Closing On A Real Estate Investment?

by | May 12, 2014


The Big day is approaching. Another income producing asset on your balance sheet.

In most states the buyer of a property gets to choose which company will perform the closing on a real estate transaction. Sometimes a lawyer does the closing and sometime not. It depends on the state. The closing (sometimes called the Settlement or Title Company) is essentially assigned the task of transferring ownership of the property from the current owner to the new owner. They will have the current owner sign the deed over to the new owner, and fill out any additional paperwork. They will research the current title history of the property, and order and purchase title insurance for the new owner.

NEVER, EVER buy a property and not buy title insurance.

I used to own a settlement company and I only had one client not buy the title insurance and two years later when he went to sell the property, Murphy’s Law struck. I don’t care what anybody tells you, always get title insurance.

The closing company also prorates rents and taxes, assigns leases, and transfers security deposits. The most important function has to do with title insurance though. The closing company is actually a title insurance salesperson. They purchase for you, the buyer, and a title policy from one of the shrinking numbers of title insurance providers. Either the title insurance company itself will do this as title search or the closing company will hire a title searcher to do the search and provide a title report. This report will identify all of the current liens on the property that need to be satisfied before a new title policy will be issued and ownership of the property transferred to you. As you might guess, it is not a perfect business. Murphy’s Law is alive and well and there are situations where a defect in title may surface later on. This, my friends, is why you need title insurance. Don’t be a fool, be cool, and buy title insurance.

The next most important type of insurance you will need is Home Owners Insurance. I like to use independent insurance brokers because they have all the connections, can get the best deals, do all the work for you, and get paid by the insurance companies themselves, not you. Some insurance companies will not insure some rental properties or they will but at a tremendous cost.

There are three basic types of insurance, sometimes referred to as “A” form, “B” form, and “C” form. “A” form is bare bones fire insurance. No bells and whistles here. The “B” and “C” forms cost a lot more but provide more coverage. You can get lost rent coverage for example if you have a tree fall on your property and your tenants have to move out while repairs are being made, you can receive money from the insurance company that will compensate you for lost rent until your property is able to be inhabited again by a renter. When you are first starting out you may want to have “B” or “C” form coverage depending upon your personal circumstances.

Always check with an insurance agent to discuss the pros and cons. After you have a lot of units under your belt and a pretty good track record of performance you can lower your coverage to the “A” form and in essence self-insure yourself against lost rent. Over the years I have had hundreds of properties; I can count the number of claims on one hand. I had a house fire one time and the whole thing was covered by insurance. It didn’t cost me a dime. I cover this in my other book Rental Profits without the Pain, the book for those who already own rentals and are managing them themselves. I also had what I call as-is coverage. This means that the insurance adjuster makes an estimate on what it will cost to get your property back up and running and when he does he will discount it for depreciation. I always got coverage for the maximum value amount possible on this type of policy. Essentially, if I had a house that was worth $80,000.00 I would insure it for $100,000.00.

Another type of insurance you might need is flood insurance. Always check to see if the property you are buying is in a flood plain. You’d be surprised. If you are buying with a mortgage (shame on you), your lender will tell you if it is in a flood plain. If you are in a 100-year flood plain you will definitely want flood insurance and lenders require it. If you are in a 500-year flood plain you should still get it. It costs less, and a lender may or may not require it. If they do they will let you know. I had two 100-year floods occur with a two-week span in 2004. If I didn’t have flood insurance, that event would have wiped me out and it would have been nearly impossible to recover. You never know, as a result you should get the insurance. It is government controlled; it doesn’t matter where you buy it. It’s all the same.

When you have your closing scheduled it is time to call and get utilities put in your name so you have electric, gas, and water on the day of closing or the day after if you are buying a foreclosure.

The last thing you will do prior to closing is the Walk Through. ALWAYS, ALWAYS, ALWAYS, do a walk through. I bought a foreclosure once and I didn’t do a walk through prior to closing. It was too inconvenient and I never had a problem before. Then Murphy’s Law showed up in a big way. I went to the house after the closing and one of the biggest trees I had ever seen was lying across my yard and the two yards on either side of me. It was huge and it took out fences, dog houses, toys, lawn furniture, grills, you name it. Guess who had to pay for it? You guessed it, ME!

Had I done the walkthrough, heck even if I just drove by, I would have seen it in time and the banks would have had to take care of it or reduce the price of the house to compensate me for it. I had another student drive by a house he just bought hours before only to find an empty lot. The house burned down a week before and had already been completely cleared. His student was the proud owner of a vacant lot that was worth a fraction of what he paid for it. He owned it. Period. No recourse, No rewind. Just a lot of sadness and self-pity.

For more information on buying real estate investment properties please visit www.MyInvestmentServices.com. You can also call 1-800-931-2605 or email Gary@WinRealtyAdvisors.com.

What to do in preparation for your closing

What to do in preparation for your closing

Written by Gary Wilson 5/12/2014

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