Several times per week, I have investors (often new investors) tell me their horror stories about how they were able to get their flip under contract with a buyer, but then not be able to get it to closing. The worst part is when I hear about situations where the investor is dragged along for months on end by the buyer and his agents, only to have the transactions eventually fall apart and the investor have to start all over, with nothing to show for it.
We don’t generally have this issue. About 9 out of 10 times, our deals close, and close either on-schedule or shortly thereafter. This hasn’t always been the case. We’ve had our situations where we’ve been duped by buyers into long, drawn-out deals that never close — and we’ve learned from them!
Follow these 10 rules and your deals will close more often, faster and with less hassle:
- The absolutely best thing you can do is to have the buyer use a mortgage broker that you know and trust. When buyers use our mortgage broker, we know upfront if the buyer is qualified and whether we should even accept the contract. If our broker tells us he can get a loan done for our buyer, it will close 100% of the time and almost always on schedule. Our broker is that good, and you need to find yourself a broker who is that good — and get your buyers to use him. At very least, require your buyers to get pre-qualified with your broker. And if the buyer doesn’t use your broker to get the loan, call the buyer’s mortgage broker to chat with them to make sure they are familiar with any flip rules that might be applicable and ask about the buyer’s qualifications and what are the broker’s biggest concerns about getting the loan done. If it’s not the broker you recommended, they probably won’t tell you anything worthwhile, but you may be able to pick up something from asking the questions.
- Get AS MUCH earnest money as you possibly can. While everyone likes to be optimistic about the deal the day the contract is signed, I can’t count the number of times I’ve looked back a few weeks later and wished I had gotten a lot more earnest money.
- Limit the buyer’s financing contingency to 21 days. There is no reason it should take longer to get a loan commitment letter for the buyer (regardless if it’s FHA, VA or conventional). If the broker balks at the 21 days for financing contingency, make the buyer use another broker — there is either an issue with the buyer’s finances or the broker isn’t very good.
- Keep the closing date to 30 days or less. Unless you live in a state where a 30 day closing is really tough (like New York), there’s no reason it should take longer than that to get a loan funded and a deal closed. Good mortgage brokers can get FHA, conventional and VA loans done in three weeks (four weeks tops), and that’s even when two appraisals are needed. At VERY MOST, give 5 weeks to close the contract if there is a good reason for the long wait.
- Did the broker order an appraisal relatively quickly? A sure sign that there is going to be an issue is when the broker drags their feet on ordering an appraisal. Buyers don’t want to spend money until they’re confident they’ll close. Put in the contract that the broker will agree to order the appraisal within 48 hours of the inspection contingency being cleared — this will force the broker to keep the process moving.
- The DAY the financing contingency is up, you should receive a loan commitment letter from the broker. No commitment letter, no deal — unless the buyer is willing to put up more earnest money. Put this contingency in the contract if it’s not already there (it’s standard in my state contract).
- If the buyer requests an extension of the closing for any reason, ask the agent and broker how confident they are that the extension will be long enough to get the deal closed. 9 out of 10 times, they’ll tell you that they are certain or near-certain the extension will be enough time to conclude the deal. Reply with, “If you’re certain the extension will be sufficient to get this deal closed, I’ll grant the extension if the buyer puts up additional non-refundable earnest money. Since they’ll need the money for the downpayment at closing anyway and since you are certain the deal will close, there’s no reason the buyer can’t put the money in escrow today, right?” How much extra earnest money to ask for is up to you, but anything up to the entire downpayment is reasonable, especially if the agent/broker tells you they are “certain” it will close. Try not to give more than 7 extra days in the first extension. [By the way, this is the best way to find out if the broker is really “certain” about the deal — if the buyer refuses to put up more earnest money, you can be pretty sure the deal isn’t going to close and the broker already knows it, which is why they won’t suggest the buyer put up more money.]
- If the buyer requests a second extension, do it under the following two conditions (and don’t give more than an additional 7 extra days):8a. The buyer puts up the entire downpayment as non-refundable earnest money (if they haven’t already); and8b. You get a “kickout clause” added to the contract, where you can start marketing the house again, and if you find another buyer you’d like to go with, the current buyer has 48 hours to get a clear to close, or you can go with the new buyer and keep any earnest money.
- If the buyer requests a third extension, you have two choices:9a. With the kickout clause, you can pretty much extend as long as you want, as you always have the option to go with another buyer if one comes along. The only drawback is that you don’t get the earnest money until you ultimately terminate the contract (though that shouldn’t be your goal); or9b. The other option is to terminate the contract and tell the buyer that if they figure out their financing issue and can get things resolved, you’re happy to sign a new contract and apply the earnest money from the original contract, but you’ll have a right to renegotiate terms and perhaps ask for additional earnest money for the new contract.
- Throughout the process, call the mortgage broker (get the seller’s written permission to contact the broker as part of the contract) once per week (Tuesday or Thursdays tend to be the best) and get a status on the loan. Ask what has been done, what the next steps are, if there are any issues that have come up, when the broker thinks the loan will go to underwriting, etc. In addition, once the loan is in underwriting, have the broker tell you every time the underwriter comes back with conditions, and what SPECIFICALLY those conditions are. This will keep you updated on exactly how close you are to the closing and what is holding it up.