Good Tuesday sophisticated investors! I hope you had a great time this past weekend as we celebrated Labor Day. Here are 5 life lessons learned from labor day...
1. If all the cars in the United States were placed end to end, it would probably be Labor Day Weekend.
2. Labor Day is a glorious holiday because your child will be going back to school the next day. It would have been called Independence Day, but that name was already taken.
3. The only liberty an inferior man really cherishes is the liberty to quit work, stretch out in the sun, and scratch himself.
4. The man who doesn't relax and hoot a few hoots voluntarily, now and then, is in great danger of hooting hoots and standing on his head for the edification of the pathologist and trained nurse, a little later on.
5. I help by staying out of the way while other people are working.
Lyle "Danny" Hintz Jr.
Other great labour day quotes.... CLICK HERE
I left off in my last post about laying a foundation and building your real estate lending team talking to you about the closing company/ title company. We understand that this company could be two separate companies or one company providing both services. There is another service which I would like to speak with you about. This is the service of escrow. Now again in some states (you will want to check with yours to make sure) the service of escrow is provided by the same company conducting the closing. In other states, it's a separate company altogether. For the purpose of this article, we will assume that the closing company will also be handling the service of escrow. In its most basic form, it's a fairly easy to understand and straightforward process. However, without the properly trained staff and professionalism of the employees, this basic service can turn into a confusing game of hind and seek... with YOUR investment capital!
The A-Z process is such as this. You the private lender contact the closing company handling escrow. You ensure that your borrower is actually scheduled to purchase the subject property and what date the transaction is to take place. Normally the seller, which could be a bank, a homeowner or another investor, will choose the closing company. But, you as the new lender have all rights and permissions to still select your own closing company if you should so choose. You would then "Open" escrow. It's as simple as sending a letter requesting escrow be opened for you or your lending entity, and in this letter, you will request a title commitment, you will formally let the closing company know who will be named as the lender, and you will state the dollar amount of your loan and the loan position. By "Opening" escrow you create a file at the closing company by which all documents associated with this loan will be collected and kept. By doing so, you will allow an "Account" to be created by which all funds must pass through, ensuring transparency and accountability by all parties involved. Now as you conduct your underwriting and research into the project's feasibility and the accuracy of the projected numbers, you will begin to draft a "closing instructions" letter. This letter is exactly what it sounds like. It is the specific instructions to the closing agent which will tell the agent all the details of this deal and specifically where to send the money once you wire it into the escrow account. A common practice is for lenders to collect "Points" upfront or maybe on the backend. These points are your fee for the time that you have spent underwriting and looking into the validity of this loan. some people may not collect any points while others may collect up to 6 points. It's all what you legally can charge in your state and more importantly what the local demand for your money is. So let's look at an example. Let's assume you are going to lend $100,000 on a property that is worth $150,000. That's 66.66% LTV (Loan to Value) a slight bit higher than 65% yet you know this borrower and your confident, after your due diligence, that they will be able to pay you back in the allotted time frame (the term) of the loan. For this $100,000 loan, you would like to charge 2points. Maybe the borrower is strapped for cash, as they will be putting the majority of their capital into the rehab. Well, you can "wrap" the 2 pts into the Note. So at closing, they would only get $98,000 disbursed to them. However, when they go to pay off your loan they will still have to pay off the full $100,000. The purpose of escrow is to ensure this type of capital structure is followed according to your letter. Thus the reason it's so important to tell the closing agent exactly how the money is to be laid out. You also instruct the closing agent where to send the original recorded documents, any and all scanned documents, how many titles insurance you as the lender require, how much property insurance you as the lender require, and so on and so forth. There are many nuances and finite details that will escape you when you first begin. That's why it is so vitally important that you have a closing company who understands these details when it comes to escrow.
If you would like to know what I specifically detail in my closing instructions please send me an email at email@example.com and I can share with you some of the more important details of closing instructions and questions you can ask a closing agent. Stay tuned as in the next article I will go over one of the most important companies offering a service that will ensure you get paid on time every month.... the servicing company!