Closing real estate deals may be the most exciting thing investors experience over the course of their careers, but that doesn’t mean the process isn’t a lengthy and confusing one. In fact, there is a large contingent of new investors that are more than eager to close their first deal but don’t quite know how to. To them I say: it’s not hard at all, as long as you follow nine simple steps. With the right system in place, closing real estate deals isn’t a burden, but rather a pivotal moment in an investor’s career. Let’s take a look at how you can make your next closing a lot less stressful and much more rewarding.
Real estate transactions can be complicated and for good reason. Few people will make a larger purchase over the course of their entire lives, and it only makes sense that there are rules to follow with so much on the line. It’s worth noting, however, that the length of the closing process isn’t to confuse or deter anyone away from buying a home, but rather to protect them. And it just so happens that there is a simple system to follow to ensure that you dot all of your I’s and cross all of your T’s. A proven system can make the buying process much more enjoyable, which begs the question: What are the steps in a real estate closing? Follow the nine steps I outline below to make closing real estate deals something you look forward to, as opposed to something you are scared of:
Conduct A Title Search & Get Insurance
Hire An Attorney
Negotiate Junk Fees
Conduct A Home Inspection
Consider Subsequent Negotiations
Sign The Papers
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As much of a practice in exercising caution as it is in facilitating a deal, opening an escrow account is a step in closing real estate deals that can’t be overlooked. Prior to bringing your deal to the closing table, be sure to establish an escrow account that will handle things moving forward.
For those of you unfamiliar with escrow, it is essentially an account held by a third party on behalf of everyone represented in a transaction. If for nothing else, it’s a way for an unbiased, trusted third party to collect all of the documents and money involved in a deal and hold on to them until instructed otherwise. Once everything is in place, the money and documents will be transferred to the new owner, essentially eliminating any chance of malicious acts from taking place. In short, escrow accounts are the safest way to exchange valuable documents and capital.
Not unlike the previous step, conducting a title search and obtaining title insurance represents a safety measure; you can never be too safe when closing a real estate deal. That said, this step is to protect your asset from anyone else claiming ownership. Reach out to a title officer who, in turn, will mind due diligence and confirm whether or not there are clouds on the horizon. It’s not out of the realm of possibility that the subject property isn’t the seller’s to sell. The least you can do is find out, right?
The title officer will perform extensive research in order to determine the proper owner. What’s more, they will be able to answer whether or not there are any third-party claims to the home you are about to buy. In following this step, you are eliminating the potential for anyone to bring into question the legality of your purchase. Provided everything checks out, you will be free to move forward with your purchase. However, any problems that result from the title search will need to be resolved before acquiring the subject property.
While optional, hiring an attorney to represent you in a real estate deal is a luxury few should do without. If for nothing else, hiring an attorney that specializes in real estate transactions will provide you with a peace of mind that can’t be underestimated. In hiring someone that is well-versed in these types of deals, you can rest assured that all of the closing documents are in order and where they need to be. What’s more, a trained eye will be able to identify any potential problems and meet them head on. Don’t let paperwork prevent you from closing on the deal of your dreams; hire a trained professional to represent your side of the deal.
It’s a sad truth, but a reality nonetheless: there are plenty of companies in the real estate industry that are perfectly fine charging “junk fees.” While the exact definition of a junk fee remains up for debate, they typically include phrases that feed off of consumer ignorance. Common junk fees include administrative fees, application review fees, appraisal review fees, ancillary fees, email fees, processing fees and settlement fees. And while each of these fees is as ambiguous as the next, they are nonetheless a reality for inexperienced buyers and sellers.
It’s worth noting, however, that knowledge is power. It’s entirely possible to negotiate those fees associated with average closing costs, if not eliminate them altogether. Those willing to acknowledge these fees, and perhaps even challenge them, stand the chance of removing them from their costs altogether. Don’t forget that even legitimate closing costs can be negotiated; you will never know unless you try.
While many will argue that a home inspection isn’t required, I beg to differ. In fact, I maintain that conducting a thorough home inspection is absolutely integral to closing a real estate deal. There is only one question you really need to ask yourself when deciding whether or not to hire an inspector: Why wouldn’t you? The cost is minimal and a home inspection can save you from a heap of trouble down the road. Any problems uncovered over the course of the inspection will give you the opportunity to back out of a deal, or at least ask the seller to rectify the problems before the transaction is carried out (as long as your purchase offer included a home-inspection contingency).
At this point, you may have realized that closing real estate deals has as much to do with protecting yourself as they do with seeing it through to the end. And you couldn’t be more right; closing a deal should coincide with significant safety measures. However, let’s not forget why you are there in the first place: to get a deal done. With that in mind, evaluate everything you have done up to this point and determine whether or not your original offer price needs to be tweaked. In the event the inspection came back with some glaring complications or some unforeseen circumstances reared their ugly heads, you may have grounds to negotiate a better deal on your behalf.
Every good real estate investor knows a great offer isn’t complete without contingencies; the clauses in a contract that allow you to back out of a deal in the event something goes awry. It’s also worth noting that any contingencies should have been taken care of by this point. While that’s fine and well, most contingencies need to be written off when they are met. In other words, you must remove the contingencies (in writing) by a certain date, which is typically identified in the purchase offer.
No deal should be brought to the closing table without conducting a final walkthrough. At this point, most things should be in place and all that is required is a final walkthrough of the property to make sure it’s in the condition you were promised. Be sure to confirm that no additional damage has occurred or that the fixes were addressed.
It should go without saying, but the most important step in closing real estate deals is signing the appropriate paperwork. Once everything is in place, feel free to start signing away. And trust me, there will be a lot of paperwork; much more than most people anticipate (upwards of 100 pages isn’t uncommon). It’s worth noting that the sheer volume of signatures required shouldn’t, in any way, force you to rush through this critical process. I highly recommend you read each page carefully and refrain from signing until you know exactly what you are agreeing to (especially the fine print).
It can’t be underestimated: the real estate closing process can be intimidated, but that’s only because of how important all of the subsequent steps are. Each task and decision carries a lot of weight, and none should ever be hurried. That said, the process can take some time. With each step having big ramifications, there is no reason to hurry, which begs the question: How long does it take for a real estate closing?
To be fair, closing a real estate deal will take as long as each party needs it to. A closing shouldn’t be rushed, which means the timetable is up to the slowest mover on either side of the transaction. Two experienced parties will most likely close a deal faster than less experienced buyers and sellers. That said, there are some timelines to base a timetable off. A mortgage application, for example, usually takes 30 to 45 days to submit. No closing will happen without the application, so the application process will set the expectations. Once each party is at the closing table, however, it’s entirely possible for a deal to close within an hour. Again, the experience comes into play. While some parties will close faster, talking at the closing table can also take several hours.
Like everything else in the real estate world, closing time frames are constantly changing. There are regular fluctuations due to recurring factors such as the season, and how busy the market is. Then, there are even larger factors that can come into play. These can include major interest rate and market direction changes, or even new regulations.
While sellers and their agents seem to be more motivated than ever to close faster, many homebuyers may be experiencing longer closing times. Even the National Association of Realtors believes closing times should be extended.
There are a wide variety of factors that can potentially impact your closing times:
Get an early start, and preempt as many of these issues as you can to streamline your real estate closing. For example, develop relationships with the different parties involved to ensure they have your best interests in mind. A good way to do this is to respond to all communications in a timely manner and maintain positive relationships with everyone involved.
The number one thing you can do to speed up the closing process is to prepare for every step of the process. That said, there are additional steps you can take toward an efficient closing. These include:
Closings do get stalled, but you can limit their likelihood by requiring sellers and their agents to demand more ‘skin in the game’ in the form of larger deposits. The further out your closing is, the larger the deposit a seller may try to negotiate for. In some cases, sellers may be willing to provide an extension but this can require additional funds.
The opposite is the case for buyers. The less money you put up, the less you have at risk. If necessary, break up the deposit into several parts, and at key milestones. For example; a second deposit after the inspection, and a third after title, appraisals, and loan commitments come in. Who you deposit with makes a difference. Choose a party that is more likely to side with you, or who is at least truly independent and unbiased.
Closing on a real estate deal will come complete with several additional costs. However, instead of simply lumping them all under one umbrella, let’s take a look at many of the closing costs one could expect to run into at a real estate closing:
Mortgage Origination Fees
Real Estate Agent Fees
Private Mortgage Insurance (PMI)
Recording Fees & Taxes
The first thing to do after closing a deal is to make sure you protect your investment. On the day of closing, make sure to get the property insured. If you are using lender financing, you will have to. However, you should take steps to ensure the property immediately after the paperwork is signed even if you’re paying in cash. Additionally, you will want to secure the property itself. Start by changing out the locks and putting plywood over any broken windows. Next, put a padlock on any basement or garage doors. By taking the above measures, you can protect yourself from any potential issues.
Ideally, you will already have a few home improvement projects in mind as you close on the property. If not, now is a good time to evaluate what you have to do, who is going to do it, and for how much. Ask your network for reliable contractors, or work with one of your existing contacts. Schedule a walkthrough and review your plans for the property. Be clear about your expectations for the project, and your ideal timeline. Remember, this is your property. You do not have to work with the first contractor you talk to. Instead, take time to find someone you trust to get the job done. With the right plan, rehabbing and selling a property should be easy. However, once the property is sold, you are still not done. There is plenty of work to be done even after you make your profits.
In order to ensure your next deal runs as smoothly as this one, you need to track your results. Going from a deal to deal or marketing plan to marketing plan can lead to a continuous cycle, with no real improvements. Even though you may already have your sights on another property, write up the process you followed to close this deal. Make a note of the purchase price, closing timeline, profits, and more. Not only can this serve to show you where you can save money and focus your future business, but you can also use this to gain new contacts as well.
The last step you should take after closing a deal is to add the finished property to your real estate portfolio. If you are not already, you should get in the habit of adding to your portfolio for each deal you are involved in. Your tracking methods could include a spreadsheet, word document, or even a presentation with photographs of your completed properties. Find a system that works for you, and remember to stay organized. This information can be used by any future private money partners, investing partner candidates, and anyone that you try to work with. The more detailed information you can provide them, the better they can get a sense of how you operate and what you bring to the table.
Once all of the papers are signed and everything clears escrow, you will be the proud owner of a new property. While closing real estate deals may seem like a lengthy process, I can assure you that all of these steps are there for your protection. Take my advice: follow these steps, as they are there to help you. Then, and only then, will you be able to create a system for your own closings, which should enable you to make success habitual.