Closing Process For an Apartment Syndication Deal

The first thing that you need to do before you close is to confirm your budget. Confirm the accuracy of your rent premiums after you've done your valid renovations and confirm your other income items like the loss of lease and the vacancy and the concessions you expect to give other income. And then on the expense side you want to confirm all of your expenses, maintenance or repairs, contract services, payroll, and admin. And in order to confirm those things, after you put the property under contract, you need to do your due diligence. Besides those ongoing expenses, there will be upfront costs associated with your value-add business plan, like exterior and interior renovations. So, one of the reports will help you to determine exactly what maintenance you're going to need to do on the exterior. Any sort of upgrades you want to do, clubhouse, new playground, upgrade that fitness center, things like that. And then you also have a report where your property management company actually walks every single unit and a term it what you need to do from a deferred maintenance perspective to every single unit as well as what you need to do from a value add perspective for each of a unit. So if there are any different majors, you'll know what those are for due diligence and then you will know exactly what units need to have. So, for example, maybe only half of the units need new appliances, maybe 75% new floors. Whereas in your underwriting you might have assumed that you need to do new appliances, new floors, new cabinets to every single unit. They might've actually had been able to reduce your budget at this point in time. Same thing applies to the exterior and same thing applies to your expenses, incomes. Those might be the exact same as they were doing underwriting, but most likely you had at least some minor adjustments to those numbers. And of course you want to work with your property management company as well because obviously they're going to be the ones who are managing the property on an ongoing basis. So you went to confirm that your property management can operate the property at the expenses if they're the ones that will be performing or may manage the renovations. Even make sure that one, they approve your renovation budget and two, they approve your timeline. So if you want to get the renovations done in 12 months and you tell your company and they'll let you know that they maybe you can do it in 18 months or 16 months because all of these things are going to affect your model and anything that affects your model is going to affect the returns. You want to know up front if your terms are going to go up, which is an amazing thing because you can let your investors know about that if their terms are going down and how much you need to adjust the offer price or maybe get a different type of financing prior to closing or if you need to back out of the deal entirely. Which brings us to the second thing you need to be doing, which is to secure financing. And if you are in syndication and at this point in the process you should have selected your loan and then you should have gone through the entire process of applying and qualifying for that loan. When the last step is actually to sign on the dotted line, but essentially you need to be knowledgeable of the loan programs, talk to your mortgage broker or lender and letting them know what your business plan is, send them your budget and they will go ahead and underwrite that deal for you and let you know exactly how much money they can lend on that property and then let you know exactly how much money you need to bring as a down payment for that property, which comes with the third thing you should have done prior to this point closing, which is to secure commitments, which at this point you'd have 100% of the funds required to close raised from your passive investors. Not only raised, but those funds should have already been wired as well. Not just as down payment for the loan, you might need to raise extra money for closing costs. You're probably going to want to have an operating account fund for any unexpected costs that comes up in the first six to 12 months out of the business plan. Also the upfront due diligence costs, you're going to want to potentially raise the capital for that. Or you might be taking money out of your own pocket to pay for that and then raising that capital from your investors to reimburse yourself at close. And then also you're going to want to have all of the legal documents, the PPM, the operating agreements signed by any and all general partners and any and all limited partners. So as long as all three of those things are completed, then you are ready to close on the deal. Because once you close on the deal, in a sense the real work I actually get into the asset management. So ideally you know exactly what will happen during the closing process because when your lender or your mortgage broker has walked in through that process or maybe it real estate broker, his walking through that process. Closing on an apartment indication deal is a little bit different than your traditional residential closing because in traditional relative closing, you show up, you sit there for two hours with documents and then you get the keys and then kind of take over the property. A lot of the work actually is completed a few days prior to closing. So what happens in three days before closing, you with a sponsor will sign the loan and you'll sign the title documents to approve that loan as well as approve the transfer of title and then you will go ahead and send that information back and then they'll mess around with that for a day. And then a day before closing, you're going to receive all of the closing documents from the lender. So rather than signing the closing documents at the closing table, you will get those the day before in the mail because the property might not even be in the state that you live in. You will most likely have to go to a notary and sign all the documents in front of a notary and then maybe go to like a FedEx or UPS so you don't have to go to multiple places because they're going to want to send those documents overnight back to the lender or the title company, whoevers handling the closing. You will also need to wire any of the funds that are acquired to close into escrow with your lender at that time as well. So you can do that before the actual closing date. At which point the lender is going to review the documents, make sure that you sign all the right spots, all the verbiage is correct, nothing is missing. Make sure that all the money is there before that to transfer it to the title company and then they will also issue a new deed in the name of your LLC. So again you're most likely going to create an LLC that you are a general partner of in that the limited partners are investors they own shares of. Then the next day after all that is done once before night, the lender will be dotting the i's, crossing the t's and the day of closing and then assuming everything is good to go, they'll send that money off the title company who can then send it to the actual seller and the property is yours. Once you receive the word that you've gotten the go ahead, the closing is completed. Then the first thing you want, what you want to do is send out an email to your team, which includes your proper management company and let them know that they can take over the property. You can tell your property management company that, we expected close between four and 5:00 PM eastern standard time, so I want you guys to get there at 3:45 PM in the parking lot. So the second you send them that email, they can instantaneously take over management of that property. That way that no single seconds is wasted and you are able to begin implementing your business plan from day one. So unless you are using the old proper management company, which probably you shouldn't do unless they're the main and may have a company in that area and you've decided to take use them after an interview, you don't want to automatically just use the old property management company just because it seems like it will make for a smoother transition. And that may be the case, but that doesn't necessarily mean that on an ongoing basis is the best idea. Majority of the time a new management company who need to go in there when you take over, the old management company should know that the property is being sold on this day and that they should expect the new management company to show up between four and five eastern standard time. It's likely that the old management company and the new management company actually know each other or at least familiar with each other. But on the off chance that the old managers either don't know that the property is sold or maybe they're not friendly with that management company. Maybe there's like some bad blood between the two companies or maybe they're just annoyed and disgruntled that they're losing the business and that might happen. But as long as your property management company is experienced, which means they've experienced these conditions before, they should be able to handle any resistance and make sure that they're able to get into the property that day. So from there, the property is yours at that point, you'll transition from if this is your first deal, not owning any deals at all and kind of just being someone who's really, really good at underwriting to now actually being the asset manager of a property. So the things that you do prior to close and then three days before closing, a day before closing and the day of closing, how to handle the transition. Again, there might be a few other things you need to do based off of maybe you're doing some sort of special loan, other circumstances, but in general that's what's going to happen. Now the other thing that you want to do before you actually close is you want to draft your email to your passive investors so that the second you close, not only do you notify your proper management company so that they can take over, but you also let your investors know that you successfully close as well.