MIT 3.0: 4.2 Closing the Property Pt 2

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MIT 3.0
4.2 Closing the Property
Cheat Sheet

1. Liquidate Funds
  1. Liquidate funds once you receive your mortgage commitment letter from the mortgage lender
    • If using a conventional mortgage on a residential property (1-4 units), funds should be in your bank account for a minimum of two months before reaching out to a mortgage lender and before finding your first deal
    • If using a commercial mortgage, it’s not imperative that you have the funds seasoned for two months, but they must be liquidable for you and any partners a week or two prior to closing
  2. Use the HUD Audit Checklist to verify the HUD statement is accurate
    • The agent by this time should gather the signed HUD and distribute to the closing attorney, property management company (if you have one), mortgage lender, utility companies, Public Assistance Agencies, etc
    • Share the HUD/Settlement Statement with all parties including the property management company
    • If any mortgage and realtor discounts fees were negotiated, make sure the discounted rate is listed on the HUD
    • In case you don’t receive the HUD settlement statement from the mortgage company in enough time to liquidate your funds, you must reach out to the mortgage lender and ask for a dollar amount needed for closing costs. Whatever figure the mortgage lender gives you, be sure to have at least 110% capital than what’s quoted to you just in case the HUD reports a higher amount
  3. If the amount needed for closing is more than what you and your partners have, you must push back the closing date to a date you know you and your partners can gather additional funds
  4. Rent prorations, security deposit credits, and negotiated credits can reduce the dollar amount you’re required to bring to the closing table, but you still need to bring the dollar amount that the HUD settlement statement or the mortgage lender quoted you on 
  5. There’s the potential to have buyers remorse or feelings of overwhelm because you may have taken on more than you can handle
    • You can seek to terminate the agreement based on several valid reasons
      1. You may have received fictitious lease agreements
      2. The appraisal may have came in lower than the purchase price and the seller refuses to reduce the purchase price
  6. You can share your sentiments with other real estate professionals and ask for their guidance
    • If after receiving professional advice and you still feel that moving forward is a bad idea, then use the contingency to back out of the deal
      1. If you haven’t put any contingency in place or the ones you do have in place do not apply, then you can expect to lose your Earnest Money Deposit
      2. If you have no valid reason to back out except for fear, there is the potential that the seller may sue you for non-performance
  7. Limited Partners (LPs) can become fearful as well and may want to back out of the deal. It’s extremely important to keep them abreast of every part of the deal every week if not everyday, see proof of their funds, and remind them at least three times on three different occasions the amount needed for closing and the closing date
  8. Have enough funds in reserve to cover for partners that do backout of the deal or disqualify as a result of a lack of credit or income (for a mortgage if they have a sizeable amount of equity)
    • LPs should be screened in phase one to ensure they meet the qualifications early on 
      1. Review LPs Personal Financial Statements
      2. Review partners credit reports
      3. Make sure LPs have liquidable funds 
      4. LPs do have the right to send money to the bank account, but it’s not recommended with the first deal. LPs should send money directly to the closing attorney as previously mentioned
  9. Set up a business bank account for the entity, which you will personally manage, but you will provide LPs with updates
  10. Set up a Schedule E on a Google spreadsheet in order to manage the cash flow
    • Once you have 50 or more units in your portfolio, use Quickbooks
2. Secure Property Management
  1. Self Manage 
  2. If you’re looking to save money
  3. If you’re within 30 minutes of the property
  4. If you’re interested in turning property management into a business to manage other peoples properties
    • Are you willing to get licensed if your state requires it
3. Property Management
  1. If you’re wanting to save time and leverage someone else’s expertise and network of vendors and contractors
  2. If you’re not in the area and need someone to keep watch on the property
  3.  Outsource to a property management company if you’re wanting to grow your business
    • Do not contract with property management companies that charge for vacant units  
      1. Have an attorney review the contract before signing it
    • Adhere to the Rule of 3
      1. Interview 3 property management companies during the end of phase 2: Find the Deal, once the AOS is signed, and at the beginning of phase 3: Perform Due Diligence 
      2. Request each property management company to provide 3 references
      3. Call each reference for a review of the property management company
      4. Have the property management company mail out to all tenants a welcome packet the day after closing on the property
      5. The property management company is responsible for letting you know whether the tenants are cash tenants or Section 8 tenants
      6. Schedule a strategy call to keep the property management company up to date with the closing details. They will need to be provided with the Due Diligence documents: tenant ledger, leases, keys to the units, rent roll, etc

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