I help real estate investors buy, sell, and set up holding structures for their properties.
My focus is on strategy, contracts, due diligence, and making sure that details don’t fall through the cracks and that third parties do their jobs.
What I often failed to realize until I became an investor myself is that transactions don’t start with the contract and don’t end at closing and funding.
Aside from selecting a property and negotiating the contract itself, real estate buyers have a fairly serious task list on their hands.
What I’ve attempted to put together here is a two part pre- and post-closing checklist for buyers of residential and commercial real estate. In this first section, I will discuss everything a buyer should do in the period before signing the contract through the closing.
The timing of these items is almost always overlapping and coordinating a transaction is an art-form
The Pre-Closing To Do List
- Get pre-qualified by your lender
If third-party financing is integral to a successful closing, the buyer should start on this process as early as possible in the transaction; ideally before a target property is identified. Diligent buyers should know how long their lender requires to close a deal and for how long a pre-approval is effective.
- Decide on holding structures, and other estate planning goals
For investors, each acquired property usually fits (or should fit) into some larger estate or business plan. Deciding how a property will be held (outright, in a business entity like an LLC, in a trust, or some combination of these) is often referred to as the “asset protection” strategy and should be done as early as possible. An alternative to using business entities to hold real estate, albeit less protective and attractive, is to put together “property agreements” that ensure that the owners see eye to eye.
The primary reason to make these decisions early is to avoid having to ask the lender for approval after the closing. Most mortgages contain restrictions that require the lender to approve a transfer of ownership of the property. In my experience, most lenders do not provide approval. If the property is transferred without lender approval, then the “due on sale” or “acceleration” clause of the mortgage could be triggered, causing the lender to require payment of the remaining balance of the loan all at once. Please note that homestead property should generally not be owned by any business entity.
In the race to find good deals, most investors will place an offer on a property before their holding structure is determined. If this is the case, the buyer will benefit from designating the buyer’s name in the contract, followed by “and/or its assigns.” The inclusion if this language commonly indicates to all parties to a transaction that the buyer will likely assign the contract to some entity before closing.
- Decide on how title will transfer upon the death of an owner
An additional consideration that goes beyond what is traditionally viewed as “asset protection” is the transferability of a property upon the death of an owner. Using trusts to own real estate (or the entities that own real estate) can help owners achieve confidentiality and avoid probate altogether. Another option is to consider how a property will be deeded to the buyer. A few deed types include those that pass title to the buyer(s) as Tenants in Common or Joint Tenants with Rights of Survivorship, and Transfer on Death, or Ladybird deeds. These designations must be specified prior to closing. While title companies often prepare basic deeds for real estate transactions, more complex or customized options will require the buyer to seek legal counsel.
- Perform due diligence
Once a contract is executed, the parties will enter into a due diligence or inspection period. During this period, the buyer and lender will verify certain information about a property. The basics in almost all real estate transactions include i) a property condition inspection, ii) survey, iii) appraisal, and iv) review of title. Title issues are usually identified by the title company in Schedule C of the title commitment. Commercial and other investment property deals require more detailed due diligence including, but not limited to suitability analysis (incl. zoning, deed restrictions, parking, signage, occupancy, etc.), environmental assessments, and financial, lease, and tenant analysis. In residential transactions, due diligence is usually done before the expiration of the Option Period. In commercial transactions, the due diligence period is built into the purchase contract.
- Engage 3rd party professionals for help
In any transaction, the factor that we have the least control over is 3rd parties. As such, third parties should be engaged as early as possible to avoid a last-minute scramble, delays, or missed deadlines. Other than the third parties required to perform the due diligence items noted above, buyers should consider arranging their movers, insurance, and home warranty providers.
- For Investment/Business Properties
For landlords or users of owner-occupied commercial space, buyers should ensure that they properly exited and terminated their previous leases. If the purchased real estate will be leased to a tenant (even of the tenant is a different business that belongs to or is affiliated with the owner), new leases should be created and executed. Most investors can also benefit from preparing a business or financial plan for each property.
For questions about this, or any of your real estate or estate planning goals, don’t hesitate to reach out.
Stay tuned for our Post-Closing Checklist. Coming soon.