Chapter 4 – Underwriting An Income-Producing Commercial Real Estate Deal

  • On March 16, 2020

PYI 5 | Underwriting Real Estate Deals

 

Regardless of what you already know, you always start from the beginning. In this episode, Ira Zlotowitz tackles one of the most important chapters of core real estate, underwriting the deal. Learn about the numbers in your transaction and the different line items in your deal from top to bottom. Get to know the profits and expenses that should be included when your underwriting and why having a person you trust who has the expertise and knowledge of each line item is critical for you to be able to discuss and understand each item in detail and leverage this knowledge to your advantage. Lastly, as with any business you’re looking to acquire, learn some tips on how you can conduct your due diligence efficiently and effectively.

Listen to the podcast here:

Chapter 4 – Underwriting An Income-Producing Commercial Real Estate Deal

Underwriting

Regardless of what you already know, let’s start from the beginning. This is the most important chapter, as far as the core real estate. I happen to think that most of the other topics and discussions are important, if not more important to a certain extent. Ultimately, a deal is a deal. You’ve got to understand what you’re looking at. I’m going to go through the deal itself, the underwriting and the numbers. One of the things I’m proud of that we rolled out the upgrade to the Eastern Union app. The most fascinating part of the app, state of the art, has been the calculators. It has all different types of calculations, but it was in piece mails, different calculations for different parts of a deal. There’s one calculation, the full underwriting.

Gross Potential Income

You could start from the beginning, go all the way down for the time of cap rates to the plan of the mortgage payment, IRR and the equity waterfall structure. I’m going to start by the real estate, going through education and what the line items mean. I stressed in the first episode that I’m going to talk about it, assuming that you have some basic knowledge of real estate. I’m going to have a second series where I’m going to go into the tougher words a little bit more detailed. Let’s talk about the gross potential income. The keyword over here is potential. Assuming that every single spot in the building was rented out, what can I turn the rent to? If I have a building that has twenty tenants, sixteen I rented, take the four that are not, apply a market rent to it, then say in total. What is the gross potential income? That will tell me the total income I could have.

We talked about gross and net. The gross is the highest number and net is what you pull back. Someone told me an amazing thing to remember, the difference between gross and net. If you went fishing with a net, you throw the net into the water and then you pull the net back. There are thousands of fish in the ocean, but you only get 30 fish. You netted 30 fish and that’s the net that goes with it. When you hear the word gross, it is overall what’s available and the net we pull back. When you see an income and expense statement, when you see numbers on a deal, when you see your rent roll, the top line item numbers close to gross potential income, that’s the highest potential. What are the line items that make this up?

If the building has commercial income, it’s commercial rents or commercial tenants. It is residential if there are apartments in there. There’s also reimbursement income. Sometimes in certain buildings, usually on commercial, the deal you have with your tenant is that they pay you in addition to their rent. They also have a net rent that they pay you, but because of it, they have to reimburse you for additional expenses on top of it. They would go out there and pay $20 afoot for the actual rent, plus they reimburse you the taxes, utilities and insurance in a building. It’s important to note that later on, it’s going to be more in tangent. With the reimbursement income, the biggest mistake I find people have is that they take a building they’re about to buy and say, “The gross potential is $300,000.” They look at, “This tenant’s only paying $12 afoot, but the market is $20 afoot. This lease is coming due.” If this tenant leaves, I will be able to go ahead and replace this tenant with a new tenant or this same tenant to pay me $20 afoot. I will get $8 more afoot. If it is 20,000 square feet, that’s $160,000 in NOI, straight to the bottom line extra.

Base Year

The mistake that you’re making is when a tenant has a lease where they paid the rent plus in addition to having reimbursements. The way the reimbursements work is called the base year. For a year, you signed the lease. If the market is $20 a foot, then a tenant has to pay maybe nothing towards taxes that year, but going forward, only a percentage of the upside of taxes. If the building is $50,000 for taxes, they are paying nothing. Year number two, the taxes go to $55,000 and they occupied 10% of the space. They’re going to pay the $20 afoot plus 10% of that $55,000. Here’s the catch I learned. You could be running into a deal that at least started fifteen years ago. The base tax then was $10,000. Many years later, the increase is $40,000 more. Aside from the $12 afoot they are paying, they could be paying $4,000 a year, whatever the percentage of this space was of the reimbursements of taxes.

There are other reimbursements also. You go and reset this tenant to a brand new year, they go into $20 afoot, but it’s not from $12 to $20 because you’re losing that few thousand dollars which might be equivalent of another $3 afoot. Is there an upside? Yes, but as a $12 to $20, no. It’s probably the equivalent of $16 to $20. It’s a very important point to be cognizant when you’re underwriting a transaction and you are seeing the upside. Sometimes the tenant has to reimburse the landlord for that utilities. It’s the same thing with insurance. Typically, what happens for reimbursement is that’s called CAM for Common Area Maintenance. What will happen is that the landlord would put all three expenses together and say, “This is the base year and going forward, you pay this percent increase the base year.” Each item could have its own separate story, but I realize, as part of the potential income, this tenant has to contribute this amount of money towards reimbursement, which goes on the income line.

A deal's a deal; you got to understand what you're looking at. Click To Tweet

It can be parking. Sometimes in a building, there’s parking and the landlord charges for it. This can be rarely on residential. Usually, in residential, the city has parking that comes with it, but it’s going to be a commercial space. Sometimes there’s a laundry and the tenant has to pay for laundry. There’s a miscellaneous fee, application fee, late fees and pet fees. There are different line items that potentially you’re always counting on an ongoing basis as potential income. The reality is one word you care about. What is my potential income for this building? It’s $200,000. What’s the breakdown? This could be the breakdown. We redeveloped the app, it allows you to come and type in your gross income which is $200,000. If you want, you can break it out. How much of that is for each line item that you’re dealing with on the specific building? After I have a gross potential income, then I have vacancy. I’m sure all of you have heard that vacancy is the emptiness or a loss. There is different terminology for it and what it means.

Effective Gross Income

The way to look at it and understand is that vacancy comprises of three things. You heard the lingo, 5% vacancy, 7% vacancy, 3% vacancy. That means, what percent of the gross potential income do you have to assume you’re not going to be able to collect? What are the three line items? One is a physical vacancy. How much of this building is vacant? If the building has a $200,000 gross potential income, but in that gross potential income, $10,000 is a space that’s vacant, but you apply to rent of $10,000. That means that the physical vacancy is 5% of the gross potential. Another line item could be collection loss. A bank could say, “We assume that over the course of a year, a tenant messes you up, a tenant leaves, something happens.” It’s vacant during a certain period of time, but your collection loss, you couldn’t collect the rent that was owed to you. Next is underwriting adjustments.

Underwriting adjustment is not a reality, but it’s a number that a bank will say. If you’re a buyer of real estate, you look at a neighbor and say, “Irrelevant is what occupancy is now. How full the building is?” I’m always going to assume that no building is always 100% occupied. It averages 95% occupied, which means a 5% vacancy or 93% occupied and a 7% vacancy. That 7% total, if you want, you could do it as a 7%. It can be broken down on the app. You could open up the vacancy line and could break it down by at least each line item. There are physical vacancy and collection loss. Let’s say the two of those equal 4% and a bank or you as a buyer want minimum underwriting of 5%. You did another 1% for underwriting and a total of 3% plus 1% plus 1% equals 5%, then comes the Effective Gross Income or EGI.

The effective gross income is gross potential minus the vacancy. This is the number, when people talk, “What’s the income of the building?” This is the income you focus on. I’m focusing on the effective gross after it’s balanced out. I’m not fooling myself by taking a building that’s 80% occupied and showing it as if it’s 100% rented. I do that for the gross potential, then I do it for the vacancy and then I see what’s available EGI to me. People sometimes ask questions like, “Why do you have it twice? You’re fooling yourself.” It’s not about fooling. It gives you a picture when you look at this deal that if I’m buying a building with a certain income and a certain vacancy, I know it’s upside. I know I own three buildings in this neighborhood and I’m able to run my buildings at 2%, 4% or a 5% vacancy. If the building is at 7%, I know that I could take the profit that they have and get it better because I’m going to be able to increase the rents because of the average rent per unit. I’m getting more in rent. More importantly, I could do a better job keeping it more occupied than the landlord is keeping the building occupied.

Expense Line Items

What are the expense line items? Before I even go into the line items, I want to say a very important piece of the puzzle. You always want to find yourself somebody that you trust as you grew. You’re going to come across a lot of expenses. You have to have to compare a lot of notes. There’s a certain underwriting of how you should underwrite numbers when you’re working on a deal. The first expense is something in management. Some asset managers manage the property. The seller could tell you, “It’s only a 2% management.” You don’t want to just trust the seller’s number. He’s lying to you. Maybe that’s how he runs the buildings. You have to have someone who’s going to tell you, “What does it cost you to run a building?” I always tell people you should have somebody. You should have your underwriting. Most sophisticated buyers or newer buyers come in, they take their list of expenses. They go to their “guru,” and they say, “Do me a favor, I’m going to always look at whatever the sellers show, but at a minimum, what should I always expect to see in each line item?” I’m going through this with you, I’m only going to tell you three things based on the banking. You should have someone tell you that at a minimum, what should the number be at all the rest of those line items.

Sometimes people will tell you, “Forget about each line item. For every unit, the unit expense is $3,000, $4,000 or $5,000.” There are ten units in a building. The expenses are $30,000, $40,000, $50,000 and others are going to say, “No, break it down line by line.” No matter what the expenses are at a certain percent of the gross income, all of these line items and discussion points, they’re fine. Find one person you trust. Don’t keep flip-flopping amongst different people. What are the line items? There’s management, that manages the property. They have all the expensive who’s going to oversee it and typically, it’s 3% to 5% number of the effective gross income gets paid to the property manager. You have real estate taxes, which are public information and that was what the taxes are. Always assume that the real estate taxes are going to increase every single year.

 

PYI 5 | Underwriting Real Estate Deals

Underwriting Real Estate Deals: The gross is the highest number, and the net is what you pull back.

 

I want to point out an important point in taxes. If you have a building that has $40,000 real estate taxes and you underwrote the building, there’s $100,000 in NOI profit. If you’re holding it in December of the year, this time you already have an idea of what the taxes are going to be. You want to make sure that if taxes are supposed to be dissipating, to go up because the tax amount would be published for another 1 to 3 months. You will know you might go to $50,000 then you don’t have a $100,000 profit on the building. You have $90,000 of NOI. Because of the difference of $100,000 to $90,000, that’s a difference in the value. As you play with the app, you’ll see it clearly. That’s a difference in the IRR, in cash-on-cash, and in the service coverage. A lot of things change by it, so you want to make sure you’re doing this underwriting. You’re not taking the last three years, but we are also looking at how far down the year are we close already to next year’s numbers that we should be using next year for underwriting and not the current year.

What are the costs of property insurance of the property? The main thing here is for fire insurance. What happens is the bank can say, “I’m lending you money. If God forbid there’s a fire, can you rebuild it?” Is there also insurance if someone’s going to get hurt on the property? It is also there because the bank wants to make sure that if someone’s going to sue you, you’re not going to be able to come up, fight it and pay for it and not have to train the cash out of the building and run into a problem with the building. Insurance is primarily, in case of fire damage to the building, you’ll be able to refix the building. You have utilities. Utilities are electric, water, sewer, fuel, whether it’s oil or gas. Some of these line items might not apply. You might have a tenant pay them, but these are the line items on the expenses. Next is repairs and maintenance. That’s the ongoing after maintenance to the building.

We use it for multifamily. The banks use $500 per unit per building. If there are twenty units in the building, if there are items that are our expenses, but then what do you assume that a miscellaneous will be? It’s going to be $20 times $500. There’s a one-line item called repairs and maintenance. They’ll put a $10,000 number. The income reflected it. What does it cost to maintain the common area? That’s the whole way lighting, the outside, the general area. You have payroll and you have workers on the process, on the premises. There are maintenance people. What’s the total payroll? Next is a replacement reserve. For example, refrigerators and you’re in an apartment building. Every year, there’s a couple of them you’re getting rid of or have to be replaced.

The bank says, “For these miscellaneous types of items, let’s put up $250 per unit in reserve.” In this case, it’s an expense as if you don’t have it. Twenty units times $250, we have a $5,000 number. That number every month the bank will take 1/12 of it. Keep it in their accounts in escrow. Whenever you have to use the money for an item that’s approved, you’ll be able to pull that money off of that item and take it back from the bank. If you never use it, you get it back at the end of the mortgage. People who run the buildings will say, “If I’m running a building, I’m always going to show up. It’s always going to have this information.” You have miscellaneous. It is an admin-marketing. Depending on the property, you might have different expense line items. You want to make sure the minimum you have these items and if the seller shows you more of these items, then that’s it. If any of these are missing, try to find out why it doesn’t have it. Maybe he labels it a different way than we’re labeling it.

Storyline Example

I want to talk about a storyline. It’s going to be from here and throughout the whole rest of this course. We can always use an example of a property type of a cashflow apartment building where the rental income covers all the expenses. It’s called the stabilized building. I have an apartment building. It’s fully rented up. That’s the example we’re going to use. We’re going to go with a purchase price of $1 million and we’re going to assume $50,000 in closing costs. There’s no right or wrong reason for the number $50,000. It’s around the number. I will use my numbers so it’s easier to talk about examples in the math instead of changing it.

Net Operating Income or EBITDA

The Net Operating Income or NOI. It’s the profit before you pay the mortgage. It’s another word for profit. In regular business terms, it is a thing called EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization. To have a common way of how people do underwriting, there’s a cute piece over here. The word underwriting means, “I want to buy real estate.” Remember I said that what makes you do a lot of due diligence? How could you a lot of due diligence? Almost every single expense is public somewhere and tracked. People could see in this neighborhood, what does it cost me per unit for this expense, that expense? There’s a certain way we underwrite real estate. When someone uses the word NOI, we know that he had a gross potential income. He used the vacancy factor. He used the actual expenses based on historical training given that he didn’t use one year of expenses. He used a management fee. He used certain assumptions, certain reserves, and that gets you generally accepted underwriting.

It's important to be cognizant of when you're underwriting a transaction using upside. Click To Tweet

In the businesses of the world, it’s called GAP or General Accounting Principles. When accountants come up and they say, “This company has this much in profit.” For business, it’s called EBITDA. That profit that they talk about, you want it to be a universal number across the board. This is the best example I found that people could relate to. Someone who has a building and they buy a piece of machinery for the business. The pizza shop buys an oven for $20,000. If they write it off as an expense that same year, the business made $100,000 minus $20,000, they made $80,000 EBITDA. If there’s another business who said, “No, I finance my oven. I didn’t have a $20,000 expense. I only had a $4,000 expense.” Does it make sense if you’re buying both pizza shops that are identical? One is going to sell based on $96,000 of profit and one thing to sell based on $80,000 of profit EBITDA? It doesn’t make sense. There’s a standard way. How do you deal with purchases? It is irrelevant to what you did as tax ways to structure it and everything would be uniform. It is similar if you want to bring it back to commercial real estate before the mortgage.

The mortgage can be different based on each person. How do we get to an NOI? For our story, we use a purchase price of $1 million, $50,000 in closing costs. For the net operating income, we’re going to use $72,967. We’re going to go with Larry the lender and Brian is the buyer. We’ll go through an actual underwriting. We’re going to use a deal and a made-up address, 123 Main Street in Bronx, New York. It’s a 23-unit apartment building. In this case, we have a gross potential income of $216,000. We have a vacancy of a total of 5% vacancy, a vacancy loss of 4.36% because the bank needed a minimum of 5%. We have a vacancy adjustment for underwriting adjustment. It’s different terminologies and that’s part throughout this course. I’m not fixing it to fit a box. I’m going with the flow of how the deals when you get sent in so that you could see that sometimes variations but what it means is roughly the same thing.

You have an EGI or Effective Gross Income of $205,000 and lists of all the expenses. On the setup of income and expense statements, it’s summed up the numbers on one page. It’s the pro forma. If this is set up on one-page, I’ll break out those thoughts for you. The income and expenses are broken down into one-page and it’s set up nicely. The second page will be the itemized rental tenant by tenant in each unit. When a bank and a buyer looks at real estate, they use what’s called the pro forma underwriting. They look at it and say, “Based on historical expenses, what do all the expenses look like? Based on the income staying times twelve, how is this whole thing in a pro forma?” It is the underwriting year, the base year. This is how they compare apples to apples. The transactions happening, this is when they focus on that. What’s interesting is that different people could relate to numbers differently. Some people like to take a gross number in a while and multiply it. Some people want to do it by a per-unit expense.

For illustration purposes, we send out a deal to a bank. It will show the listed expenses and how much each expense is in a relationship that works out per unit. If this is 23 units, this amount divided by 23 units. “Does it make sense that it costs this amount per unit and this line item?” That becomes the lingo. Sometimes it’s based on a percent, but for the most part, it’s based on a per-unit type of basis or for commercial building and non-multifamily building. It’s based on a per square foot to get the building running. You have the building, $205,000 in ineffective gross income, $132,000 in expenses, that brings you to an NOI of $72,967. If you’re using the app, you can type in gross potential income $216,000, vacancy 5%, the effective gross income will show you $205,200. You can list the expenses of $132,000, $233,000 and you get the exact number of $72,967. On the rental page, I highlighted the one unit that’s vacant. The reason why I highlight it is to show the example that on the setup, we have a total vacancy of 10,800. By the vacancy loss, which is the actual vacancy of 9,420.

This is to show you that this is the vacancy that’s reflecting back and forth. Sometimes people can be more forthcoming and tell you these things and point it out. Sometimes they’re like, “If we hit in the numbers and find it, you’ll see what’s going on.” The other piece when you look at the rental is you want to see, does anything stick out to you? You have a tenant name, the apartment number, number of bedrooms. Sometimes it’s a number of units, of rooms and total, the monthly rent, annual rent, and at least end date. They might add the lease start date, depending on to what level of diligence. We are on the cycle of each point that’s relevant to you? It adds it up, but you might want to always glance at it. When were the last few rents you lease assigned? When did the last few tenants move in? Are the rents trending up or trending down? Is the market high or low? Where are you?

You have a basic understanding of the numbers themselves. The income-expense line items, the income line items, expense line items, the vacancy works, and general underwriting. That’s the number side. Let’s see you do it and what looks good to you. What do you always want to do? What’s the next thing? My next thing is due diligence. Those that are successful can come back to the beginning of this whole show from the episode. In the second episode, we discussed and we went into the ROI or Return of Investment as play of words. If you want to protect yourself and you have a luxury of so much intel, spend the time to do due diligence and make sure you’ve got numbers in and everything’s accurate. Inquiries, ask many questions to sell our appraiser broker. Ask a ton of questions to everybody, but then also reconcile it.

 

PYI 5 | Underwriting Real Estate Deals

Underwriting Real Estate Deals: The more you ask and in different ways, the more you’ll become much more knowledgeable about this building, this area, and what’s going on.

 

Don’t ask one person that says A and the second person is B and you go, “That’s a difference of opinion.” Go back to the person with A and say, “I’m curious. You told me A. Someone else told me B. How do you reconcile that? Why do you think they said B?” Go to the person with B and ask the same question in reverse. The more and different the way you ask, the more people open up and you’ll become much more knowledgeable about this building, this area and what’s going on. The other part of it is drive-by assessments. Don’t just buy, especially timid people. “I never look at my properties.” Google Maps is amazing. Maybe other programs are amazing. Someone told me, the one thing they didn’t get to develop is the smell through the internet. If you want to go to a property, there’s a certain feeling, a certain smell, a certain something that you’re going to get when you walk through that property. You’re going to be able to tell the level of the property. Something is going to tell you if something’s wrong or not wrong. Definitely, if you’re buying the property, you’re financing a property, get into your car, get onto the plane and look at that property. Walk through the property. See if there’s something that you notice.

When you’re going to go there, often, you’re getting there and driving around in the neighborhood and seeing what it’s like. You want to walk through the property. Even if you say, “What do I understand about roofs and boilers?” Look at the roof, the exterior, the boiler room. Check from the naked eye and look at something and say, “Something doesn’t seem right.” If he was in charge, what would he do differently on the property? What would he fix up? From there, you’ll gather the information that will save you from a surprise that had you known you wanted to bought the deal and you know or you would buy it, but you are willing to pay for this property $1 million if it has that much work to get done.

$30,000 and work, you’re not doing that and paying the $30,000. You might make a deal upfront and split it. You pay half the work, he has to pay half the work or no. You’re only buying it if he lowers the price to $970,000. The other thing is you want to walk through the property and verify the lease terms with the tenants. If you’re buying a building, remember, invest in the trust that you do the due diligence. You have a fiduciary responsibility to make sure the information is accurate. At random, you should knock on different tenant’s doors and ask, “What’s your name? How much do you pay rent? When does your lease expire? Do you have any issues? Do you owe money?” Match it to the rental they gave you.

When you spot check and it all adds up, then you could assume that you’re dealing with someone honorable and matches up. You tested it. If there was one fluke, I met someone who says no. When he buys a building, it’s not upfront. Before he closes, he walks through every single unit. He double checks and triple checks everything. Is that extreme or not extreme? I can’t answer. I know one thing, if I had a choice to buy a deal from somebody that did it that way versus the first way, if everything else is even, I’d probably go with the second person. I know that they’re thorough in the due diligence. The bottom line is, you’ve got to do the due diligence diligently and you won’t walk into a trap.

I want to talk about a piece of a title company. The reason why I’m putting on the title and focusing here because this is the one thing that you want to make sure you’re protected on. It’s the one thing that you could buy a deal and something from the past could come back to bite you. You think it’s great due diligence. You walk through and look at the property. You went through the numbers. You’re in the right building. Everything was amazing, great and fine and then you buy the building. It’s possible that someone comes back and says, “You don’t own this property.” “Years ago, the guy promised me money.” “I have owed money for this property, so I have lean on this property.” This is what title insurance is. It gives you insurance that when you buy this property and you close, nobody else has any claim to this property. If somebody does, you’ll file an insurance claim and they’ll pay back the difference.

What I happened to find pretty interesting about title insurance is that’s it the only insurance that we deal with that’s going backward, not in the future. You buy car insurance. If the car gets into an accident, you have car insurance. You buy life insurance, if someone dies, they get paid. You have fire insurance. Many insurances are priced on the unknown. Title insurance is the only insurance in the past. They’re ensuring that if someone had a claim to that property, they’re insuring you. You can go to the city record and you could find that the claims are there for the most part. The answer is as follows, that many titles are the only things regulated. As I hire new people and I train them. They came to fathom this concept. When you go online, you see.

The most important piece of the puzzle that you always want is to find for yourself somebody that you trust as you grow. Click To Tweet

Imagine many years ago, the title concept has always existed. If someone records a sale, how do you know if it was recorded? How do you get signed? You have to send someone down. Real estate wasn’t selling for $1 billion properties. It seems odd for the price point that works. It’s regulated in many states, but what happens is that this is based on the big four underwriters. They are the ones that underwrite and sign off and guarantee the payment. They are the insurance providers. They are the underwriters. The main four are Fidelity, First American, Old Republic and Stewart. What you typically deal with is title agents. Those are representatives. They are agents. Madison Title, Residential Title and Riverside Abstract are companies as many more. That’s typically who you would deal with. If you are buying a property, you’ll talk to them. They’ll underwrite it. They’ll do the research. They’ll go back to the mothership to the underwriter to sign off, then that’s how the insurance will be taken care of.

You care at the end of the day, to make sure you have insurance. When I meet someone who’s buying a deal who says, “I close with cash. I’ll lend the money in one condition, get me a clean title. Prove it and I can make a judgment call.” I know this building is worth $1 million, $5 million, $2 million, $500,000. I’m ready to take the risk if that is its worth. “I didn’t want to take the risk on the past and to avoid that risk in the past, I want to go ahead and get title insurance.” Typically, I’ll say, “Give me the title insurance and then I’m ready to close.” Title insurance is a key piece of the puzzle. It’s a regular business and my business, as a mortgage broker, I could charge you a 1% fee. If you wanted to come to me and say, “Ira, I’m giving a lot of business. I don’t want to pay you a point. I want to pay you a point-less than $1.” It’s a negotiation. Me and you, we can negotiate it.

Whatever deal that we strike, it’s between the two of us. Insurance is regulated and that it can’t change. It’s tough. What could somebody do? They used to take people out on trips, sporting events, dinners, but they thought that the government started cracking out regulation and say, “If you’re going to go ahead and take somebody to the Super Bowl, fly them on a private plane and pay for the ticket, you give them a $50,000 benefit, that’s giving a discount in reverse.” The fee should have been $200,000. Instead of charging $150,000, you charge $200,000, but then you wrote the person a check to cover this. You paid for some other expense of the head. There’s a lot more regulation being cracked down to change this over here. There’s also regulation to change the whole thing of insurance. Title insurance shouldn’t work this way.

One thing which is interesting to note and I found this out about a couple of years ago. When they say that it’s regulated, it’s not that they can’t change the pricing. They could change the pricing, but they have to have one pricing for everybody. That’s the difference. Can Fidelity say, “Instead of charging a third of a point to do title insurance, can I charge a quarter of a point to title insurance?” 1000%, they can do that all day long, but if they change it, it’s across the board for everybody. I always thought that they have to go and act to government regulation from the government. It is not. Someone can change the policy like anything else. This company opened up and said they can have much cheaper pricing. If GEICO goes direct, they’re going to go direct. They’re not going to go through agents. They can go straight to the owners. It’s a very interesting thought, I ask the person, “What’s the biggest hurdle?” He said, “The biggest hurdle we’re having is even though we’re insured, we go out to a bank. The bank says, ‘I don’t understand. I’m the bank, and I’m not paying anyway for the title insurance.’ The bank is paying.”

You’re a new guy, how do you know that this can be a problem? You can pay the claim. What do I care if the fee is a little bit higher? The bank says, “I run the security. I’m lending the person $800,000 first mortgage, $1 million, $5 million, $20 million. They want to borrow my money, let them get the best insurance out there.” He’s telling me that what’s slowly happening is he’s thought of only getting smaller deals than bigger deals. That’s an interesting dynamic of what’s going on. That’s one part of the commercial real estate area where there are regulations and things going to change and process when it comes to the title. Thank you very much.

 

Important Links:

 

 

0 Comments

Get A Quote


We received your quote form and will be in contact shortly.


Done