Tài liệu The Complete Guide to Buying and Selling Apartment Buildings Chapter 11-12 doc

■ Principal amount of new loans■ Existing loans ■ Seller financing ■ Prorated tax adjustments ■ Prorated rent adjustments ■ Tenants’ deposits ■ Lender fees ■ Title fees ■ Attorney fees Y

Closing the Deal

To put the world right in order, we must first put the nation in order; to put the nation in order, we must first put the family in order; to put the family in order,

we must first cultivate our personal life; we must first set our hearts right.

—CONFUCIUS

After securing financing for your property, the next step is to prepare to finalize and close the transaction Depending on the size of your acquisition, the closing process can be fairly simple and straightforward, or it can be quite involved, with extensive doc-umentation required It is also time to begin planning and defining what your role as a strategic manager will be This, too, will depend on the size

of the transaction, as well as your level of experience

C H A P T E R 1 1

Closing Fundamentals

The closing process is the time when everything comes together to finalize your transaction You have studied the market and analyzed numerous apart-ment buildings, you have successfully negotiated terms and conditions accept-able to both you and the seller, and you have sought out the best financing alternative for your property It is now time to bring all the parties together to close the sale Before you do so, however, there are several factors to consider that may affect the closing They include a thorough review of all related clos-ing documents, a final inspection of the property, and the timclos-ing of the close

Closing Documents

While numerous ancillary closing forms and letters will need your attention, the primary closing documents that will require a careful review are the title report, closing statement, deed of trust, and promissory note

The title report, also known as the abstract of title, provides information about

the property’s chain of title In other words, it gives a history of ownership, judgments, liens, and anything else that may have been recorded against the property over time The title insurance company issues an insurance policy to the buyer and a separate policy to the lender that ensures the title is clean and there are no encumbrances that may adversely affect the new owner

Closing statements, also known as settlement statements, are commonly

pre-pared by the title company handling the closing They detail by line item all

of the associated debits and credits assessed to both buyer and seller, such as:

■ Contract sales price

■ Earnest money deposit

■ Principal amount of new loan(s)

■ Existing loan(s)

■ Seller financing

■ Prorated tax adjustments

■ Prorated rent adjustments

■ Tenants’ deposits

■ Lender fees

■ Title fees

■ Attorney fees

You should take the necessary time to review each charge on the settlement statement and verify its accuracy I cannot think of a deal that I have been involved in where all settlement charges on the closing statement were com-pletely accurate Errors are inadvertently made for one reason or another For example, the title company may have an incorrect payoff amount for the seller’s loan, or it may prorate the rents or taxes incorrectly, or it may not be aware of a credit you are entitled to because of a specific clause in your pur-chase agreement negotiated by you and the seller

Do not assume that because the closing officer works at the title company and acts as the facilitator in numerous closings, the officer must be right because the closer should know Precisely the opposite is true The fact that the closer does act as the facilitator in numerous closings is all the more rea-son that he or she must rely on you to provide accurate information for the settlement statement The inherent risk to you by neglecting to review the closing statement can be substantial and potentially cost you hundreds or even thousands of dollars

The lender is responsible for preparing the deed of trust and the promissory

note These documents outline the terms and conditions under which the

Closing the Deal

lender has agreed to loan you money Repayment terms are specified, including the amount of the loan, the interest rate and amortization period, and any prepayment penalties that may be imposed Other lender require-ments that may also be included are escrow conditions for taxes and insur-ance, minimum insurance amounts, standard of care for property condition, and default provisions

Many years ago, when I was first getting started in real estate, I bought my first two single-family rental houses The seller owned 10 or 12 rental prop-erties and was beginning to sell some of them He offered each of the two houses that I bought for a sales price of $23,000, with only $1,000 down In addition, the seller wanted to defer the gain on sale for tax purposes, so he was also willing to provide owner financing Because I was buying both properties from the same seller at the same time, it was only natural to close

on both houses at the same time with the same closing officer The closing went smoothly, and, as far as I knew, everything appeared to be in order However, when I decided to sell the properties years later, I discovered that the legal descriptions were mixed up and had accidentally been switched in several of the closing documents This was an easy mistake for anyone to make, but one that should have been caught by either the closing officer, the seller, myself, or all three of us Rectifying the mistake ended up costing me several hundred dollars in attorney fees

To help avoid some of the problems that can occur in closings, some lenders

may require you to sign what is commonly known as an attorney opinion

let-ter It is often prepared by the lender’s attorney and subsequently forwarded

to your attorney The letter serves two primary functions First, it forces you, as the borrower, to review all of the pertinent and relative language affecting the transaction with your attorney Your attorney will advise you regarding the legal content and may recommend changes to help protect you By signing the attorney opinion letter, you are stating that you under-stand all of the legal documents and that you are in agreement with them By

taking time to have a competent attorney review these documents, you will minimize your exposure to risk from any inadvertent errors, such as the ones previously discussed Second, an attorney opinion letter serves to indemnify and hold harmless the lender By outlining all of the terms and conditions and by requiring you to review them with an attorney, the lender

is effectively adding an extra measure of self-protection

Final Inspection

Several days before the closing, you should take the necessary precaution of performing one final physical inspection of the apartment building Doing so could potentially save you thousands of dollars On one particular acquisition

I was involved in, a cracked slab was discovered on one of the buildings about two weeks before the scheduled closing The weather had been extremely hot and arid that summer, with no rain for several weeks The soil below the foun-dation (which was a cement slab; there was no basement) had completely dried up due to the lack of moisture in the ground This caused a portion of the building’s foundation to settle downward and subsequently crack Fortu-nately for me, this incident occurred before I took possession of the property While this was an unfortunate incident for the seller, he knew he had an obli-gation to repair the foundation at his expense A repair crew was called out to lift up the settled portion of the slab with hydraulic jacks and then pour sev-eral cement footings underneath to support the building Although I did not see the final bill for the repair work, I am sure it was not cheap

Closing Credits Can Add Up

Closing credits most often consist of prorated credits for rental income, security deposits, and taxes The time of month your closing is held can have

Closing the Deal

a significant impact on the credits you are entitled to as a buyer Suppose you close on the very first day of the month Although you would technically

be entitled to receive the full month’s rent at the time of closing, assuming rents are due on the first of the month, chances are the seller will have col-lected very little of the rental income yet Most landlords provide a two- to three-day grace period before rents are considered late If the seller were to give credit for the full month, this would put the seller in the precarious position of having to collect the remainder of the rent after the date of clos-ing when he or she is no longer the owner It is better to wait until the fifth

of the month or so By then, over 95 percent of all rents should have been collected and as the buyer, you will be entitled to receive a prorated credit for 25 days’ worth of rent without having to expend the time and effort to collect them Depending on the monthly revenues generated by the apart-ment complex, the credit due from rents collected can be quite substantial Take a look at the following example:

100 units × $600/unit average rent = $60,000/month

× $60,000 = $50,000 closing credit for rental income

Conversely, closing at the end of the month, say on the twenty-eighth, would have the following effect:

100 units × $600/unit average rent = $60,000/month

× $60,000 = $4,000 closing credit for rental income

By studying this simple example, you can see the potential impact of closing

at the beginning of the month versus closing at the end of the month In this case, you would have had to come to the closing table with $46,000 less by closing on the fifth rather than the twenty-eighth I should mention that a

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prepaid interest payment to the lender would be greater at the beginning of the month, which would partially offset the difference collected in rental income In this example, the prepaid interest would be around $12,000 to

$14,000, so you would still come out ahead by more than $32,000

While timing does affect the amount of rental income received at closing, it has no effect on the credit you are entitled to for security deposits As with the rental income credit, however, this can also be quite substantial Using the same 100-unit apartment building example from before, assume an average security deposit of $300:

100 units × $300 average security deposit = $30,000

Now assume the seller required a security deposit equal to the first and last months’ rent:

100 units × $600/unit average rent × 2 = $120,000

Keep in mind that although you will receive a credit at closing in the form of cash, there is an offsetting liability equal to the credit received The money you receive at closing really belongs to the tenants; however, because they move in and out over a period of time, the cash flow from operations is not materially affected As old tenants move out and are reimbursed for their security deposits, new tenants move in and replace the funds The primary benefit to you as the buyer is received at the time of closing when the trans-fer of the asset (cash) is made

Depending on the area where the property you purchase is located and also

on the lender’s specific requirements, you will either receive a credit, give the seller a credit, give the lender a credit, or some combination of these I have purchased property both in areas where taxes are paid in arrears and in areas where taxes are paid in advance In the case of the former, you will

Closing the Deal

receive a prorated credit at closing, because the seller’s liability for unpaid taxes is transferred to you In other words, you will receive a credit in the form of cash, an asset, and an offsetting liability in the form of taxes payable Receiving a cash credit at closing may significantly reduce the amount of cash you need for the down payment Of course, eventually you will be responsible for paying the taxes, but for the time being, you effectively have

an interest-free loan Your lender may, however, require that funds be set aside in an escrow account In that case, the cash credit is transferred to the lender, who, in turn, assumes responsibility for the offsetting liability

If the area where your property is located requires that taxes be paid in advance, you, as the buyer, will be required to give the seller a prorated credit at closing, because the seller has already paid the taxes for the given time period The seller has an asset, prepaid taxes, which is transferred to you as the buyer In this case, there is no offsetting liability, but rather an offsetting owner’s contribution, or contributed capital, which is applied in the form of cash The transfer is made between the seller and the buyer only

No lender is involved under these circumstances; however, the lender may require that an additional two months’ prepaid taxes or so be set up in an escrow account

In summary, familiarity with all aspects of the closing process, including a thorough review of all related closing documents, a final inspection of the property, and the timing of the close can potentially save you thousands of dollars

Managing Your Property

The harder the conflict, the more glorious the triumph

What we obtain too cheaply, we esteem too lightly.

—THOMAS PAINE

Now that you have successfully closed your apartment transaction, the real fun begins It is time to imple-ment your postentry strategy This includes putting together a winning management team Depending on the size of the apartment building, your management team may consist of just yourself, or it may include a profes-sional management company to administer the day-to-day operations You must also give serious consideration to the role you will play in this process, which should be a function of where you can contribute the most value Finally, even after taking all the necessary precautions of careful planning and execution, you must take care to expect the unexpected In the apartment business—or in any other business for that matter—unfore-seen events have a way of challenging you While almost impossible to anticipate, you can take steps to mitigate the effects of these incidents

C H A P T E R 1 2

Hiring a Professional Property Management Firm

If this is your first purchase and the property is smaller than 50 units, you will likely want to be as directly involved in managing the property as possi-ble There is no substitute for the kind of experience you will get while directing the daily affairs of your apartment complex Conversely, if you are a seasoned real estate investor and are acquiring a larger property, you

will likely want to employ a competent management company to assist you.

Note the emphasis on “competent.” A property management firm must

be capable of operating your property effectively and efficiently The firm’s representatives may promise a great deal over the phone when you are con-ducting your search I recommend that the initial telephone conversation be followed up by a face-to-face interview at the management company’s office This way you can sit down with them, look them directly in the eye, and discuss the issues that are most important to you in executing your pos-tentry strategy

I remember conducting one such interview myself It was with the vice pres-ident of a fairly well known and well respected management company I expected him to be able to elaborate in considerable detail on the benefits his company could offer me When I asked him what the company did to train the on-site managers and personnel for the apartments, his response astounded me

The company’s on-site property managers had to meet two basic criteria: (1) they were required to be 18 years of age or older, and (2) they were required to undergo a drug screening test For whatever reason, the vice president seemed really proud of requirement number two

I commended him on the fact that all of their managers were over 18 and had passed drug screening tests, but what about training? His answer led