closing

Commercial Loan

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We closed on a new type of loan last week. It wasn’t a completely smooth process, but it was easier than a residential loan.

WHY COMMERCIAL?

Residential loans on second+ properties were over 4.5% on their interest rates last month. The commercial loan gave us options that were lower than that. It comes with a catch though. While the loan is amortized over 25 years (there was a 20 year option too), there’s a balloon payment after 5 years. There were also 3, 7, and 10 year options. Being that this was our most expensive investment property purchase, 3 years was too much of a risk to take on that balloon payment. The interest rates for 7 and 10 years didn’t make it worth going the commercial loan route. While the interest rate is fixed (unlike in an ARM or adjustable rate mortgage), this balloon is a risk.

By going through a credit union, our costs were also minimal. Our closing costs were just over $1,000, rather than the typical $2k-3k that we’ve seen on closings that cost less than half what this house cost us.

The only other “catch,” if you want to call it that, is that there is no escrow. I already handle the taxes and insurance payments on my own for a handful of our houses, so that’s not a big deal. I also appreciate having control over my money instead of having to check in on escrow regularly and making sure all the escrow analyses are actually done correctly (because one recently wasn’t!)

PROCESS

We filled out an application, which they called the “personal financial statement” and included our detailed financial status. It had me list all our account types and balances. I assume that’s what they used to compare against our credit report, because we actually didn’t send any account statements to them (glorious!). We had to provide the last 3 years of tax returns (ugh… we haven’t done 2021 yet so we had to give 2018).

I developed a rent roll and gave that as well. It listed all real estate owned, purchase price and date, current market value, monthly rent, mortgage balance, monthly mortgage payment, and whether or not it’s occupied. I added the HOA payments on the houses where it’s applicable because that always seems to be a last minute request for documentation.

Once the application was completed and reviewed, that was it. We were asked a few follow up questions about the numbers on our forms, but we weren’t asked for anything further. Essentially, “underwriting” happened as part of the application process, versus in the middle of the application and closing dates, spanning days and maybe weeks of documentation gathering and answering of questions.

Instead of a “rate lock,” the rate given is the rate that was present at the application submission, pending any exceptions (e.g., if credit isn’t what we said it was or we have outstanding loans not disclosed). As an auditor, it was hard for me to accept that we weren’t going to be hit with a surprise somewhere along the way because we never signed anything agreeing to loan terms! 

We saw no documentation until the Monday before our Thursday closing. There was no initial disclosure, and no “rate lock.” We had no idea how much the closing costs actually were going to be. The responses to our questions were slow or nonexistent. We didn’t see our appraisal until the Friday before closing. Not knowing the process or knowing when we’d find out how much this was costing us was more than we’re used to handling emotionally.

We received the HUD settlement statement on the Monday before closing. Luckily, everything was correct. Our sellers had already moved out of the area, so we had to have the statement sent to them, signed, and sent back to the Title attorney. They did that perfectly, and we had an easy closing on Thursday. We signed all the paperwork in about 20 minutes!

FIVE YEAR LOAN

Mr. ODA ran some numbers to show me why we should go for the 5 year loan instead of the other terms.

We didn’t consider the 3 year option because we didn’t want to manage that balloon payment or refinancing so quickly.

As a reminder: the closing costs for the commercial options are the same regardless of the term, and were about $2k less than the traditional loan; all the commercial loans are amortized over 25 years, but have a balloon payment at the end of the term given; all are based on 20% down (because there was no incentive for 25% down).

The final decision to go with the 5 year loan was that we haven’t shied away from risk in the past, so take the incentives that come with the shorter term (i.e., lower monthly payment and less interest paid). Our portfolio has made drastic changes over the last 5 years. Therefore, we don’t see a reason to pay more interest, reduce less principal, and have a higher monthly payment (thereby lowering our monthly cash flow) just because a balloon of $167k is concerning.

BALLOON PAYMENT

The loan is $193,600. After 60 payments (5 years), the principal balance (with no additional payments made) will be $167,500.

Let’s face it, if we had $160k+ liquid, we wouldn’t be paying the first 5 years of interest on the account. We can make additional principal payments over the next 5 years to dwindle the balance before the balloon payment is due, and/or we can look into refinancing the balance at the end of the 5 years.

We had another private loan that had a balloon payment at 5 years. That loan was originated at about $70k and we paid it off in about 3 years. We had several issues with that lender, so we had the incentive to throw money at the loan and be rid of it, versus attempting to refinance it at the end of the 5 year term.

It’ll be interesting to see what we do on this going forward. The balloon payment would typically be an incentive to make additional principal payments. However, we have six other loans with an interest rate higher than this loan’s, and one loan with the same interest rate. We’ve been focusing on either the one with the lowest principal balance or the one with the highest interest rate. This new loan doesn’t fit either of those categories!

SUMMARY

Mr. ODA asked me if I would do this again, and I would. It was frustrating to ask someone in customer service a pointed question and not get an answer, but overall this was easy. There was minimal documentation needed, the requests didn’t drag on, and the closing costs and interest rates available were favorable. The balloon payment is something that needs to stay on your radar over the next 5 years (and mostly in that final year), but refinancing is always an option. It doesn’t mean that you have to be ready to fork over $167k on that date, but you do need to plan for closing times and ensure you keep your credit worthiness in good shape (although isn’t that always the goal?!).

Moving States: Part I

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In March 2020, as we all know, a pandemic hit. Well, our second child came into the world at the end of March, just a week after lock down. My family lives in NY, and Mr. ODA’s family lives in KY. So living in VA left us without family, with limited visits, and only seeing some neighbors while hanging out in yards and the street, but no child care or help.

We had talked about officially moving to KY while we spent the summer of 2019 there for Mr. ODA’s work assignment, but we decided it wasn’t the right time. We loved our neighborhood and town back home, and we just weren’t ready to leave. Mr. ODA was offered a promotion in DC at the same time, and that sealed the deal for us to stay in VA. The cost of living in NY near my family (Long Island), along with the crowded lifestyle, was not something we wished to pursue after experienced a ‘taste’ of the traffic and crowds when we lived by DC, which is why ‘moving near family’ meant KY.

On a walk one night in June 2020, Mr. ODA mentioned moving to KY again. He was working from home indefinitely, so there wasn’t anything holding us to VA (except my Ob and the kids’ pediatrician…. gosh it was hard for me to leave them!). At this point, isolated from most people because of the pandemic, the logic was there to make the move. Additionally, our mortgage was a 5/1 ARM that was coming due in January, so selling our house a few months before that was great timing.

LISTING OUR HOUSE

We built our house and moved in at the beginning of January 2016. For a new house, we had a lot of little projects that had to be completed before we could have people walk through it. When we sold our first house, we put a lot of our things into our neighbor’s basement as storage. This time around, we had to do the same, but without a neighbor’s basement as help.

There were the typical paint touchups, wiping baseboards, and moving of furniture. There were just several small projects that needed attended to (like replacing burnt out light bulbs and buying a comforter that fit our new bed), which took me about two weeks before we could get the pictures done for the listing.

We had one room that was the catch-all for mismatched furniture. We were told to give the room a purpose. I was able to get the exercise bike, desk, bed, and bookshelf to live harmoniously.

For pictures, we chose to keep a full-size bed in one of the bedrooms, but I quickly changed it to our daughter’s crib. We were afraid that if people saw a crib, they’d think the room was too small for a bed. So while, functionally, I needed that crib, I didn’t mind if they saw it during the walk through because they could refer back to the listing photos to see the bed there instead.

SOLD QUICKER THAN PLANNED

It’s hard to manage the expectation of how long the house will be on the market against how long to wait for listing it. We knew our new house wasn’t going to be ready until November. I was too afraid to wait until everyone went back to school, especially with all the uncertainty of what school would look like. I pushed to list mid-August (central VA goes back to school after Labor Day).

We were under contract at the end of the first weekend listed. They asked for a 3 week close, and we denied that. There was no incentive for us to move that quickly. We asked how long they’d be willing to push it, and they agreed to 30 days because they’d be living in a hotel with their family of 5. That was exactly 7 weeks between leaving our house and our new house being ready.

We decided to seize the opportunity and travel with that time. Since Mr. ODA was working remotely anyway, we could explore new places where he could work during the week from our hotel or AirBnB. I had one rule – there had to be two separate sleep areas because our 6 month old required her room to be pitch black for sleep, and messing with a baby’s sleep hurts mama! Our options are also limited because we have a dog.

Here’s how we had to unpack and repack the car each time!

Week 1 – We went to the beach! We grabbed a beautiful little AirBnB in Norfolk, two blocks from a little beach and boardwalk. I took the kids to the zoo one day, and we played at the school playground across the street a bunch.

Week 2 – We went back to our old neighborhood and imposed on some friends. Our daughter had her 6 month pediatrician appointment, and I wasn’t about to give up an opportunity to see our wonderful doctor again. Their family has kids the same age as ours, but their youngest was still sleeping in the parents’ room, which left his crib available to our youngest. As a bonus, they went on vacation for the week! As a form of payment for our time there, I painted their first floor. I love to paint, so I enjoyed having an activity. Our oldest got sick at the beginning of the week and his fever wasn’t breaking, so we ended up at the doctor 3 times with an eventual ear infection diagnosis. Him being sick delayed my progress, but I got it all done.

Week 3 – Bristol VA and TN. Mr. ODA took more time off during this week so that we could go hiking and explore the area more. It’s beautiful down there.

Week 4 to 7 – We went to KY to stay with Mr. ODA’s parents. By the time I got there, I wasn’t leaving until we moved into our new house. It was a lot to pack up the car, unload it all, keep it organized, live with the minimum for the two kids, and then pack it all back up again. I ended up cancelling two of our trips that we had planned. I kept one where we went back to our old neighborhood for Halloween. I wanted our oldest to play with his friend for the holiday, but then we didn’t even really see them. Our youngest had her flu vaccine booster that weekend too.

In hindsight, our quick decision to move was great timing. We knew there were bidding wars happening over real estate (our Realtor fielded 16 offers on a home in Richmond, VA the same weekend we listed!), but we didn’t know it was going to get as bad as it has where inventory is so low and house prices climbed. While we may have been able to get more for our house a month or so later, we wouldn’t have found many options for what we wanted in KY.

House prices in KY are about 8% higher than this time last year, and our area’s housing prices are 11% higher, according to Zillow. Example: Our neighbor was under contract to purchase his house in July. They had a new job offer come in, and they sold their house earlier this month for $55k more than they purchased it. That’s a 14% increase in less than a year.

Prepare for a Closing

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We have purchased 16 properties directly (3 personal residences) and 2 properties indirectly (partner); we’ve sold 3 properties. All houses have been mortgaged because we choose to leverage our money rather than own them outright (at least at first). This post covers the closing process in terms of clearing the loan processing.

Your loan must pass through underwriters before being approved and issued. The underwriter is evaluating your financial statements to determine risk and credit worthiness. While you’re given a pre-approval based on your credit score and report, the underwriter is verifying there are no other risk factors in the details. I’ll probably never cease to be amazed at what an underwriter focuses on – sometimes they want every account’s statement and several explanations, and sometimes they want you to confirm you don’t own a property that you never did own while ignoring the accounts you do own.

While a deadline is rarely given, you should provide the paperwork within a couple of days. The longer you take to gather the required documents, the more you jeopardize being able to close on time (the timeframe is set within the purchase agreement).

The are several documents that are going to be requested every time that you can keep filed away or know to start gathering them when you make the offer (some need to be more current than having them filed away). Inevitably, there will be follow up requests from the underwriter, so it’s best to get these files to them as quickly as possible.

  • Most recent 2 years of tax returns
    • Usually we just hand over the PDF version of our tax returns. One time, we actually had to fill out a transcript request form on the IRS page.
  • Proof of income (e.g., W-2)
  • Most recent paystub(s) (e.g., cover 30 days)
  • Color copy of drivers licenses
  • Most recent 1 or 2 bank statements
    • At the beginning of our purchasing, we had to provide a statement for every account (e.g., retirement, investments, banks). Over time, the request has become more focused on showing the statements associated with the accounts that will be used for funds as closing. I don’t know if this is related to our credit worthiness, or if it’s simply how they’ve streamlined the process. Here’s an example that shows they only requested accounts that make up our closing funds.
  • Proof of paid earnest money deposit (EMD)
    • EMD is a deposit made along with the signed contract. It’s the buyer’s showing of good faith to purchase the home. There are different expectations on the amount of the EMD. Sometimes it’s 1% of the purchase price, sometimes it’s a flat rate. We’ve just followed our agent’s lead on the amount to put on there, and it’s usually $1000 or $2000. The EMD is held by your Realtor’s office and credited to the total due at closing. If the buyer breaches the contract, the buyer may forfeit this deposit to the seller (e.g., backing out of the purchase without invoking a clause within he contract, such as the home inspection clause).
    • Proof is usually given by showing the check image along with the bank statement from the account it cleared.
  • Insurance agent contact information
    • This isn’t always known at closing, but you’ll need to provide your agent’s information before closing so that escrow can be set up. If the property won’t be escrowed, then you’ll need to provide proof of an executed policy before closing.

When investment properties are involved, you’ll need to provide documentation associated with those properties. For instance, a mortgage statement may be sufficient if you have the taxes and insurance escrowed. If you don’t have it escrowed or don’t have a mortgage, then you need to provide the current tax statement and insurance declaration. You’ll also be asked whether the property is subject to an HOA, and, if it is, you’ll provide a statement or coupon book showing the payment schedule. Neither Mr. ODA nor I are patient when it comes to illogical requests. For example, we were asked to give mortgage statements for all of our properties, as well as tax documentation and insurance policies for every property. Well, if the property is escrowed, then I don’t have tax paperwork because it’s sent to the bank, nor should I have to prove that the taxes are paid since it’s managed by the bank. I eventually provided all the tax documents though – it just took a while.

There may be large deposits or withdrawals that you’re requested to explain. For instance, I had to sign a statement that the deposit in our account was from the sale of our house. While it can be tracked with paperwork, there are many instances where the underwriter wants the details explicitly stated, versus making assumptions. For the example below, I provided the corresponding withdrawal from our main checking account.

Our first home purchase was at the same time as our wedding (we closed on our house on July 15 and got married on August 4!). A NY wedding isn’t cheap, and we were attempting to pay 20% down on our DC suburb home ($$$), so there was a lot of money movement around this time. Since my parents were helping pay for the wedding, we had large cash deposits into our account that had to be explained. We also had several investment account liquidation transactions. The underwriter had a hard time following the flow of money, and it took me several, very detailed, emails to show how each liquidation entered our checking account. We also had to provide gift letters, which stated we were gifted these sums of money and there was no expectation of paying it back (thereby creating another liability). That’s probably been the hardest closing in terms of our financial status, to date.

You may be requested to provide updated bank statements closer to the closing date, especially if there’s over a month between the initial documents given and the closing date. When you go into a closing, you’re told that it’s not a good idea to open new credit cards, make large purchases, or do anything along those lines that would affect your credit worthiness. They run a recheck of your credit before closing to ensure your credit card balances are about the same, and that there’s been no new credit opened in your name. Verification of more recent bank statements accomplishes the same.

We’ve had two closings delayed.

House 5‘s sale was about 6 weeks delayed due to the buyer’s lack of responsiveness. They didn’t respond to information requests quickly and struggled to provide the necessary documents to underwriting. Unfortunately, as the seller, our only ‘play’ is to take their EMD and walk away. If it’s bad enough, this is worth it. But it brings you back to square one. This was an off-market deal, which is enticing to see through rather than attempt to list and sell it. If we decide not to sell, we’re now looking at January or February before we had a renter; it could be even longer since we struggled in the summer to find someone for the house. Plus, the EMD doesn’t cover the lack of rent we experienced while under contract, where we expected to lose only one month of rental income, but it turned into 2.5 months. We had our Realtor (who was a dual agent, unfortunately for this matter) lean into the attorney on the buyer’s side after already being weeks beyond the contract’s closing date. By the time their delays were acknowledged, it was Christmas, which delayed closing into January, unfortunately.

Houses 12 and 13 were purchased together (and not yet discussed here). That closing was delayed a week, and it was completely the loan officer’s fault. We, the consumer, obviously get no restitution for their mishap. He didn’t order the appraisal timely and then had to put a rush on it, but it still didn’t come in on time. He created several errors in our paperwork (including the house number of one of the purchases). It got so bad that we just worked with the title agency, and she was awesome at getting all the documentation in order, even if it was a week later and Mr. ODA had to be my power of attorney!

Be prepared and be responsive. Understand that the bank is doing their due diligence and you want to be able to close on the loan and purchase that property. While there will be several requests for information, keep in mind that it’s over a short period of time and will soon be over.

House #8

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I shared that I would tell the stories of our home purchases. Instead of starting with #1, I decided to start with the most interesting. This property was being sold by a licensed Realtor, so we had a false sense of security. It ended up being the sketchiest (technical term) deal we’ve done. This is in Virginia.

We started with a home inspection, which revealed several issues. We requested the HVAC condensate line be cleared and the water in the backup pan removed. We also agreed to have our attorney withhold $1,300 at closing, to be paid to a contractor of our choice after closing, to repair other items found during the inspection. I can’t remember why we were handling the home inspection items, but that should have been the first red flag.

Our closing was scheduled for 8/18.

We were told that the HVAC repairs agreed upon were completed. We went to check on the progress of cleaning out the house and the HVAC repairs on August 10th. The HVAC’s backup pan still had water in it, and the house was filthy (after being told it was ‘vacant’ and ‘cleaned’). Plus, the electric was turned off. We had our Realtor reach out to the seller to cover our bases. Here’s his email:

While waiting for a response on this email, we checked with our closing attorney to ensure everything else was ready for closing; it wasn’t. We fully expected a “we’re clear” response, but instead we were told they were having trouble clearing the title. We weren’t given the specifics, but that’s not what you want to hear a week before closing. It ended up being cleared, but that was one more thing to worry about!

As typical, we had to do a final walk-through of the house to ensure it’s in the same condition (or better) as it was when we went under contract. Knowing how poorly the seller communicated over the previous month, we wanted to see the house the day before closing, rather than right before we head to the closing table. The electric was still not turned on, and it wasn’t cleaned. Our Realtor contacted the seller again. We were assured it would be addressed, and the electric would be on. We made plans to walk through the house in the morning.

Our Realtor was unavailable that morning, since this wasn’t supposed to be part of the schedule, so he sent a team-member to let us in. As luck would have it, she dropped the lockbox key below the front porch, so we couldn’t get in. We called our attorney and postponed the closing to later in the day. The Realtor was able to obtain a copy of the key to let us in, where we learned the electric was still off.

I contacted the electric company. I explained that I was the buyer, and the seller kept saying the electric would get turned on, but here we are at the 11th hour with nothing. The woman on the other end couldn’t tell me what she was seeing since it wasn’t my account, but she carefully played with words to let me know: sorry, hunny, but there’s no way this electric is getting turned on while under this person’s name because there is a high outstanding balance. She assured me that if I put it in my name, there wouldn’t be any issues. However, I wasn’t about to pay fees and put it in my name before the house was legally mine.

This is where we learned that a good attorney is worth his weight in gold. We never really understood the role of a closing attorney, since all our closings had gone smoothly (I mean, we could sign all the closing documents in about 20 minutes at this point). Since the electric wasn’t on, and we couldn’t verify the condition of the home, as required by the contract, our attorney withheld $5,000 of the settlement proceeds. The seller’s attorney was NOT happy, but it was entertaining to watch from our standpoint. 

We had been provided a ‘receipt,’ dated 8/17 (the day before closing), that indicated an HVAC repair man had been out to do the work required. We are pretty sure that this was falsified. There was no electricity in the house that day, and there was still water in the pan on 8/18. Here’s the email I sent to our attorney releasing the $5,000 withheld, less the cost of my HVAC technician performing the repairs.

It cost me $125 for the HVAC technician’s trip. Our attorney told the seller’s attorney that he would release the $5000 less the $125. The seller’s attorney said he didn’t have any authority to allow that; so our attorney said he didn’t have any authority to release the $5000. Well, the seller’s attorney decided $4875 was better than nothing, and I got my $125 back.

All in all, everything fell into place, but there were many days and hours that felt like we were about to fall into a pit.

We purchased the house for $89,000, plus the $1,300 for contractor repairs, and the seller paid $2,000 of our closing costs (this minimizes the amount we have to bring to closing and allows us to leverage every last dollar we can for maximum efficiency). Our first lease was for $995/month, exceeding the 1% Rule. We closing in mid-August, and the first lease didn’t execute until October 1, which was one of our longer vacancies. That tenant renewed her lease once. Currently, the rent is $1,025/month. We sought $1,050 for a 12 month lease, and the prospective tenant negotiated an 18-month lease at $1,025. We accepted this because it was rented in October, and an 18-month lease brought as back to spring-time turnover. Even though taxes have risen since the purchase, we still maintain the substantial cash-on-cash return that is provided for in trying to obtain the 1% rule on investment real estate purchases.

After closing, I painted nearly the entire house (including the trim) over the course of a week; the house looked significantly better with just a fresh coat of paint. We also had to do a more thorough cleaning job than we’ve typically had to do on houses we purchase, including caulking the tub and cleaning the carpet.

We replaced the dishwasher with the first tenant, and then replaced the refrigerator after the second tenant kept complaining about the seal not working well. Most costly, the house has had several roof and siding issues. The kitchen was an addition with a flat roof, which typically causes problems. We replaced the gutters, fixed the flashing, repaired some siding, and then eventually replaced that part of the roof altogether. We also had to replace a cracked window, which was surprisingly under warranty. It took a lot of work to find the window manufacturer and a local distributor, but it surprisingly all worked out because it was a stress fracture and covered under a lifetime warranty.