Closing the Deal

In baseball, it goes without saying that the pitcher is held in high esteem and is one of most important players on the field.  There are different types of pitchers, but none is held is higher regard than "the closer".  According to Wikipedia, the closer is "a relief pitcher who specializes in getting the final outs in a close game when their team is leading. The role is often assigned to a team's best reliever."  Fans love a closer because he seals the deal and gets the job done.

Real estate is similar to baseball as the closer garners the same type of respect.  One of the things that frustrates investors and real estate agents alike is the buyer that doesn't close on the deal.  At times there are legitimate reasons for not closing on a deal such as discovering something unexpected during an inspection, but more often than not, it is inexperience which leads to the inability to close.  This can cost both time and money for all parties involved.

Negotiating the agreement of purchase and sale is the easy part.  What separates the wheat from the chaff is the buyer that is able to navigate the tough part which is actually closing on the deal.  On its face it may seem like closing on a deal is easy, cut a cheque, you get the keys and the deed and you're done.  Unfortunately its anything but simple as there tend to be many moving parts to closing and this must be balanced against strict timelines.  For a novice this can be a daunting task.  As I am currently working on closing a 12 unit residential property, I thought it would prove useful to provide an outline of what one can expect during the closing process.  There are a number of different scenarios that can arise on closing, but I will focus on the most common elements of my current and previous closings.

AGREEMENT OF PURCHASE AND SALE

The closing process begins as soon as there is an accepted Agreement of Purchase and Sale ("APS"). Most APS' tend to be conditional meaning that unless certain conditions are fulfilled, the deal can be terminated without penalty.  In most APS' there are conditions that must be fulfilled by both the buyer and the seller.  The conditional period is typically around 30 days so you have to be organized to get all your due diligence done within the time frame.

Conditions to be fulfilled by the Seller (Deadline: Within 5 business days of the APS being accepted)

• All Tenant Leases or Agreements
• Certified Rent Roll
• Any Building Plans, Drawings and Surveys in the Possession of the Seller
• Any Environmental or Building Inspection Reports
• List of Chattels to be Included
• Any Existing Maintenance Contract or Warranties
• Current Insurance Policy
• Realty Tax Statements and Assessments for the Past 2 Years
• Latest Fire Safety Compliance Inspection
• All Hydro, Water and Gas Invoices for the Past 24 Months
• Tenant Acknowledgements

Once you have all the documents in hand, the buyer needs to review them carefully to see if they contain any information they may have missed.  It is also vitally important that the financial figures that enticed the buyer to put together an offer are consistent with the rent rolls and invoices that they have in their possession.  This is especially true with respect to utility expenses such as water, gas, oil and hydro and rental income verified in the certified rent roll.

Conditions to be waived by the Seller (Deadline: Within 30 days of the APS being accepted)

While every situation is different, I tend to try to keep conditions to a minimum as it is more appealing to the seller.  While few in number, the conditions still afford the buyer the requisite protection to ensure they can back out of the deal if necessary.

• Inspection
• Insurance
• Financing

INSPECTION (Timeline: Book it ASAP) - I intentionally started with inspection as the first condition as it is the first thing a buyer needs to do.  This is where inexperience can cost you money if you don't prioritize properly.  Before a buyer first makes an offer on a multi-unit property, they are often only allowed to see the common areas of the building, and on occasion, they get to quickly view a unit or two.  While several inspections may take place, the first one always needs to be the inspection of the entire property, including all units, by the buyer himself/herself.  Why?  Because all subsequent professional inspections will start to cost the buyer money.  Even to the untrained eye, a collapsing ceiling, rusted out tub or raised floor are all pretty easy to spot which might be enough to kill the deal.  Why pay for an inspector to point out the obvious.

INSURANCE (Timeline: Quotes usually take a couple of days) - This one tends to be the easiest of the three conditions if you have a good insurance broker.  If not, you need to get on the phone with at least two or three insurance companies or brokers to see if the rates and coverages they can offer you are at least comparable, if not better, than the existing insurance on the property.

FINANCE (Timeline: Can take up to the full 30 days Lenders Fee:.5% of total mortgage) - This is one of the most critical aspects of closing on a deal.  The majority of investors rely on the leverage provided by financial institutions to close on the vast majority of real estate purchases.  Given the sub-prime crisis and the devastated US real estate market, Canada tightened its lending policies making it even more difficult to finance real estate purchases.  Common requirements for financing a multi-unit residential property can include:

-Building Condition Assessment (Timeline: Up to a week or more to schedule and another week for full report  Cost: $2,000).  This is a professional inspection which checks every aspect of the building from plumbing to electrical to roof to foundation to major systems.

-Appraisal (Timeline: Up to a week to schedule and another few days for full report Cost: $2,500).  The financial institution relies upon the appraisal report to justify the amount of mortgage being sought.

-Phase I Environmental (Timeline: Up to a week or more to schedule <One company told me they were booking for 3 months out> and another week for full report Cost:$2,000).  This is the preliminary inspection to determine if there are any factual or historical grounds (eg. Property was formerly a gas station) to conduct a Phase II Environmental which would require analysing soil samples.

Be Prepared to Manage

To effectively close on a deal, the buyer has to be in regular contact with all parties involved which include the real estate agent, banker, appraiser, phase I consultant, inspector and insurance agent.

While the above is far from being all-encompassing when it comes to closing a deal, it does provide some valuable insight into time and effort that is required to close a deal.  Many deals tend to fall apart as the buyer doesn't anticipate the amount of time and effort that actually goes into closing a deal.  Closing requires both organization and time management skills.  Rarely does a deal every go smoothly from beginning to end so one can always expect an unexpected surprise which will also add the work load. 

Before making any offers on an investment property, make sure you are prepared for the time, effort and costs that go into closing the deal because it may not only cost YOU time and money, it may cost others valuable time and money, and will invariably affect your reputation as a serious buyer.

Author: Paul Kondakos, BA, LL.B, MBA - Professional Real Estate Investor