“Never underestimate the value of cold cash.” – Gregory Nunn
As a real estate investor, there will come a time when you will be in a position to buy properties with all cash. You may have profits from selling a long-term hold or a short-term flip. You may build up equity and get credit lines. You may develop access to cash through private lenders. You may have a combination of all these.
When you’re buying with cash – houses, apartment houses, commercial properties, or any other kind of real estate – you’ve reached a higher level of investing.
Buying with cash enables you to do deals you couldn’t do with traditional financing… and may even be impossible with hard-money lenders. Your field of competition becomes smaller… and your potential profits grow.
At this stage, you may qualify for the need-to-sell-quickly, deeply discounted deals other buyers can only dream of. It’s a good position to be in. You can even buy large properties that are vacant, direly in need of rehab, or both… and then fix them and lease or sell them for a big profit.
But with that extra power comes the need to be extra careful…
You Can Learn a Thing or Two From Stodgy Banks
No one looks after their money quite like a bank does. Before giving you a loan, they’ll make you:
- Prove you’re worthy of the loan (or that your partner is).
- Prove the building is in okay shape.
- Take steps to reduce legal risk and provide adequate property insurance.
They’ll make you complete a series of appraisals and inspections. And in special circumstances, they may require environmental reports and/or “four-point inspections” (certifying that the heating and cooling, roof, electrical, and plumbing systems are okay).
They’ll insist on reviewing the survey and title insurance. Then they’ll have you sign dozens of documents that allow them to grab the underlying asset, its income, or both if you start to default.
In other words, they’ll do all the things a reasonable, cautious person would do to cover his bases when lending a substantial sum of money.
When the only money on the line is your money, you should do no less. Just because you’re not filling out an application and jumping through bank-required hoops doesn’t mean you shouldn’t be just as diligent in your research, making sure you’re watching your downside at all times.
Yes, Cash Is King… but Don’t Make King-Sized Mistakes
Do banks sometimes cut corners on their due diligence? Absolutely. Especially in bubble markets, when many of them become little more than money pimps. They just want to get the cash out there, working for them.
But solid banks – the ones that last through up and down cycles – do their homework in earnest. Those are the ones you want to emulate when you’re financing your own deals.
The key point to keep in mind is that when you buy with all cash, you no longer have a bank looking out for their money (and, by implication, looking out for you). So you have to be careful that you don’t make the kind of mistakes I’ve made…
The first time I did a self-financed deal, the closing was on the eve of a holiday weekend. Everyone was rushing out of the office, and I was closing from out of town, relying on an excellent local partner who had a limited power of attorney from me.
I was busy, the title agent was busy, my local partner was busy.
My partner and I were excited, because we had picked up a property in an improving neighborhood for 25 percent below market value and with the potential to cash flow like the Mississippi. I expected her to watch the details, and she expected the closing agent to watch the details. And I guess the agent expected us to watch the details.
Turns out, we missed a few…
For one thing, we didn’t get a survey – and it wasn’t the first time I’d made that mistake.
On one house I bought early on in my career, I assumed the property line was where the owner had surrounded the property with hedges. But it turned out it was five feet inside the hedges. Multiply that by a 300-foot perimeter, and I was shortchanged 1,500 square feet! Wit barely enough room to begin with to accommodate a pool in a pool-type neighborhood, the loss of that 1,500 square feet smarted.
Fortunately, it wasn’t the disaster it could have been. Because I had “bought right,” I still made more than five times my cash investment. But I vowed I would never again make broad assumptions on key points,and that I would double-check things like the survey. (And so I did… until I bought with cash.)
But the survey wasn’t our only area of negligence on that house. The coup de disgrace was the property insurance…
Before closing, my partner had obtained a decent insurance quote. But we never got the binder, because the agency never got the check! So, for the entire holiday weekend, the property I bought with all cash was uninsured… ready to be burnt down, blown up, or blown over without anyone anywhere offering me a nickel in compensation if it happened.
Make a Checklist and Check It Twice
For any closing, you should make a checklist. But it’s doubly important when you’re closing with cash, because you no longer have a lender who is (indirectly) doing due diligence for you.
Your checklist should not only include the kind of property inspection I describe in detail in Main Street Millionaire, it should cover the following red-tape P’s and Q’s:
- Get the title insurance commitment in plenty of time, usually at least a week before closing, so you can have your lawyer review it to make sure there are no “weasel exceptions.” (You’ll also – at the very least – want to have your lawyer review the closing statement for you.)
- Get the updated survey in plenty of time, usually within a week after the effective date of the contract or at least a week before closing. Then take the survey out to the property and walk it off. If it shows one property line to be 30 feet from the garage door and other property lines to be 25 feet from the center of the street, bring a tape measure and measure it. Make sure you’re getting the land you think you’re getting.
- Make sure the type of deed you specified in your contract is the deed you’re getting. The best kind of deed is usually a warranty deed. That’s where the seller warrants and will back up his right to deed you the property against all potential claimants, past and future. The weakest type of deed is usually a quit-claim deed. That’s where the seller gives up their interest in the property, but they make no warranties as to whether others may have claims against it.
Go for the warranty deed at contract time. Spell it out if your contract template doesn’t.
- Make sure you get an insurance binder, not just an insurance quote. (This goes in the Duh! category, but it’s easy to overlook if you think someone else is taking care of it.)
- Make sure FIRTPA (Foreign Investors Real Property Tax Act) documents are in order. FIRTPA requires non-resident foreign investors to have 10 percent of the gross sales price withheld so the IRS can make sure they get their cut. If the seller is a non-resident foreigner and you (or the title agency) don’t withhold the 10 percent, you as the buyer could be on the hook for it.
There are some exceptions, but this is a potential minefield.
- Make sure that any credits due to you – such as rents or negotiated allowances for repairs – are indeed credited to you on the closing docs.
On residential properties, you’re entitled by law to see the closing statement at least one day prior to closing. Many title agencies do not honor this. Hold them to it so you can make sure they do what they’re supposed to.
- Finally, remember that if the seller chose the closing agent (which is what usually happens), that closing agent often feels almost no fiduciary responsibility to you. So have a conversation with him early in the process, and put in writing the items you want to make sure are in place before closing.
Take charge of these details, and closing with cash will indeed become an option that can help you make a lot more cash.[Ed. Note: Justin Ford will be one of 12 highly successful real estate entrepreneurs to teach their investment secrets at the Doral Golf and Country Club Resort in Miami this fall. Other speakers include Dave Lindahl (on apartment house investing and condo conversions), Alan Cowgill (on building a multimillion-dollar network of private lenders), Steve Cook (on wholesaling properties for quick cash), Thomas Phelan (on buying real estate with your IRA), plus other expert investors and teachers in the most profitable segments of real estate investing – from pre-foreclosures to short sales.]