Welcome back sophisticated investors, and I trust this past week had treated you well! If you will remember from my last blog, Laying a Foundation on August 12, I started to delve into who you would need on your team should you decide to delve into private mortgage investing. The first and most important in, my opinion, is a real estate attorney. Now we will look at who or more specifically what roles you should be looking to fulfill next on your team.
The next role we want to be sure we have lined up on our team would be our closing company/ title company. Now depending on the state this could very well be the same company your real estate attorney owns and operates. "What is a closing/ title company?", you may ask. Again the company is not as important as what the function of closing is. Here in Florida, you can find a closing/ title company that is owned and operated by a RE (Real Estate) Attorney, or you can find a closing/ title company not owned and operated by a real estate attorney. If you happen to be using a company without a real estate attorney that is fine, be sure you have your own trusted attorney lined up to draft and review your documents. Now what is a closing/title company's role and their function. The company lets say is called ABC Closings. There can be two scenarios. The first is that ABC is only a closing company. The second is that ABC is a closing company with title services. As a lender you should require lenders insurance. This is extremely important. If you have any questions or concerns on why this is so important please contact your attorney they will give you plenty of examples on why having lenders title insurance is so important.
First lets go over the role of ABC Closing company. We will look at the timeline of when ABC Closings is brought into the picture and your direct involvement with them: (We will say, for simplicity sake that ABC Closing also has the title insurance function as well. If not you will have to coordinate with another company that specializes in title insurance work)
- After you and the borrower (the buyers) agree to terms, you will contact ABC Closings. Normally the closing company is chosen by the seller, not the buyer. Be sure to request their E&O insurance and proof that they can operate closings in the state your doing the loan. * As a matter of policy I only deal with closing companies located in the same county as the property my borrower is buying. I'll explain why later *
- You will send the ABC Closings a request for title insurance. This insures that you have lenders title insurance for whatever amount the property is being purchased for.
- ABC Closings will assign you a closing agent. From this point forward you will pass all communication and documents to the closing agent.
- You will then send over your closing instructions along with all the documents that your attorney has drafted/ reviewed.
- The closing agent will open escrow (a function of closing) and send you a preliminary HUD-1 or closing statement. You will review that HUD-1/ CS to ensure accuracy of disbursement and allocation of funds.
- Once the closing company has a confirmation from you that the HUD-1/ CS is accurate, your borrower will then wire into escrow their money.
- Before you wire funds into closing insure the following: #1 Borrower has provided proof to the closing agent of Builders Risk Insurance, and you have received this proof from the closing agent #2 You have received preliminary title insurance and had your title attorney review for your complete understanding #3 You have received a Survey of the plot of land from the closing agent, if you required one
- You wire your funds into escrow held by ABC Closing or by another third party company whose sole function is escrow. I personally require to receive all executed documents via email and REVIEW these documents for accuracy and completeness before wiring my funds into escrow.
- ABC Closing will then take these executed documents to the county recorders office, where the property you have just lent on, and "record" these documents. The act of "recording" is the first and primary public record of you having a lien on a property.
Now if you remember I mentioned that I require to have the closing company in the same county as my collateralized property (What a property is once a lien has been placed on it). The reason is, lien position is vitally important. Lien position is only determined by one thing... when the security instrument (Mortgage/ Deed of Trust) was recorded! If you chose to work with a closing company in County A, but your collateralized property is in County Z, there could pass a whole day or two or even a week before that Mortgage/ Deed of Trust is recorded. Why is that important? If you made the loan with the belief that you would be in 1st position (Meaning the 1st to get paid off in the case of a default and foreclosure) but your borrower had another lender lined up and that lender was able to record their lien in front of yours, guess who is now in 1st? The other lender, and now you could be in 2nd. Not a good position to be in for sure. To mitigate this I choose a closing company located in the same county as the property I am placing a lien (Mortgage/ Deed of Trust). This way they can go immediately to the county recorders office that day and record my Mortgage/ Deed of Trust, ensuring I am in the position I wanted to be in.
Now there are several other documents that you may ask your attorney to draft and create for your loans to real estate renovators/ builders. This is in no way an all inclusive list of documents but may help you get started in discussing, with you attorney which documents may or may not be needed in your specific case:
- Personal Guarantee
- Construction Loan Agreement
- Affirmation of Use
You may also want to request clauses be added into you Mortgage/ Deed of Trust. These are clauses that can help you perfect your security and hedge against all types of issues that may pop up with our borrowers. I will not delve into the different clauses as these are well known by many experienced and professional attorney's. Your best option is ask your attorney what clauses they recommend that you place within your documents. Here are some standard yet important clauses as well: (Please note your attorney may call these clauses different names)
- Assignment of Rents and Profits
- Mortgagees Powers
- Cross Collateralization
Second lets look at the function of closing. As you might have been able to tell from the first look, the role of ABC Closing company, their function falls inline with these roles.
- They ensure all documents are executed and notarized
- They make sure you receive copies of these documents, both digital and actual
- They ensure that all documents that need to be recorded are recorded and then they will mail to you the actually recorded documents when they receive them back form the county recorders office
- They ensure clear communication between the seller, the buyer and yourself
Another function of closing is Title Insurance. In some cases this function may be a required internal function for the closing company handling the transaction. In other cases the closing company may not be able to provide title insurance. In this case you will have to receive title insurance from an actual title company. Please do not proceed forward with this investment strategy without getting title insurance. You can simply ask the closing company if this is a service they provide. Then you will know what you will need to do.
In my next post I will go over the function of escrow, why it is so vitally important and whose is responsible for providing this service. Have a great week, and I pray that you continue to expand your investing horizons for the future. If I can be of any assistance please do not hesitate to reach and contact me by email or phone. You can find my contact information on my website at the bottom of all my pages