This is when it all comes together! This is payday in real estate investing. If you have been working with your tenant-buyer from the beginning and keeping them in touch with a mortgage broker, you will know when they are ready to purchase your home. They are finally ready to close. If they want to use a mortgage broker of their own choosing, that is fine. Just find out who it is and keep in touch with them, so that you will know where they stand on getting their mortgage completed.
Although the paperwork was signed many months earlier, often the mortgage lender may want you to change something on the contracts in order to get the mortgage approved. For example, the buyer may need more money for closing costs, so the lender may ask if you are willing to pay for some closing costs if you increase the price of the home by the same amount. I am always willing to do this, as long as the home can appraise for the new amount. Appraisals have been a bit more difficult lately, so this might become an issue. A way to avoid this is to make sure you set up the lease option right from the beginning. You need to make sure that what your tenant buyer puts down and option credits you give them each month, will be enough to close at the end of the option period (based on the current mortgages available in the market place). The lender will work with you on these numbers and changes, but they do happen frequently. I am always willing to work with them as long as the changes are fair for all parties involved.
I have also been willing to hold a second mortgage for the buyer. For example, the buyer is purchasing the home for $200,000 and they gave me $4,000 option fee, therefore they owe me $196,000 and possibly less with option credits for paying on time, etc, however, the lender wants to them to have five percent plus closing costs into the home, and they don’t have any more money to put down. They really need an additional $10,000 to close this home. I might be willing to hold a second mortgage for these buyers for the $10,000 if I believe the home is worth the mortgage and I believe the people will pay me on the mortgage. I would then get all of my profits out of the home at the closing except the $10,000, which I would get out over time with payments on the second mortgage. Many times on the second mortgage I do a one or a two year balloon so I get paid off fairly quickly. They would have to refinance the home in that time period and pay me off. Note however, that second mortgages MUST be on the HUD statement and known to all parties. Our current mortgage climate may not allow for this, so beware that they might not be so easy to do.
A simultaneous or double-closing is when there are two closing on the same home at the same time or the same day. It is sold and bought the same day. It used to be that we, as the investor, didn’t need to bring money to the closing table, but now that is not possible in any state. You must have the funds to buy before you can sell. You can get funds for a twenty-four to forty-eight hour time period, called transactional funding. It will cost you a couple of percentage points, but it will get the deal closed for you. This is one way to handle this situation. The other way is to get the seller to sell directly to the buyer and you put a lien on their home for the amount of your profit. All parties still get what they want, but it does take a little more creativity on your part. There are ways around most everything, when we use our creative minds. This last idea also helps with “seasoning” requirements set up by many lenders today.
Find out when the buyer is going to close and keep in communication with the seller about it. Go back and forth on it until finally you get it down to the exact day and the exact hour. You should be the coordinator, not anyone else. You have to make sure all the pieces fall into place. You coordinate the tenant making arrangements with the mortgage company. Make sure the buyer, the title company/attorney and the mortgage company are all on the same page. I recommend you reconfirm each party the day before. It would be a shame for the deal to fall through due to a scheduling oversight.
The mortgage lender only sees one side of the transaction – the side between the investor and the buyer. To the lender, I am the seller. To the seller I am the buyer. The title company sees both parts. Make sure when you are coordinating with the title company or attorney’s office that they know both sides of the transaction. They will need the paperwork on both sides. To them it is two files.
The mortgage lender will need copies of the contracts, a payoff letter, and copies of cancelled checks. From the very beginning, ask the tenant to keep copies of their cancelled checks. With the banking industry changing and us not receiving our checks back, they might have to order these, but I keep a record of all of their checks — the check number and date paid. I also put a copy of their check in their folder. They may not keep records like I do, so I can help them gather this information quickly. For most lenders, if they want to do a lease option refinance type of program, they will need twelve months of cancelled checks, or proof of payments. A letter from me alone is not enough. A bank cancelled check is real proof or a bank statement showing their cancelled check is what the lender will require.
I usually don’t like my buyers and sellers to meet (unless it is necessary due to seasoning issues with the mortgage for my buyer). Though intellectually, each of them know I am making a profit and each of them know I am a real estate investor, to put a dollar amount in front of them can destroy their enthusiasm. In each of these real estate deals, they are a win/win/win for each person involved, but change the scenario to put us all at the same closing table. Have the seller and buyer see me get my check for $42,400. Now, their joy is robbed. They are not as happy about the deal they each received when they know exactly how much I am getting. The atmosphere of the room changes quickly. I would not want to change the way they each feel about the deal and therefore I would not ever put them together again. This is from experience!
Usually you will close with the seller and buyer at almost the same time if you are using transactional funding.
