25. BRRRR – Top 10 reasons for closing delays
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.
Closing day has finally arrived and you are ready to complete your third R of the BRRRR strategy. But wait! Are you ready? Here’s our top ten list of reasons why your closing may be delayed.
- When underwriting has received the appraisal and everything is as expected, you can expect to close within approximately 10 days. Check to make sure the name of the borrower is correct and your satisfied with the appraisal amount. If anything is incorrect or you dispute the appraisal amount, this could delay closing an additional 2-3 weeks. Especially, if you dispute the appraisal and the lender allows you to order a new one (at your cost).
- All lenders will perform a third-party secondary valuation of your property about a week before closing to account for any possible pricing fluctuations between receiving the appraisal and the actual closing date. You only hear about this if your secondary valuation comes in lower than the appraisal amount. If it does, the lender will finance the lower of the two (it occurs 1 out of 100 properties). If this happens to your property, you can either close with the lower value (meaning less cash out) or you can cancel the closing. Most all lenders will not allow you to dispute their secondary valuation.
- As I have discussed in a previous post, all lenders require a revised insurance policy adding them as an additional insured. They will also require specific replacement cost coverage and rental loss coverage. Is your insurance policy up to date with the lender’s requirements? And make sure to obtain a paid invoice or an invoice to be paid at closing for your policy. You want to provide this both underwriting and your title company prior to closing. The lender will provide instructions to provide to your insurance company.
- Title issues can occur at any time even up to the closing date. Typically, it is a chain of title issue or outstanding lien. To avoid surprises, check with your closing attorney at least two weeks prior to closing.
- Often underwriting has approved the loan only to find out it has been delayed because of their legal department. Legal will review everything including the mortgage documents before final approval of the loan package. This is the second and final review stage before the lender will agree to close and provide closing instructions to your closing attorney.
- If you are closing after the first of the month, the lender will require your previous month’s bank statements. Make sure you have the minimum liquidity required by the lender in the bank account. If you do not, the lender may require you to move funds into the bank account and provide a snapshot of the account showing the funds have cleared. This will need to happen before closing.
- If any leases need to be updated or corrected, an estoppel letter will be used. This document states the tenant’s info, rent, deposit and lease dates are correct. It is signed by the tenant and you. Make sure you have provided these letters if requested by the lender. Electronic signatures are fine.
- Reviewing the preliminary HUD closing document. This document outlines all costs, and the closing attorney should send a preliminary one to you 1-2 days prior to your closing. Make sure all costs are correct.
- If you have an existing mortgage on the property, this will need to be paid at closing. Often obtaining the payoff letter is the one document most overlooked by the borrower prior to closing. It is your responsibility to contact this lender to request a payoff letter. Most will email you a copy to provide to your closing attorney, but some may take 2-3 days to issue it.
- And finally, the dry closing. There are two scenarios that can delay receiving your funds on day of closing. First, you attended closing and signed all documents. The closing attorney must scan and email all documents to the lender to review before releasing funds. If you closed in the afternoon, you could expect the lender to review and approve release of the funds the next day. Second, if you are doing a mail away (not physically attending closing), the closing attorney will email you all documents. You will print, sign and overnight them back to the closing attorney. For documents that require a notary, the closing attorney or lender will usually arrange a mobile notary for you. Even though everything is dated and signed, funds are not released until after the original documents are received by the closing attorney. We recommend you always close in the morning. Hopefully, the lender will have the time to review and approve release of your funds by end of the day.
It is in your best interest to always anticipate and resolve any delays by keeping in constant communications with the lender and your closing attorney. Doing so will significantly increase your chances of closing on schedule with no surprises.
Got questions regarding financing your BRRRR properties? Please reach out to me at firstname.lastname@example.org
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