You’ve found a money partner, you’ve made the presentation, and your partner has agreed to invest with you. How do you close the deal?
The process itself is pretty much the same every time
(If you are a member of the Getting the Money Program, you can download all the documents you will ever need from the site. If you need money for a deal, this is also a great program to check out.)
So, let’s break the process down…
This consists of a promissory note and a mortgage or deed of trust, depending on whether yours is a mortgage state or a deed of trust state. As the borrower working with a debt partner, you have to take control of this process.
I couldn’t have said to Aunt Sally after she gave me the first $150,000, “Cool. Prepare the docs, and I’ll see you at closing.” She would have said, “What the heck does that mean? Are you coming to Christmas dinner?”
With one-to-one transactions, I typically take responsibility for this. If you’re working at a super-high level with millions of dollars and multiple investors, you might have your attorney prepare these documents.
I recommend having a title insurance policy and a hazard policy. You should have an owner’s policy in the amount of the purchase price to protect you against title defects. It will last as long as you own the property.
You should also have a lender’s policy to protect your private money partners. It’s for the loan amount only, and it protects the lender for as long as the loan is in place. This stuff is a little pricy, but is extra security that you can offer your private money partner.
Hazard insurance is like a homeowner’s policy, but it’s on your investment property. Your hazard insurance policy names your lender as the loss payee. The piece of paper that says, “Yes, we agree to insure you,” is called a binder, and you get that at closing.
Let your hazard insurance agent know that the loss payee or the mortgagee (those two terms are used interchangeably) for the policy is your private money partner or your lender. If the property burns down, a tornado knocks it down, or flood waters carry it off into the ocean, the check doesn’t come to you; it goes directly to your private money partner.
You can write a disclosure into your promissory note, in a separate addendum, or in your private placement memorandum.
The disclosure document should include a few key points.
You should keep a file for each of your investors and private money partners. Your records should include
A word on the master investor list…
You don’t need an expensive software program, all you need is a spreadsheet that lists their name, address, phone number, and email address. I list exactly how much they have available in private money, titled “Total Capacity.” It’s their total capacity for lending.
I also list how much they have outstanding with me and how much they have left over or available for me, and any notes I want to include. I use this list to keep track of birthdays and anniversaries so I can send cards or commemorate anniversaries of deal closings.
It’s a celebration, and I am cool like that.
Send closing instructions to the title company to explain what’s happening in the transaction. Tell them what checks to cut out of the closing proceeds including insurance, rehab cost, and appraisal fees.
Let them know you want to approve the settlement statement before they fund the deal, which outlines how the money is going to flow and where all the money is going to go.
Let the title company or closing attorney know if you’ll be bringing the loan documents (the promissory note and the deed of trust or mortgage) or if you want them to prepare them.
I personally prefer to prepare my own note and deed of trust and then have the title rep or the closing attorney look them over just to make sure I haven’t missed anything. The title company files the deed of trust or mortgage. The original note doesn’t have to be notarized; it usually stays with the lender until you pay it off.
Don’t file the deed yourself. Let the title company or the closing attorney do that. I’ve made this mistake before and can tell you to save yourself the agony! (It’s a long and crazy story. Guess where I share it…Getting the Money)
A word on closing instructions…
It’s just a simple email, or you can write it up in a memo and attach it to an email. Send it to the closing attorney or the title rep. I had an attorney prepare some documents for me, and he charged me $350. Did I pay the amount out of my pocket? No, I paid it from the money that my private money partner was wiring and loaning me. It was part of the loan transaction.
Now you’re getting the money for real. It’s time to have your private money partner fund the deal. You call them up and say, “Partner, it’s time. Wire the money to the title company (or the closing attorney).” Provide the wiring instructions you get from the closer.
Wiring instructions is just a fancy way to say “bank account information.” If your money partner has checkbook control, they can just cut a check to the title company. Those funds go into escrow, which means the title company holds them until it actually makes those disbursements and the deal funds. Never have your private money partner cut the check directly to you. Never! You want the title company or closing attorney to record the disbursements so there is a formal money trail in case there are questions about it later from an investment partner, or worse, an SEC investigator.
A word on the money…
Don’t let your money partner pay you directly!
When you accomplish whatever it is you wanted to accomplish with your property, the title company or closing attorney will need a payoff statement to pay off your private money partner when you sell or refinance.
This is a letter written on behalf of your investor that lets the title company or the closing attorney know exactly how much money your private money partner is entitled to.
Here is what to include…
What you’re saying is “Here’s what we owe today, and if it closes in a week here’s the amount of additional interest that’s going to accrue that you’ll need to tack on.” I always provide a per diem interest rate.
A word on a delayed closing…
Your partner can use that rate to calculate the interest and add it to the payoff. Have your private money partner sign the letter, and fax it to the title company or the closing attorney. Your private money partner can go to the closing if they want to and get their cashier’s check right there, or they can have it sent directly to them.
Once the loan pays off, don’t forget to release it.
That’s another mistake I made once. It’s a humdinger that we discuss in Getting the Money. (In case you haven’t signed up yet)
A word on releasing the lien…
If you tell your Aunt Sally that she needs to file a release of lien, chances are she’s going to scratch her head and say, “I don’t know what that means. What are you bringing to Christmas dinner?”
So, have your servicing company prepare the release for them, or help them yourself. The county needs to be notified by the lender so it can release the lien. You can usually just download and prepare an e-file that can be sent to the county online. (Guess where I have sample lien releases)
The title company will often handle the release, but if you are paying your partners without a title company you will need to take care of the release.
That’s how you close your deal. Now you are ready for the next one.
If you’re like, “Susan, I don’t have a next one because I don’t have any money to fund the deal” – Please start reading again from the top!
Have fun. Create value.