Keith gives an update on his active foreclosure and discusses the HUD-1, also known as Closing Disclosure. One of the things he learned from his CPA is to look closely at the HUD-1 or the settlement statement because a lot of the mistakes tend to happen here. He lays down the things you need to go over and put consideration into, whether as a buyer or seller. He then shares about his foreclosure and his experience of deciding when to evict someone out.
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Foreclosure Journal Part 3 And The HUD-1
I’m going to talk a little bit about the HUD Statement, the Settlement Statement. If you close at a title company, you purchased a house or you sell a house, the buyer and the seller get a copy of this. It is the document that records the transaction and the pieces of the transaction. The thing that makes it the most interesting is a couple of things. One my CPA always requested, which is pretty standard if you invest in real estate or purchase, is the document by which my CPA will compute my taxes. I was taking a class by Michael Plaks, who was guest on this show. He handles nothing but federal taxes and state taxes for real estate investors. He taught that you need to look through this HUD-1, the Settlement Statement with a sharp magnifying glass and a good lens because a lot of mistakes are made here. I’m saying this not only just as a lender because I always look at this as a lender as well. During the process, I’ll get my commitment for title insurance, but I also get a copy of a pro forma HUD-1.
It’s a living, breathing document. The down payment is on here. The insurance premiums, the costs, and the fees to file with the county. All of that is listed out here. If you’re buying, selling or lending, you want to check this to make sure that your interests are best represented and there’s not a typo or an error. There are essentially two sides as the left side and the right side. It starts pretty simple. The contract sales price, what were the settlement charges that the borrower is going to pay so as the closing costs that the purchaser, in this case, I’m using one of my HUD-1s from a transaction I did where I was the purchaser and not the lender. However, it doesn’t matter for the illustrative purposes, but I will put a copy of it on the website. The HUD-1 is going to list off all the costs and fees. There’s going to be HOA dues, insurance, taxes that need to be paid or prorated. They’ll take into account the earnest money and how much the principal of the new loan is going to be. There is the owner’s policy that’s paid by the seller. When someone buys a house, the seller normally pays for the title policy, for title insurance, not for property insurance. It will go down and say the estimated amount from the borrower, how much they need to bring to the table and also with the seller contract sales price, any monies they are giving up, any concessions that they’re having to give up.Lending is a business; it's an investment. Click To Tweet
Oftentimes the seller will contribute to the buyer’s costs. In this case, I negotiated $4,000 off of my original contract price. There are also interesting things. If there’s a mortgage on the property, how much that has to be paid off. That’s key. It’s taken into account. The settlement charges to the seller, oftentimes they pay more, they pay the realtor fees. That’s going to be part of their fees. That will come out of their end. You want to make sure that everything is correct. Your loan payoffs are correct. You want to make sure that anything that’s quoted in here is going to be accurate. Insurance premiums, for example, taxes owed, all of this. There should all be paper trails for this stuff and take a look at it. Make sure that if you owe property taxes and you’re selling October, you could pay the taxes up until that point. Most of the times, they’ll just prorate and credit to the buyer and then in January, that buyer has to pay the taxes. You want to make sure those numbers are accurate.
Items payable in connection with the loan. This is where your origination fees and points are going to be listed. It also has a place for the flood certification, tax service, or credit report. Oftentimes, the appraisal fee is paid but normally, I pay my appraisal fees upfront initially before I get the loan. If I’m going to use an appraisal or let’s say a broker price opinion, then those are paid up front. If you go back to my lending scam, those are one of the few things you want to pay. One of the few lending fees you want to pay upfront. It just lists everything out. Those reserves that have been deposited, how much money has been put into escrow, earnest money, so on and so forth? Then there are title charges. There’s a settlement or a closing fee that usually goes straight to the title company or to the attorney who’s performing the closing. There’s an owner’s title insurance and lender’s title insurance. As a private lender, it’s something you demand. It’s one of those non-negotiables or you don’t lend the money, plain and simple.
There are extenuating circumstances where I would consider not taking a lender policy, but they would have to be very rare. What Michael Plaks was talking about is that a lot of these fees get doubled up. People will use preliminary numbers. Let’s say for example, taxes that are going to be owed on a property. They’ll use preliminary numbers. The more that you stay on top of the HUD-1 statement, the more you’re involved in it, the more that you requested and want to see the updated versions of it. It gives you a chance to find things that are inaccurate. It also lets everyone know that you’re not just going to take their word for it at face value. You’re going to look at everything. Whether you’re buying, selling or lending, you’d need to look at your paperwork. Plain and simple. In the future, I’ll be bringing on guests that work at title companies to explain a little bit more. I wanted to start at least get the conversation rolling on this document because it’s boring. Everybody gets it. It’s there for a reason. I highly recommend that you check everything on your HUD-1your Settlement Statements when you close as the buyer, as the seller and as the lender.
I’m off my soapbox about HUD-1s. I’m thinking about jumping right back on when I give you my foreclosure update. The attorney reached out and said, “There may have been an issue. We may have to wait another month” because the clerk reported some inaccurate information back to him and said, “We’ll have to wait another month.” As it turns out, he did a little digging and emailed us and said, “No, everything is okay. We’re on schedule to foreclose on the fourth.” The first Tuesday of the month in Texas is when the foreclosure auctions occur. This one happened to be December 4th. Nobody purchased the property at the foreclosure auction. The title is now gone back to mine and my partner’s company. We’ve issued the order or the notice to vacate, to evict. Then I started thinking. I’m not going to lie, I felt like a piece of crap for kicking somebody out this close to Christmas. It was a little rough. November doesn’t bother me and January doesn’t bother me, but there’s something about around the Christmas time that I didn’t like. It was too late essentially at that point in time.
I started thinking, it was a mentality of lack because I was taking something away from somebody literally. This borrower didn’t honor the contract and it’s written down. These are the remedies available to me. I took those remedies. I hired a lawyer. I let him do all the dirty work and filing and everything. I’ve hired a lawyer to keep me legal as well. To keep me protected, to keep me and my partner, our business and our LLC protected. I started thinking, “I need to always stop thinking with that lack mentality.” Then I realized that for the last sixteen months, this person has been able to live in a house. Is it a perfect house? No, it had issues with it but he knew that going into it, he was going to fix it up. I did receive some water from Harvey. For the last sixteen months he’s lived in that house and for fifteen of those months, I let them live there for free. We waited over a year to foreclose because I didn’t feel right after Harvey. Now sixteen months later and fifteen months of no payments, time is up. He needs to go. I still feel like a piece of shit because I did it at Christmas, but it’s bad timing. Fifteen months of free rent is a pretty good gift. If you’re not ready to foreclose on people, you probably shouldn’t be in the lending business.
I want to keep it real with everybody that I don’t want to come across and say, “It’s all rainbows and snowflakes,” because it’s not. This is a business to me. Lending is a business, it’s an investment. I do it to grow my money, to make my life better or my future life, I should say my retirement hopefully, and that of my wife and my children. I don’t get into it to take properties back. I want the cashflow every month, but I’ve come to accept this. This is part of it. This is my warning to you is if you’re going to lend to somebody who’s going to be an owner occupant. This may be a case not to do it because one, you need an RMLO, residential mortgage loan originator. They need to make sure that these people are vetted because they are a consumer. They’re not an investor. Essentially in the eyes of the law, they’re completely ignorant and easily misled. It’s not a complaint. I’m just saying that, but that’s the way it’s going to play out. They don’t know anything in the bad lender.
I kicked somebody out of their home right before Christmas. I don’t like that but have moved through it, moved on and we’ll do it again. This is one of the less favorable spots of this business. It’s all part of it. I feel like I would be doing a disservice to anyone reading if I wasn’t honest about the foreclosure process, the end result, and how that made me feel as a person, as a lender. Hopefully, you can glean something or take something away from it. I want to do this again. I’m okay with it because I’m not going to change my lending strategies because of this. This is part of the game. Please continue to email your questions to Keith@PrivateLenderPodcast.com. Please rate and review on the platform that you use. Please spread the word, connect with me on social media at Facebook, Instagram, Twitter, LinkedIn, BiggerPockets. You can find all this information, how to connect with me and more over at PrivateLenderPodcast.com. Thank you for sharing your time with me. I wish you prosperous lending, investing and life. I’ll see you in the next episode.
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