Welcome to The Landlording Show, where we dive deep into real estate investing, not only covering how to invest but also what to do once you've started building your property portfolio. Today, I’m excited to have a special guest: Anthony V. Panzica. Anthony has worked extensively with buyers, sellers, and investors, helping them navigate the often complicated world of real estate closings.
In this episode, we focus on the common pitfalls of closing on a property, potential buyer’s remorse, and strategies you can use to save money after closing. Here’s a breakdown of our conversation.
The Importance of Attorney Review and Inspections
When buying real estate, it’s essential to understand what the attorney review period is and how it works. According to Anthony, the contract is designed to be "pro-buyer," with numerous contingencies in place to protect you. The most critical of these is the attorney review and inspection period, where buyers get five business days to review the property’s details, including the inspection report.
For rental properties, it’s even more crucial to get as much information as possible to avoid walking into a mess. You may need to ask for credits or request repairs, depending on the inspection results. Always work within the designated time frames to ensure you don’t miss any vital steps.
Earnest Money: How Likely Are You to Lose It?
Many buyers worry about losing their earnest money if a deal falls through. Anthony explains that losing earnest money is rare, especially in states like Illinois, which are very buyer-friendly. In most cases, even when a deal fails, the buyer gets their earnest money back.
However, Anthony highlights that both parties must agree on what happens with the earnest money. It’s not a unilateral decision. Even if the buyer messes up, the seller will still need the buyer to sign off on releasing those funds. In Anthony’s 16 years of practice, he’s only seen one case where a buyer lost all their earnest money, and it was due to a significant breach of contract.
How to Tell if Your Buyer is Moving Forward
As a seller, it’s crucial to identify the signs that your buyer is progressing through the deal. After the inspection period, you should expect to see evidence that the buyer is moving forward with their loan. Anthony suggests looking for title requests from the lender and confirmation that the appraisal has been ordered. Silence from the buyer’s side can be a red flag that the deal is stalling.
Asking for Repairs or Credits?
When the inspection report comes back, buyers often wonder whether to ask for repairs or request credits. Anthony advises leaning toward asking for credits because sellers, especially if they are eager to move, might opt for the cheapest repair option. By requesting a credit, buyers can take control of the repair process and ensure the work is done correctly.
What’s the Deal with “As-Is” Clauses?
The "as-is" clause used to be more meaningful, especially in foreclosures or short sales, where buyers knew they couldn’t ask for any repairs. Today, however, even with an as-is clause in the contract, it’s common for buyers to request repairs or credits. Sellers often agree to these requests, despite the as-is condition, to avoid losing the deal.
It’s essential to understand that an as-is clause doesn’t eliminate the buyer’s right to an inspection or attorney review. Buyers can still walk away from a deal if significant issues arise during these periods.
Tax Prorations at Closing: What You Need to Know
In Illinois, property taxes are paid in arrears, meaning you’re paying last year’s taxes this year. This can complicate things at closing. Anthony stresses the importance of checking if the property is in a reassessment year and adjusting the tax proration accordingly. For example, if the property’s assessed value doubles, the tax bill could jump from $5,000 to $10,000. Buyers need to ensure they receive the proper credit at closing to avoid being hit with a large tax bill down the line.
A fair way to handle this is to hold back a portion of the tax credit until the actual bill comes in. This ensures that both parties are protected from paying or receiving the wrong amount.
Rent Prorations and Section 8 Tenants
For investors, buying a property with tenants in place can be tricky, especially if the tenants are under a Section 8 voucher. Anthony advises obtaining all necessary documentation, including rent rolls, tenant letters, and assignments of rent. At closing, make sure the prorations for rent and security deposits are calculated correctly.
If the property has Section 8 tenants, additional paperwork is required to transfer the voucher to the new owner. Without this, you risk delays in receiving rental payments.
Key Takeaways
Attorney Review is Your Friend: Always use the attorney review period to address any potential issues, especially after the inspection. Request credits rather than repairs when possible.
Earnest Money is Usually Safe: As long as you follow the contract and communicate, you’re unlikely to lose your earnest money. Even in cases of buyer fault, sellers still need your signature to claim the funds.
Watch for Red Flags: As a seller, pay attention to communication from the buyer’s side. If you don’t hear about loan progress or appraisals, it might be time to raise concerns.
Negotiate Credits: When buying, focus on big-ticket repairs and try to negotiate credits rather than asking the seller to make repairs.
Be Cautious with Tax Prorations: Ensure that you account for any tax reassessments and apply for applicable exemptions after closing.
Section 8 Properties Require Extra Steps: If you’re buying a property with Section 8 tenants, make sure all documentation is transferred correctly to avoid payment delays.
Thank you to Anthony for sharing his expertise, and thank you for reading! If you’re in the process of closing on a property or planning to invest, this advice could save you time, money, and headaches. Be sure to stay informed and work with professionals who have your best interests in mind.
We’ll catch you next time on The Landlording Show!
