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The Drive Toward a Successful Investment | Part 2 – Due Diligence and Pre-Underwriting
Posted: | Author: John Seeburger- President of Foundation
In the dynamic world of real estate investing, envision your next loan as a high-performance race car and you as the driver speeding towards the checkered flag (a successful sale or capital event). Every successful race car driver relies on a high-performance vehicle and an expert crew to execute a series of pit stops that are highly choreographed to shave seconds off that driver’s time. In a competitive real estate market where speed and certainty of execution win the race (i.e. close the deal), a high-performing lending team is essential.
In this blog series, we explore the parallels between a well-executed real estate transaction and the precision of a Formula 1 pit stop. Your investment is the race car, you're the driver, and the Foundation deal team acts as your pit crew. Each member of this expert team plays a synchronized role in closing your loan swiftly, much like a pit stop that gets you back on track toward a successful closing.
Part 2 – Due Diligence and Pre-Underwriting
As we discussed in Part 1, by the time you have your next investment property under contract, your loan officer will have pre-screened the transaction with you and provided indicative pricing and leverage in the form of a term sheet. At this point, your transaction is in the pit and the clock is ticking on your closing. This is when your expert deal team springs into action.
The front end of the diligence process is where a high performing lending team sets the stage for smooth closing by conducting a pre-underwriting review to identify key issues that require additional information and attention as well as initiating orders with third party vendors for items that require a long lead time such as an appraisal, title search and hazard insurance quote. These deliverables can take a week or more and are often overlooked until late in the process delaying loan closings by days and sometimes weeks.
Your loan officer and transaction coordinator work together up front to provide you with a needs list of all documentation required to underwrite and close your loan as well as a secure link to upload and encrypt documents to protect your sensitive information. The transaction coordinator communicates down the line with the closing specialist who initiates the title order and provides the escrow agent (title and escrow are often one in the same) with the loan terms, fees, and other costs so that a preliminary settlement statement can be drafted with estimated closing costs and cash required to close or in the case of a refinance, the cash out to the borrower.
While the transaction team is assembling the file, the underwriting team is already conducting the preliminary credit review and analysis, first by reviewing the renovation budget, for value-add projects, and working with the appraisal vendor to ensure the correct reports are ordered and to communicate any unique property or market issues to be addressed. They will do an initial review of credit and background checks and inform the borrower and loan officer if a credit score comes back lower than expected or to identify any background issues that may require an additional letter of expectation. The underwriting team will also review bank statements, financial information, and investment experience and communicate with the loan officer and deal team if there are any issues to address.
Experienced borrowers facilitate this process by providing all requested items on the lender’s due diligence list as quickly as possible. The most important of those are a detailed renovation budget which will be required by the appraiser to begin the assignment, the loan application so the lender can order credit reports and background checks, bank statements to verify sufficient liquidity to carry the project to completion, a real estate schedule to demonstrate your investment track record, and borrowing entity documents to confirm the ownership structure and corporate governance.
These first few days of the due diligence and underwriting process are critical to putting the loan on the fast track. For some lenders, this process functions like an assembly line with each step occurring sequentially and with a lag time between each step. This leads to drawn out loan closings of as long as 30 to 60 days. If you want your loan to move quickly, you need a highly trained deal team that jumps on your loan in unison as soon as it pulls into the pit. Each crew member from loan officer to transaction coordinator to underwriter to closer should be involved from the minute the loan request is submitted. They coordinate their respective functions and communicate together, with third party vendors, and with you the borrower to speed your loan out of pit and back on the track toward a closing.
Keys to ensure a streamlined due diligence and pre-underwriting:
- Coordination: A synchronized effort by a professional team will deliver speed and performance when it matters most.
- Communication: Open and timely communication between all stakeholders, from the borrower to the loan officer to the deal team, ensures that issues are promptly addressed to keep the closing on track.
- Technology: Leveraging technology streamlines the process, minimizing delays, and optimizing your time.