Lesson 3 - Your Team:

I am not aware of any successful business people who didn’t have other people help them become successful. You are no exception. Here are the people I use.

You will need a good title and escrow person. In most states, the title and escrow functions are handled by one company even though they are separate functions. You will not pay for their services until you actually put a deal through. That is, they provide their expertise for free up until you bring the Sale & Purchase Agreement on the property you are selling. Then you will pay for both the title and escrow services that are part of the closing.

Title means exactly that. It is the department that researches the filings against the property. For example, the IRS may have a tax lien against the property. The city may have a sewer lien against the property. The property owner may have lost a case in court and there is a judgment against the property.

On the other hand, the only lien against the property may be the mortgage(s). All of this is important to know. It is the difference between a good deal and a bad deal.

Years ago I was speaking with a lady in foreclosure and asked her if she had any tax liens against the property. She looked me in the eye and said no. At the same time I was meeting with her, my partner was checking the county records.

He discovered one million dollars in tax liens from both the state and federal government. When I met her the second time and showed her the liens (you’ll be able to get a copy), she looked me in the eye and said, “Oh I must have forgotten about those.”

I know I don’t have to tell you this but I will. When you encounter such a situation, run, don’t walk, away from this homeowner. There are a hundred deals waiting for you that are on the up and up.

You can get a copy of every filing against any piece of property by visiting your county recorder’s web site. This is all public information and must be made available by law.

This is my first source of knowledge for every piece of property I decide to work. Before I accepted my current clients I researched their property at the recorder’s website and learned neither was encumbered with any other liens but the mortgage liens. This means if I am successful with the short sale, it will be a clean sale and I’ll pocket the profit.

When I get close to formalizing a deal, I take it to the title company and have them run a preliminary title report. In my area, they perform the prelim as it is called for free. This way I know if any recordings have happened since I last checked the recorder’s site.

Before I cover escrow, let me add that a title policy will be bought and paid for at close of escrow. Title really is short for title insurance. Their other function is to insure that what they reported in the title report is true and accurate. It is an actual insurance policy with the company regulated by your State’s Insurance Commissioner.

Never, ever do a deal without title insurance. If the title company says they won’t insure your transaction, you will know to back away. They will have found something that makes the transaction uninsurable hence not worth your time because of the potential liability.

Yes, they will tell you what it is. If you think you can still do the deal, do it. I have yet to see that work out for anyone but you may just get lucky.

Escrow is the money side of the transaction. They make sure the right parties get the right amount. They act under orders called Escrow Instructions. While a majority of the instructions are in the Sale & Purchase Agreement (contract) there will most likely be extra orders.

For example, they may be instructed to send a copy of all closing documents to my lawyer, apply extra funds to taxes, etc.

Contact a title/escrow company and meet with an escrow officer. Let her explain what they do and ask her to introduce you to their customer service branch. The customer service branch is the branch that will prepare your prelim. You will want them to know you.

If you are unsure how to approach them, call and say you are a real estate investor who is looking to build a relationship with a local title/escrow company and you’d like to make an appointment and meet them. Believe me, they will gladly make an appointment and show you their operation.

When you visit the title/escrow company be sure to ask if they do simultaneous closings. Here is how a simultaneous closing works on paper.

I negotiate a price with the lender, say $100,000. I turn around and sell it to my buyer for $130,000. Because I am doing a simultaneous closing the only one who has to bring money to the table is the new buyer.

They bring $130,000 and it gets distributed like this: the old lender gets $100,000 according to the escrow instructions and I get the $30,000 balance. The buyer gets a Trust Deed and becomes the new owner of the property.

The moneys were dispersed within seconds by order of the escrow officer who took her orders from the contract and parties to the transaction. The $130,000 was dispersed by the buyer’s lender to the title/escrow company who then dispersed the funds to the other parties.

This all happens very fast. I’ve seen delays but not very long delays. Sometimes the email takes a minute or two to reach the lender or the escrow officer but when it does, bingo! the money is paid. Believe it or not, they use email to dispense funds. What a great country.

Notice I didn’t bring a dime to the table and walked out with $30,000. In reality, it would have been less because of my share of the closing costs. If my share was $1,000, my check would have been $29,000.

That’s team member one and two if you count your county recorder’s website as a team member. <g>. Team member two is a mortgage broker. You will want to have a broker as a member of your team so you can have him qualify your buyers. Brokers do not charge anything until the deal is funded. They work on what is called points and fees. Generally, they charge 1 point (1%) of the loan amount plus some additional fees like processing (a person actually puts all of the paperwork in proper format for the lender and is paid out of this fee) and administrative (a person oversees the whole loan process and gets paid out of this fee). Sometimes the broker foregoes the admin fee as the processor does it all.

I work with two brokers in my area. You’d think both being brokers, they’d offer the same type of loans. Basically they do but the difference is one is hard money and the other isn’t.

Hard money loans usually are for shorter periods of time and at a slightly higher interest rate. You don’t have to jump through hoops to qualify, but you usually pay through the nose. They are good for short term deals where you don’t plan on holding the property for more than one year.

My other broker handles all of the conventional loans plus some odd ball stuff. I use him for potential buyers who want to buy and hold the property as a rental or who want to live in the house.

Regardless of which broker is used, they do the tedious work of qualifying the buyer for a loan. You see, I negotiate as the buyer with the lender from the current homeowner who is late on his payments but then sell it immediately through a simultaneous closing. I don’t want to own the house. I only want to get control of the house then flip it (sell it immediately) to a buyer.

Team member three is a CPA. Don’t let just any schmuck do your taxes. Use an honest to God CPA so you can get the deductions to which you are entitled as a business person. Since you will be investing in real estate, the IRS has a special designation for you that could cost you a bundle if you don’t have proper tax guidance.

This book isn’t about tax advice so you must use someone who has the knowledge you need to get the most benefit for you and your business. CPA services generally aren’t inexpensive but, to me, they are worth every dime.

Team member four is an attorney. Sorry, but you should at least know one who is familiar with real estate law. In this business, anything can happen. People react in different ways to the stress of their situation. They may decide you are the cause of their problems and sue you.

It is better to be safe than sorry and the approximately $250 per hour you will pay an attorney pale in comparison to what you might have to pay should you lose the suit. I think so anyway.

Before I leave this lesson let me tell you about another county website that you need to use. It is the tax assessor’s website. What you will find on this site is information on the house like year it was built, the total number of rooms, square footage, number of stories, assessor parcel number (APN) and maybe even a legal description. If your assessor’s website has a legal description, copy it and the APN onto a separate paper and keep it. You will need them for your Sale & Purchase Agreement. As you use this site, you will discover it is worth its weight in profit. :)

Go To: Part 4 - Getting Started