openers, or other devices required for entry to your new property. You don’t want to be locked out on your first day!
Helpful Post Closing Tasks
Whew - don’t you feel better? You’ve done all the hard work.
But there’s still some work to be done. Rather than difficult tasks, these will make your life easier down the road.
Contact Your Tenant(s)
You’ll want to establish a relationship with your tenant(s) ASAP (if you already have some). After all, they’re the ones that pay you monthly.
If you’ve hired a property manager then you can ask them to conduct all communication. But it doesn’t hurt to meet your tenant(s) personally.
Ensure First Payment to Lender
The best and quickest way to ruin your relationship with your lender is to be late on the first payment.
DO NOT be late on your first payment. We cannot stress this enough.
If you have to, deliver it in person.
Happy Investing
Well, there it is.
We didn’t cover every single task you can do during due diligence and closing, but we covered the major ones.
With this information, you’ll be able to close on your first investment property and any property thereafter.
Good luck and happy investing!
How We Can Help You
Does investing in real estate sound intriguing to you? Would you like to learn more? We’d love to be of value!
At Undoor, we pride ourselves on teaching new and experienced investors how to maximize their gains with minimal stress. Our goal is to help you fall in love with real estate and real estate investing. What we’re most passionate about is maximizing investment gains for people like you.
Do you want to get key insights and advice that’ll help you get ahead of the game? Don’t hesitate to contact us for any and all real estate wants or needs.
