Streamline your cycle sale process in legal agreements

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hello my name is Patrick Connell and I'm one of the end house counselors at Washington Capital Partners this is a re-recording of a live webinar which broadcast on noon March 4th 2020 we apologize for this recording everything on our side looked as though the audio was in tip-top shape and then after we saw the recording we realized that the audio was off for significant portions of the recording so we're recording this after that live webinar it's going to cover all of the format all of the items that were mentioned in the original webinar and we hope that it's useful to you so without further ado let me get underway a few preliminary notes I'm not going to be giving any legal advice today I'll be providing general information on the lifecycle of a real estate transaction from the time that the parties sign a contract to the time that an investor purchaser conducts the out sale of the property we're going to take a 30,000 foot overview of issues such as real estate contracts wholesaling use of business entities title companies title insurance the settlement and what it entails hard-money financing and post settlement matters I'm going to incorporate some questions that were asked in the live webinar into the presentation that you're listening to now today's presentation is geared toward those who have little or no investment experience and aren't quite sure about the process of the acquisition of the property from that point to the out sale that said I hope that there are aspects to this presentation that are useful to more experienced investors the first item that we're going to look at is the global concept of the purchase of the property and that that can be divided into two phases the first is that the contract the first phase is the contract that is entered into between the seller and the purchaser and the second is the settlement will be discussing the settlement in a few minutes but a basic question that beginner investors have is quite frankly what what is what is the contract well and after you as an investor have identified a property and after you've negotiated with a seller you need to put your agreement in writing and that writing is the contract that's that's nothing complicated about that right right well following from this very simple point it is important for novice investors to understand that I said written contract everything everything in real estate has to be in writing and that includes the contract between the seller and the buyer as a general matter the law regardless of jurisdiction requires that the contract that the seller and buyer enter into is in writing and that it's not a verbal contract you can imagine the issues that would come up if we were permitted to use verbal contracts in the real estate world there would there would be an endless list of issues that that would come up and it would really make it impossible to transact anything so as a result as a policy matter everything in real estate has to be in writing and that includes the real estate contract we're not going to go into great detail on the intricacies of a real estate contract here that that would take all day and maybe we'll hold a different training at some point to address more nuanced issues the important point is because the contract is in writing the contract sets forth the responsibilities and rights of both the seller and the buyer therefore as we'll discuss more fully in a few minutes it is it is critically important to have the proper team members in place and one of those team members is your attorney that will be reviewing your contract and making sure that the terms are appropriate for you a few other considerations with with real estate investment contracts unlike a contract for your home that you live in as your primary residence in the investment world the seller is frequently conveying the property as is and it's not subject to an inspection and that might reveal substantial defects in which case the buyer could elect to back out investors are looking for deals and those deals are those properties where the seller is in a financial bind and needs fast cash or is selling a property that is known as a distressed property that is there could be substantial damage to the property and the seller quite frankly doesn't have the money to make those repairs and so it's selling at a substantial discount rate the investor is looking for that type of opportunity and they're going to acquire the property fix it up and make a profit off of it very simple formula simple simple to say of course difficult to do in execution and that that really goes to the crux of the art and science of investing there are plenty of resources available for evaluating properties and how to to make an offer and what a property should be evaluated at appropriately I just wanted to highlight Diaz's provision in an investment contract although many investment contracts include this as is provision if there is a significant title defect the buyer would not be required to purchase the property and there's usually a provision in the contract that would permit the buyer to back out if there is such a title defect and that would that where it wouldn't be able to get resolved or insured over prior to the proposed settlement date in a few minutes I'll be discussing the role of a title company and we will touch on on title defects an item that it's very important for beginner investors to understand is the concept of wholesaling and if you're in the investment world for more than five minutes you're going to come across this term and in fact it might be a way for you as a new investor to to perhaps acquire a property wholesaling is when the seller enters into a contract with say Joe and Joe then turns around and enters into another contract what's called an assignment agreement with Jill where Joe assigns his rights under the contract with the seller to Jill Joe Jill is paying Joe just to step into his shoes under under the contract and be the ultimate purchaser so a few few things with respect to this which you'll see very frequently in the investing world excuse me the original contract between the seller and Joe has to contain a provision which would permit Joe to assign the contract if there is a provision which does not permit Joe to assign the deal then Joe and the original seller have to go back and the contracts of the Jo can assign it why is this done well there are companies and persons that make it their business to enter into this field to obtain distressed properties with sellers they have the resources and the contacts and it's it's more lucrative for them to acquire properties and to to to get under contract and assign those contracts to third persons than it is for them to flip the property and at the same time the ultimate purchaser Jill in our example she's willing to pay a premium to the original buyer because she believes the property is so undervalued that she's going to be able to still put in all the work to conduct the rehab and then flip it for a profit so at an introductory level in my opinion is far easier for an investor to become the ultimate purchaser then to start wholesaling deals but that's that's an issue for perhaps one of our sales reps to discuss with you in more detail on a different presentation the point I wanted to bring to you is simply that wholesaling exists you're going to encounter it and that it might be a way for you to acquire an investment property another question that frequently comes up with new investors is why do investors use business entities for the acquisition why do they take title to the property and a business entity as opposed to their individual names well there are tax advantages to using business entities but the primary advantage in my view is the limited liability that is afforded by business entities and I should say with respect to the tax advantages you would certainly need to talk with with an accountant or your tax attorney regarding what specific benefits you would get from using a business entity but but the primary benefit in my mind is that you are afforded this limited liability that is for both limited liabilities and corporations provided proper formalities are followed then the owners of either are not going to be held personally liable for the obligations of the company so generally speaking if there is a successful lawsuit against an entity and that results in a money judgment against the entity that nobody can reach in generally speaking into the pockets of the owners to get money for that judgment the the entity's obligations are going to be kept separate and apart from the money that the owners have in their individual names and of course this this is a tremendous advantage and why people want to shield themselves and protect themselves against any potential liabilities liens judgments etc that could come up they want to shield their personal assets from the obligations of the business entity moving along the contract is going to specify a title company that will facilitate the deal and the title company is typically selected by the buyer but in a commercial transaction generally a lender may require a borrower to use a certain title company and so that raises the question of okay well what exactly what exactly does the title company do and the title company will start at the beginning of the process the title company is going to receive the contract from the buyer or the buyer's agent and they're going to order a title report from a licensed third-party vendor and that license third party is going to compile a title report which is going to pull all of the publicly available information for the seller for the buyer and for the property the title company is going to review that report and identify any issues that need to get resolved prior to scheduling settlement the title company is going to look at this report to make sure that the chain of title is clean that is are all of the various people who have owned the property are we able to account for their interest so that a reasonable person could conclude that the seller the current owner is the only person or entity that has an ownership interest in the property the title company is also going to take a look to see whether there are any mortgages that the seller has for which they need to obtain payoffs they're going to make sure that that they follow up with after getting permission they're going to follow up with those lenders to get current payoffs so that those those items can be paid off and they will no longer be a lien on the property there further going to look at this report to make sure that there are no other liens or judgments that might attach the property and which would need to be addressed really broadly speaking that they're looking to see that there's nothing else that might constitute a title defect such that the bar such that the purchaser isn't obtaining marketable title marketable title is is a term that has many definitions I think the simplest definition is is somebody willing to buy this property especially in light of any potential defect that might attach to it so from a very high level the title company is going to conduct the settlement and they're going to issue a title insurance policy we're going to issue an owner's title insurance policy to the purchaser you as the investor in the name of your entity and they're going to issue a lender's title insurance policy to the lender so with respect to this owners title insurance policy the title company will be in touch with you in the very beginning of the process regarding what products are available for you as an investor and what the title insurance will provide what coverage it's going to have and what will be excluded from coverage a question that comes up all the time regarding regarding this process and especially with new investors is what is the utility what's the point of an owners title insurance policy in my opinion title insurance is an absolute necessity for a known for a purchaser if there is an issue that comes up impacting an owners ownership and the property something that the owner did not create themselves then the owners title insurance policy is going to protect the owner so that he or she doesn't have to pay any money out-of-pocket to resolve this issue this title insurance owners policy it's a one-time fee at settlement and if there's any issue that comes up impacting this the owners ownership of the property a lien a judgment a gap in the chain of title anything at all this owners policy is going to come in and prevent the owner from having to expend any money out-of-pocket I think you know an example is really the best way to illustrate the importance of an owner's title insurance policy what it does and why it's important about 10 to 15 years ago and this is a rather dark tale but I again I think it's a it's it's a very good illustration of why and owners title insurance policy is is important about 10 to 15 years ago there was a UVA student that murdered his parents and no one at the time suspected that he was the murderer well under his parents will he took title to the property and then very shortly thereafter sold the property to a third party and that third party bought an owner's title insurance policy so a few years go by two to three years go by and the murderer confides to his girlfriend that he murdered his parents well the girlfriend informed the police the young man was arrested tried and convicted of the murder of his parents and was sent to jail where I believe he is still currently residing the family members of the murderer came forward and they said that the they tried to unwind the deal they tried to unwind the sale from the young man to the third party saying that he should not have benefited under what's known as the Slayer statute by murdering his parents and then taking title to the property and then selling it so they came forward and said this this deal has to be undone he never he never should have taken title to the property he never should have had the ability to sell the property to anybody so they loitered up and they contacted the third party that bought the property the third party that at the time they bought the property obtained an owner's title insurance policy well well because they they bought that owners policy they did not have to spend one dime defending this lawsuit they contacted the title insurance company the title insurance company then resolved the issue for them they paid off the other family members and the problem went away but had that owner not obtained an owner's title insurance policy they would have found themselves involved in a very costly lawsuit expending thousands and thousands of dollars defending what very likely would have been unfortunate for them and and that it's possible that the house would have been taken back from them so again a rather dark tale but it illustrates again the necessity of an owners policy and I think again it's the idea of what is not known as settlement right you can't possibly know of all of the things that could go wrong better to have protection than not moving on so we've now taken a look at what happens when a purchaser gets under contract what the point of having a business entity involved to purchase the to take title to the property we've looked at the role of a title company and the role of the title insurance policy I've mentioned along the way at various points people having key players to assist them in the real estate process and this this is I think a very critical point you as a new investor want to put together a quality team that can assist you as you build your your real estate Empire and that team is going to involve a quality title company attorney accountant lender construction team and real estate agent so the more experience you get the more you're going to come across the names of people that you should work with and and people that you should you should avoid another question that frequently comes up among beginner investors is the ID question of what happens at settlement what is considered the settlement the title company is going to make arrangements with the seller and buyer to coordinate the signing of the various documents the seller will need to sign the deed conveying the property to the seller both the seller and buyer will need to sign a settlement statement which is the ledger for the transaction showing the contract price the amount the seller is going to receive the amount the bar was the buyer is borrowing and the amount the the buyer must bring to the table the buyer is going to need to see if they're getting a loan to finance the deal the borrower is going to need to sign all the loan documents and so after all of these documents are signed and after the title company is in possession of all of the money that's needed from both the buyer and lender then at this point the settlement occurs and the settlement the property is transferred from the seller to the buyer some jurisdictions like Virginia will require that the deed and other documents that have to get recorded that those get recorded prior to disbursement of the funds other jurisdictions like DC and Maryland will allow funds to be dispersed at the table another question that beginner investors have is what is the advantage of using a hard money loan for the real estate acquisition so there are many ways to finance a real estate acquisition one of the main advantages is how quickly a borrower is able to obtain a hard money loan compared to traditional bank financing the underwriting process for a hard money loan could take just a few business days where whereas the traditional lending sources could take 30 to 45 days so so one it's a function of time although hard money lenders may look at a borrower's credit score and other factors that are specific to the borrower the primary underwriting requirement is the asset upon which the loan is being used as collateral in fact that's where the the name hard money comes from it's the hard asset property that is being put up for the hard money is this consideration that makes hard money an attractive option for investors as they become more and more leveraged and need access to capital which is conditioned on the asset itself over and above other considerations so so what happens after settlement what is the borrower required to do after settlement well the purchaser the new you as the investor who just bought this property you have to make regular monthly payments that are due under your loan I guess that would be the first thing that would come to mind from from someone at a lending institution you want to keep the taxes current you absolutely have to keep the taxes current that will also likely be a condition of the loan that you have as well but letting the taxes go into arrears is never a good idea you want to you want to make sure that you're not in trouble with the taxing authority with respect to that you're going to need to address any issues that were noted at settlement like correcting any housing conditions housing violations like like trash removal for which a lien may have been placed on the property you're going to need to provide your lender with with appropriate information sufficient information so that they release any construction money that's held back at that settlement so meant off many times not the full amount of the loan is dispersed at closing there will be a significant amount that's held back and the release of those funds is really conditioned on making sure that the prop that the that the rehab is proceeding ingly and you're going to have to meet your lenders obligations in order to have that money released you're going to have to meet their requirements in terms of photographs or other documents that show that you're making progress on on on the fix and flip and if it is a fix and flip you have to make sure the work is is getting done if you're you as the investor or also the contractor well you you have control over that but if you're if you're not or if you're the contractor the investor that's subbing some work out you know you have to make sure the work is done and I think this then goes back and relates to the point that you need to make sure you have a quality team in place that's looking out for you and making and that your construction team is finishing the work when when they need to finish it so kind of coming full circle now you've you you as the investor have acquired the property you have done all of the rehab it's now ready to be put on the market what happens well many investors are going to time the rehab so that they put the property on the market during periods of peak interest so they'll do the work in the winter and then the property will be listed in the spring summer early fall those are those are the times traditionally when people are buying houses to live in as their primary residence again typically the buyer is going to select the title company but but in my experience if the title company did a good job for you and the acquisition you you might try and steer the deal back to that title company they will they will already be familiar with the property they're already on the hook for liens that predate at your acquisition of the property they're going to do a bring down to make sure that nothing that nothing new has come up but I just think it helps move the transaction forward more quickly you're also going to want to consult with with your attorney on the out sale contract and make sure that that's then protecting you as well so this wraps up the presentation I hope that it's been informative I think we're doing more of these down the road we look forward to that and again we apologize for the technical difficulties that occurred during the live webinar but what I've just gone over is really the some substance of what we discussed that we look forward to hearing from you and getting your feedback on this presentation and if you have any questions about borrowing money in general please don't hesitate to reach out to us and we'll put you in touch with with the right contact thank you very much for your time