Episode 19: Real Estate Investing: Unless It Is In WRITING, It Did NOT happen
Summary
How many handshake deals have you seen go sideways? Have you ever seen folks remember details differently? When you put pen to paper and write the details down, it is AMAZING how the details become undisputable. In today's episode, we review the items you need IN WRITING through the stages of closing on a property; from due diligence, to loan commitment, and to closing. If it is not written down, it didn't happen!
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Full Episode Transcription
Welcome to My Life as a Landlord, where we untangle all things housing and educate the curious. If
you're looking for some entertainment with some honest, awkward conversations, you've come to the
right show. I'm your host, Dr. Jennifer Salisbury. This is my life as a landlord. Welcome to it.
Aloha welcome. Welcome to this week's episode of My Life as a Landlord. I'm Dr. Jen. Welcome to our lesson.
Many of you know that I have five content buckets. One is a landlord perspective and then also a tenant
perspective. Last week we did real estate development, talking about other people's money and how to do
a no money deal. This week is real estate investment, and next week is all about other Salisbury
adventures. I'm excited about today's lesson because we are talking about something very tangible and
something that is absolutely required as a real estate investor. If it isn't in writing, it did not happen. It is
that simple. If you do not have a consistent way to document what's going on in your real estate
transactions, as an investor, you are setting yourself up for failure. So let me help you remember, as a
mindset of an investor, you are expecting some kind of return in money, especially if other people are
investing with you. So I'm going to go through a few points, and then I'm going to give you a call to
action. This can get a little touchy because people will hear what they want to hear. But if you write it
down, if. And then you deliver whatever you've written down, you share with them, whether it's minutes
or paperwork, whatever. We're going to go through all these things in writing. It is hard to argue with
black and white. And as a real estate investor you need to make sure that as much as possible is in black
and white. So let's talk about some of the items that are in writing during due diligence. Meaning you've
got a deal under contract potentially, but you're still waiting to close. You're almost to close. So what
kind of things are you going to have in writing? And remember, this is what I call source documents.
These are documents that if somebody was going to audit you or you would have to go before a court,
let's say, and a judge was going to review it, you can't argue with it because these are items that are
prepared usually by someone else, and if they're prepared by you, that you've done it so professionally
that it's almost hard to argue with it. It's not fake and it's not unprofessional, if that makes sense. Okay, so
let's talk about due diligence. So the first thing in a due diligence situation as a real estate investor is the
contract. The contract is a piece of paper that has the buyer's name, the seller's name, the contract itself,
plus earnest money in deposits either in trust with a lawyer or in escrow, whichever applies in your
geographic area. But it also includes the time limit to do the next thing. Usually a contract will have
subject to lines where subject to inspection, subject to finances, finding finance, suitable financing to
survey, subject to appraisal. There's all kinds of things that are in that contract and so the contract is
usually prepared by either a realtor can be prepared by a lawyer in some places, but the contract is the
number one thing that you must have in writing. You can't do a real estate deal legally and transfer title
based on a handshake? I don't believe so. Items during due diligence. And there is my list during due
diligence of what I ask for goes way beyond what I'm going to tell you. Those of you who know with my
nuclear engineering analytical background, I've got quite a laundry list of items that I request during
inspection periods or during when I'm trying to seek financing. I need as many source documents as I
possibly can get. So some of the simple things that we can ask for survey of the property that we're
interested in buying. Does the sellers have a survey? How recent is it? Do we need to have one? Do we
need to order one? If we do have to order one, how long does it take to get? I know in certain places it
can take a month or two to get a surveyor. So it just depends on the reality of where you're at. But a
survey, especially a survey, is stamped and so that survey is definitely a source document. Also an
appraisal, appraisal of a property is usually required from any lender. They're going to want to see a
current appraisal. That is, what's the value of this property. And there's many different methods of how
they figure out the appraisal, but it's done by typically a licensed appraiser and or someone who is
professional. That that's what they do. Again, it's another great source document. You'd also
potentially would want an inspection, a formal inspection of some kind. Whether it might be you hire an
inspector, like a housing inspector or a contractor, or maybe you've got, let's say a roofing inspector.
Maybe you've got some real issues with the roof or potential concerns about the roof. Then you might
hire someone to provide an inspection report or an estimate in writing of, say, let's a contractor that is
going to do some repairs, either on a roof or some other item that is of concern. Maybe the drainage of
this parcel that you are looking at buying is messed up and it needs to all be dug up and fixed. Well, you
need to have an estimate from a contractor, someone who can provide such estimate on their letterhead,
and then it becomes a source document, other source documents that you'd want to consider in writing.
During due diligence, the seller usually will provide a disclosure. However. That's not always a great
tool. And here's why. If the seller has never lived on the property, they can put not to my knowledge, not
to my knowledge, not to my knowledge on just about every item. And then at the bottom, they'll say,
well, the seller has never lived there. So you have to kind of take a seller's disclosure with a grain of salt.
Is it a source document? Yeah, but it's up to interpretation. It's part of your package. Okay, fine. That
one's kind of a gray area, but let's go to the next one. Insurance binder. If I'm looking at a parcel, if I'm
looking at a piece of property, I will immediately call my insurance agent, whoever it is, and say, I need
an insurance quote on such and such a property. Usually a civic address or property ID. Or a tax map key
or whatever number, whatever it is, that they can identify it, and we'll get a binder pretty quickly. But you
can also request from the seller if there's been any insurance claims or outcomes, anything that has
involved insurance at all in the property in the last five years. Also your property tax records or the
property tax assessment. And that is usually public knowledge. That is usually something that the
regional area or your county or your city will have that in a searchable form. I know in British Columbia,
you go to bcassessment CA and you type in the address and it pops up and you can pick whatever
property you want to look at, not even necessarily your property. You can pick any property and see what
it assesses at. That is a source document, because that is something that's provided from a government
agency. Also, if you go to your local city, if your city has zoning, some places do not have zoning, which
is really interesting, but anywhere that is zoning, there will be a zoning map somewhere, whether it's with
your city or your county or your regional district. If you've got areas that are with zoning, where does this
property that you want to buy fall into the zoning map? And if it doesn't have zoning, there is usually
different classifications where it says in this area, in this geographic area, we want light industrial, or we
want this to be an employment center, meaning businesses and housing and things like that. So even if it
doesn't have specific zoning, it will have some kind of something is designed for that area. You want to
get that from your local area. So. Usually I'll ask the seller for copies of all the utility bills for six
months. So if you've got either electric, gas, water, sewer, trash, even cable, cable, Internet, anything that
is a utility bill of any kind for that property, I need to know it. Because guess what? If we close on this
property, I'm going to be paying all those bills. So, yeah, they can say, well, the electric or the hydro is
$200 a month. Okay, that's fine. Prove it. Send me the bills. I want to see the actual source document for
the bills. Not just a spreadsheet or an email that they say it's just this. No, I want copies of the utility bills.
A couple of other things that are in writing that you are going to need is credibility package. That is a
resume on you, on your experience, who you are, what's your story, why are people investing with you?
That credibility package, is it a source document? Well, it's debatable. You are making it up, but it's
something that shows your experience. Meaning if an investor is looking to invest with you and they start
researching who is the owner or the owner of this property that you've used, that every single thing in
your credibility package can be justified. Yes. Then it is a source document. I would say also you need to
be prepared with your personal net worth. I would also say that personal credit, both your report and your
score, you need to have that ready to go. Now, I have talked about personal credit and why is credit
critical? In previous podcast asks if you want to know more about personal credit. I encourage you to go
back to some of my previous podcasts where you can learn about that. If. But sometimes it's not all about
personal stuff. Any investor is probably going to want to know about your personal net worth, your
personal credit. But what if you want to buy this property in your LLC or a family trust something now
beware if you are purchasing in any kind of company or trust that may affect it may affect how your
lender view use the deal. Sometimes we have found lenders who do not do deals where an LLC is buying
a property. Well that's a problem because we operate quite a bit in LLCs. Of course this is in the US.
There are similar items, similar issues with lenders in Canada. So if you've got a limited company that
lenders might view that a little bit differently than an unlimited company for example or in your personal
name you want to really look at how you are buying this property. That may affect how your lending
goes. If you are able to buy it in your company then the lender is very likely going to want to see or any
lender you're approaching is going to want to see your articles of organization or your incorporation
agreement. If you're considering buying it in a trust they're going to want to see the trust agreement,
they're going to want to know who the trustees are, who the members and the managers are. All of these
are considered source documents because they are directly impacted into the deal. And I'm still talking
about due diligence. We have not moved off the first point yet. This is pretty big point. A couple of other
things that in due diligence when you've got your money and you're waiting for either loan commitment
or you're trying to get your subjects removed you want to make sure you've got your Ccnrs or your
homeowners association or your Strata. If you're in Canada it's known as a Strata or your CPR documents
there's a number of documents that are dealing directly with properties depending on how they are titled,
depending on how they are set up. If you've got a leasehold, if it's a lease transfer and it's not a clear,
free, 1s simple title, you want to make sure that you've got all the lease documents that you understand
how that is all affected. All of these are important source documents during due diligence once you have
a property under contract. Now let's talk about when you have got a loan commitment. Let's say you've
qualified with some kind of a lender, whether it's a hard money lender or a bank or an institution or even
a private lender. Let's say you've got someone who's going to give you back you on this and they want to
register a mortgage. You're prepping to close when you get that loan commitment. Okay? So you've
removed the subject to lending. You've got a mortgage doc, you've got your loan commitment document
that says we're going to loan you this amount of money. You have to put in this amount of money and
we're going to take a mortgage in this amount. This will be your monthly payment, this is your interest
rate, this is your term, your duration, how long it's going to be for. And then at the end of that we want a
balloon payment, we want to work with you on a refinance, however you want to do it. But the loan
commitment document is critical when you are preparing to close because if you can't get loan
commitment, it is very likely that you may not be able to close on this property depending on who is
providing the loan. Now that loan very likely is going to come with a mortgage document. A mortgage
document does not have to be. Too crazy. Or banks and institution lending institutions usually have a
standard mortgage document that's fine. But if you have a private lender that's going to lend to you, an
attorney can prepare one. Potentially Escrow can prepare one. It just depends on who's preparing the
mortgage document. Further, there's usually a promissory note that be either secured with a mortgage it
can also be an unsecured promissory note. So either way there is a promissory note that is given to the
lender and we usually do both. If you're securing, you're usually doing both a mortgage document that's
registered on title and then a promissory note. But we have also done unsecured loans with just a
promissory note and no registered on title on any of the properties and that's some trust, but we have
done it also. The other thing that you want to be prepared for when you're about to close is the deed. The
deed is what gets recorded, either the state or the province and it depends on which form you're using
depending on what province gets recorded. But there is some kind of a transfer of title in the US. It's
called a deed. Sometimes it's called a form C or form A, depends on what your lawyer, your Escrow. But
there is something that will actually record and will actually transfer the title to the buyer. Okay. Now
throughout this entire process as a real estate investor, let me put my real estate developer hat back on
here for a SEC. There's usually going to be some kind of an improvement along with the property and is
during the loan commitment prior to close time that I will be talking with contractors. I will be getting
estimates on whatever work I need them to do. I'll be screening the contractors. Getting my detailed
scope of work so that I can get my estimates from contractors. By the way, if you are trying to figure out
how to find a contractor, I recently did a podcast on how to find a contractor, part one. So I encourage
you to go back and listen to that podcast if you're stuck on that. But when you're prepping to close, that is
the stuff that's in writing. That's what you're starting to look, because you are literally heading to the
closing table. You are about to get the keys. And when you do get the keys, you need to be prepared for
making sure you're ready to actually own this property. So, point one we talked about items in writing
during due diligence. .2 what is in writing when you're preparing to close? what's in writing when you
close? Well, guess what? You've got a recorded, signed deed. You should have all your closing
documents, including your buyer settlement statement or your HUD, one whatever it's called in your
area. And. Transfer all your utility bills. Your property taxes will already be transferred when they record
the title transfer. Typically, when we close, we are already looking to sign the agreement with a
contractor. If Mike's not doing the work, we'll be signing the agreement. We'll be ready to go. That day
zero is the day we close. And then usually day one is the next day where we're starting work. That's
typically how we've worked it. But also, when you close, I hope you have name and number of your
neighbors. This is a piece of property. Again, the whole goal of why you create housing is to create
community. You should be interacting with your neighbors. If there's something that's going wrong or
going right, you want your neighbors to communicate with you. If you want to know a little bit of the
history, you would communicate with your neighbors. So what's in writing? Name and number of your
neighbors. That's exactly what I would do, and that's what we have done in the past. We will typically
walk around and introduce ourselves to all of the neighbors in the entire neighborhood, at which point
they will tell us all of the stories about whatever property we are about to buy. Usually very disturbing
stories, but sometimes they'll be good stories, but they will typically have the history. Okay. If it's not
in writing, it didn't happen. You've got to keep yourself organized and that's a difficult skill set to have if
you are not an analytical person like me. If you're a visionary like Mike, you need to make sure that you
are hiring someone who does have an analytical skill set that can keep things organized, that can
communicate and keep things written. You cannot necessarily, do things on a handshake basis. So
here's your call to action. What do you have as a handshake agreement? You as a real estate investor
right now, do you have any handshake agreements that you should put in writing? Think about it. If you
do, you probably should put it in writing, which is going to be a really interesting, awkward conversation,
but sometimes that is what is required. So make sure that if it's a handshake agreement that it should be in
writing. You kind of need to put that in writing. You need to get through that and put it in writing.
Remember, again, if it's not in writing, it didn't happen. Next week's episode other Salisbury
Adventures immigration Myths, Lies, and Assumptions. For many of you that don't know Mike and I
personally, we have had a number of immigration problems, both on the Canadian and the US. Side, and
I will go through a lot of the lessons learned, so hopefully you won't get caught in the pain points that we
were. And so we will see you next week. Thanks for tuning in. We'll see you next time.
Thank you for joining us this week. To view the complete show notes and all the links mentioned in today's episode,
visit our website www.mylifeasalandlord.com. If you're looking for educational resources for getting
into real estate investing, becoming a landlord, or even a better tenant, then I have a page on my website
to get you started looking for a solution to the pickle that you're in, I've suggestions for that too. You can
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podcast on, or you can sign up at www.mylifeasalandlord.com Thank you again for joining me, Dr.
Jen, for Salisbury in this episode of My Life as a Landlord. I'll see you next time.