Accelerator: 2.4 Pre-Contract to Post-Close

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Accelerator
2.4 Pre-Contract to Post-Close
Cheat Sheet

1. Pre-Contract
  1. At this point you have the documentation to prove that you have the money to purchase your first owner occupant home:
    • Tax returns
    • W2’s or 1099s
    • Bank statements
    • Pre-qualification and pre-approval letters from the lender
  2. Know your purchasing power and terms:
    • Interest rate: Fixed or ARM
    • Amortization rate
    • Down payment
    • Points
    • Estimate of closing costs
    • Update the Deal Analyzer with the above data  
    • Apply the 1% rule
  3. Deals:
    • Look for deals by:
      1. Drive around and check the quality of the neighborhood.
      2. Attend open houses.
      3. Leverage your network to find deal finders who can locate properties for you.
        • Put together a team. Reach out to them once a week and ask these questions, and notate all responses in the CRM and use you OP:
          1. How’s it going?
          2. How are things progressing?
          3. Is there anything they need from you?
          4. If there’s something you need from the seller?
          5. Is there anything you need, period
          6. Are there any constraints?
        • Team members consist of:
          1. Mortgage broker/ Lender 
          2. Closing company
          3. Real estate attorney: To review documentation
          4. Realtor: Someone who looks at deals for you
          5. Property inspector
      4. Search on Zillow, Trulia, Homepath, etc
      5. Send offers in your personal name when just getting started for owner occupant properties:
        • Secure insurance to protect your assets:
          1. Vandalism insurance
          2. Lower deductible 
        • You can Quitclaim the property out of your name into your business name at a later time. Contact an attorney to draw up the paperwork, or do it yourself by visiting the clerk at the courthouse and ask what paperwork is needed to complete.
          1. Warning, if the mortgage company finds out that the ownership has changed, (even if it’s from your name to your company’s name), they may instate a “Due on Sale Clause.” Meaning, the full balance of the mortgage is due within 30 days. 
  4. Offer 10 – 15% below asking price:
    • What makes a deal a deal is if it works once numbers are put in the Deal Analyzer.
  5. If the property is valued at higher than the asking price, then this means that there is built in equity and you should consider making an offer:
    • Ask questions to agent after you’ve submitted your offer 
    • Pre-contract questions to ask agent:
      1. What are the terms (Due diligence period, earnest money deposit, contract)?
      2. What is the asking price?
      3. What are the comps (comparable sales in the neighborhood)?
  6. Mindset:
    • If the appraised value comes back lower than the purchase price, then ask for the purchase price to be reduced, and if the seller refuses, walk away from the deal because there are plenty of other deals out there.
  7. Contract:
    • The contract is known as the Agreement of Sale (AOS), P&S (Purchase and Sales Agreement, or the contract.
    • Based on your location, the contract will be different.
      1. The contract will contain the following information:
        • Who’s selling or assigning the property 
        • Property address
        • Legal description 
        • Sales price
        • Equity payable
        • Existing mortgages
        • Insurance 
        • Risk of loss
        • 5 day grace period for the seller to sign
    • The earnest money deposit should be between $1000 to $2000.
    • Enter a closing date that’s 90 to 120 days from the date of signing the contract. 
    • For “Other Agreement” listed in the contract, this could include things like:
      1. How you want the deal to close for example:
        • Who gets to keep the appliances or any furnishings
        • The seller gets all occupancy repairs done, etc
    • The buyer and the seller signs the contract with an understanding that time is of the essence. 
  8. Contingencies:
    • Along with the AOS there needs to be contingencies. 
    • Start off requesting a 30-45 day property inspection due diligence period, but settle for no less than 30 days.
    • If you don’t like ANYTHING about the property, you can back out legally within that 30-45 days and get your earnest money back.
    • Here is a checklist for contingencies to be included in your contract: Purchase and Sale Agreement Checklist.
    • Review the seller’s contingencies, but do not accept the property in an “As is” condition.
    • All documents, meaning the contract should be sent through Docusign or a PDF format.
    • Update the date you signed the contract if the seller signs at a later date. Otherwise, the date the seller signed will not be the starting date for the due diligence period, it will start the date that you signed.
    • Contact the local government for fees associated with rental units.
2. Due Diligence
  1. Financial due diligence:
    • Expect the seller to provide you documentation within a 5 day period.
    • Send out friendly reminders if you haven’t received anything by day 4.
    • The financial due diligence process should be completed within 10 days.
    • Review docs from the seller and compare them against the listing and other information you researched with 3rd parties (Taxes, Utilities, etc).
    • Notate any discrepancies on the Due Diligence Findings Report.
      1. Go to Google Sheets
      2. File
      3. Make a copy 
      4. Save to your drive
      5. Rename it for the property address and street
    • Ask the seller to provide a written explanation for discrepancies.
      1. If the seller’s reason for discrepancies are inadequate, seek cash back at closing.
      2. If the seller’s reason for discrepancies are fictitious, then back out of the deal before the due diligence time frame is up.
    • Make copies of all documents you receive and share them with your team.
  1. Physical due diligence:
    • The physical due diligence process is to be completed within 10 days after the financial due diligence is complete.
      1. Locate a property inspector and request a detailed inspection report with life expectancy.
      2. Complete a walkthrough of the property along with the property inspector.
      3. Get 3 different bids from 3 different contractors to do the repairs.
3. Close
  1. An Addendum is an addition to the contract based upon the seller’s explanation:
    • Could be something like getting cash back at closing.
  2. An amendment is a change to the contract based upon the seller’s explanation:
    • Could be something like a reduction in the purchase price.
  3. Reach out to the mortgage lender/ broker:
    • Request the status of the mortgage commitment letter and when will it be provided to you.
      1. You must have the mortgage commitment letter before the financial contingency time is up.
    • Reach out to the closing attorney weekly to find out the status of the title work and any action items that still need to be accomplished.
    • Complete a walkthrough with a professional to confirm that the seller has completed all repairs required.
  4. Coordinate the closing:
    • You are the responsible party to schedule the closing date and keep everyone informed.
      1. The closing date is outlined in the contract, but circumstances may cause the date to change. 
    • Verify the unit you plan to live in is vacant.
    • Reach out to the insurance broker to make sure there is an insurance binder that protects your asset, is in place and share the document with your team.
      1. If anything in the binder changes, update the Deal Analyzer to have a clear picture of what your cash flow will be with the changes.
    • Have liquid funds to settle the closing costs:
      1. It’s a good idea to wire the funds to the closing attorney two days before the closing date.
      2. If you’re closing in person, then take with you a cashier’s check to settle the closing costs.
  5. The closing day:
    • At the closing in person or remotely: 
      1. Retrieve all keys to the property.
        • In person, have keys mailed express mail.
      2. Collect the service contracts.
        • Collect contracts In person or have contracts mailed express mail.
      3. Notify tenants of new ownership.
    • At this stage, consider filing an entity for an LLC in regards to property management:
      1. Hire an attorney, apply with Legal Zoom, or set up the entity yourself using your state’s website, by visiting the Directory of Secretary of State Offices and Website.
        • If creating the entity on your own, visit your secretary of state website for instructions on forming an entity. 
    • Review the HUD Settlement Statement for prorations, credits, and to make sure none of the fees were duplicated.
      1. Celebrate your success!
4. Post-Close
  1. If you negotiated to receive cash back at closing, then it’s now time to complete the repairs.
    • Let tenants know the scheduled repair dates and times. 
  2. Decide if you’ll be the property manager or hire out.
  3. Keep track of the expenses and revenue by recording them on a Schedule E.
  4. Decide whether you’ll entertain the Airbnb model or use market rent:
    • With Airbnb, consider your time, money, and zoning laws:
      1. Sign up for an account on Airbnb.
      2. Take photos and post on Airbnb site.
      3. Write out a description of the unit available. 
      4. List what the unit is accessible to.
      5. List all amenities being offered.
      6. Furnish the unit.
      7. Check out guest reviews before selecting. 
      8. Review all the Airbnb SOPs, check in, check out rules in the Resources for more details.
  5. For market rents:
    • Screen market rate tenants via mysmartmove.com for criminal backgrounds and credit checks.
      1. Contact the previous landlord for tenants rental history, how the tenant treated the property.
      2. Contact tenants employer for pay details and for length on job.
  6. For whatever model you choose to operate your property, have the mindset that if your property is damaged accidentally or on purpose, things can be fixed with the repair reserves. If tenants don’t pay the rent, you have reserves for vacancies.
Words of advice
  • The linked contract above is an example for you to understand what a contract entails. 
  • Ask your real estate agent for an AOS at no cost. 
  • You can also get an AOS from a real estate attorney, at cost, to view the actual contract you will use to purchase your owner occupant property to make sure it’s up to code and legal in your specific area.
  • Once the contract is signed by both the buyer and the seller, it is now a binding contract.
  • Do not accept a contract that is written on a “docx file;” the seller has the ability to change the language after you sign it.  
  • Maybe you’ve heard of a 10 day due diligence period. That’s for hard money loans/ distressed properties and not applicable to this real estate strategy of buy and hold.
  • When buying an owner occupied property, be sure to put in the contingency that whatever unit you want to live in that the current tenant occupying that unit will have to move out.
  • If a tenant moves out several days before closing, have in your contingency that the seller will have to extend the closing date until after the seller finds a new tenant. Else, you can put in for 2 months of rent credits in this same scenario.
  • If you allow the seller to provide the contract, you must have an attorney look it over before signing it. Why? Because the seller’s contract will be drafted in his or her favor.
  • When first starting out, it’s highly recommended to hire a real estate attorney to review contracts. Now for future deals, you won’t necessarily need a real estate attorney, because you’ll already know what the contracts should contain. It would then be time to hire a settlement company. 
  • When putting together your team, ask for three references.
  • Whether to use an addendum or an amendment is something your agent will advise.
  • No matter what team member you communicate with orally or in writing, be sure to let all team members know the outcome of it and send them copies of any documents. 
  • Regarding collecting rents from tenants, you want them to send their rent to the property management company and not to you personally.
  • Tenants do not need to know that you own the property, just tell them you’re the property manager.

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