If you have never closed on a house or property before, it can be a bit overwhelming. But, don’t worry; I will walk you through it step by step. This is the exciting step, where we go from making an offer to receiving the keys. The hardest part of this process is that it can take 45+ days … that is a long to wait for your new property.
If you haven’t already, check out our previous post, “Step 5: Making An Offer,” take a look at that to familiarize yourself with the first step in the process of closing. While you are closing, you should also be setting up your services; see Step 7 for more detail.
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Making the offer
From the previous post, Step 5, you should have a balk park offer ready. Your realtor will work with you to draw up the formal offer. If you buy a house without a realtor, you will need to get a state-specific offer agreement form. You can find those online or at a closing company. If you are buying a house without a realtor, you still need a closing company or lawyer to prepare all the documentation for you. Now, your realtor will send your offer to the other realtor with an expiration date, usually a day or two. As I mentioned in previous articles, you will probably make the offer without physically seeing the property. Remember, you should be making lots of offers that get rejected. Also, compensate your realtor for making the low offers for you.
Next, you will receive an acceptance or counter-offer from the seller. They will usually negotiate the price and earnest money amounts. This back and forth will continue until a mutually agreed-upon offer is accepted in writing by both parties. At this point, the clock starts.
The Inspection – The first step in the closing process
If you choose to get an inspection, and you should, your realtor will work with a licensed inspector to inspect the place. You have roughly 7-14 days to have the inspection completed and accept the results. The buyer pays for the general inspection at the time of inspection. This is a key step in the process of closing. What if the inspector finds something big like roof damage? If you have the inspection contingency in your offer, you can go back to the seller and amend or cancel your offer. Often, in this case, you can negotiate a new offer price or have the seller fix the issue. I would choose to lower the price and fix the issue myself. If the seller fixes it, they will look for the lowest bidder contractor to fix it. Some issues have to be fixed before selling the property, such as a broken chimney or unsafe wiring. If you did not put an inspection contingency in, I would recommend still having an inspection done. It is much better to lose $5000 in earnest money than buy a house that needs $40,000 in water damage and termite repair.
Inspectors will not find everything wrong in a house. But, they will find most major things wrong. You can read the horror stories of things missed in the inspection on the internet. For instance, home inspectors are not allowed to move things around to see behind them. However, you or your realtor can accompany the home inspector. If you have not seen the property yet, this is a great time to come into town and see it. Please don’t distract the inspector from their job by asking a bunch of questions.
Other mandatory inspections required for the closing process
There are a variety of other inspections that the inspector can do. Some other types of inspections include chimney, lead-based paint, pest/termite, radon, mold, electrical, and foundation. Depending on the state and the type of loan, some of these inspections are required. For instance, the VA loan has more inspection requirements than a normal loan. If you would like to have a more comprehensive inspection, I would suggest adding the mold and possible pest inspection, depending on what part of the country the property is located in.
Financing as part of the closing on a property
As soon as the offer is accepted, it is time to kick financing into high gear. Some properties do not qualify for a conventional loan. For instance, a condo with a front desk does not qualify for this type of loan. If this is the case, you need to look for a private lender. Your real estate agent may be able to help you with that. I highly recommend BancorpSouth bank; they will do private money loans. For more information, see my post on “Financing your Investment Properties.” Your loan officer will walk you through the steps of the loan process. Be prepared to submit things like your W-2, pay stubs, bank statements, proof of employment, etc. The bank will most likely require an appraisal of the property.
How much to put down and other financial decisions
When buying a property, a big decision is to claim this as a second home or not. For a property to be a second home, you must spend so much time in it a year. Here is a great article on this topic. Finance rates are lower for a second home than an investment property. I declared my property as an investment property for both the property loan and insurance purposes. It was a moral thing to me. This decision needs to be made early in the closing process.
Your decisions about a second home and conventional vs. private loan affect the amount you need down. Most often, private loans require 30%+ down to secure a loan. Conventional loans require 10%-ish down. Second-home loans can require as little as 3%. You want to stay above 20% not have to pay PMI (private mortgage insurance). PMI is a monthly amount you pay to cover your lack of 20% down. It does not go towards the loan. I personally like to have 30% – 50% equity in my properties. This allows for market fluctuations. Others prefer cash only for investment properties. See my future post on “Using Leverage for Investments.”
Insurance
You will be required to have insurance on your property by the time you close. I highly suggest you get property insurance that covers short-term renters. Most home policies do not cover renters or short-term rentals. It is important to inform the insurance agent of your plans. This allows them to find the appropriate insurance. Also, it would help if you shopped around for insurance; some of the quotes I received were 4x the lowest quote. Being a rental property, insurance costs vary greatly from company to company. You should look for insurance early in the closing process.
The appraisal
As part of your mortgage application, the bank is going to order an appraisal. Basically, a licensed appraiser will come and look at the property to assess its value. They will do a very similar process as we did in Step 3. They look at things like square footage and find other recently sold properties in your location that match. They do some adds and subtracts to make your property more similar to the comps. Then, they return their findings to the bank, you, and the seller. If you have the appraisal contingency, you may negotiate a better price if the appraisal comes in low. The financing contingency also will allow you to do this because the bank will not loan you more money than the property is worth. If the appraisal comes in low, you will have to make up the difference between the purchase price and the appraisal plus your 20%-30% down.
Closing day, the part of the closing process
After your loan is approved and the closing day comes, or a new closing date is agreed to, it is time to get the keys. For the closing, you might have to wire money beforehand to the closing company to cover your part of the closing costs, or other items agreed to in the offer. Typically, closings do not go like you see on tv; everyone is not sitting around a table, yelling to finish the negotiations. You and the closing agent are the only ones in the room. You will have what feels like 1000 paper to sign “exactly as your name appears on the form.” At some other time in the day, the seller will sign the same set of papers. At the close of the day, each party will come and pick up a fully signed set of papers. You will have a Warranty Deed or Deed in your package showing you now own the house. You also get a set of keys. YEAH!!! The closing company will file all the necessary paperwork with the county and state for you. If you do a remote closing, the papers are mailed, and you need to sign in front of a notary. You’re done! The closing process and vacation rental purchasing process are finished!
Now that you have the keys
Run around the new house screaming like a fool and then call a locksmith. It would be best if you are positive that you have the only keys. Since this will be a short-term rental, you will want to install a digital lock. This allows you to give each of the guests a separate code. More importantly, this keeps the guests out after the code expires. I highly recommend KABA e-series locks or the mortise e-series here. To read more about this, see my post, “Get Ready to Host.”
You are finally a real estate investor.
Just a reminder, you should be starting setting up various services while you are closing; see my post “Step 7: Setting up Services” for the next step in the process.
Remember, if this sounds overly complicated, Relaxing Condos offers consulting services to get you started with any of your vacation rental business needs. If you found this useful, please share it on social media using the buttons below. Also, don’t forget to sign up for our monthly Newsletter, Special Hot Tips, and our cost estimating guide delivered to your inbox!
— Jake
