Welcome to our fourth installment in the Investment Purchase Process. We are going to take this process all the way to the end! If you are just stopping by for this post, check out our previous blogs to follow the process of purchasing an investment property–from the beginning.
The 3 first vital steps you should follow when starting out – get educated in real estate investing, form an initial team to help you find and analyze investment properties, and get out and look at properties!
Find and lock down cash flowing real estate – run the numbers on properties you found to make sure they are great investments, go secure some financing, and zero in on your future investment property!
How to make your real estate offer stand out – negotiate your deals properly with these tips and, oh yeah, these tips too. If you are lowballing the sellers, use numbers to provide justification, but don’t make a habit out of it. Perform a thorough due diligence after your offer is accepted.
(Photo: Mark Moz)
Final walkthrough and inspection
You’ve done your “due diligence” and you’ve really checked out the property. At this point, you feel great about your decision and you’re already pulling contingencies off of your purchase/sale contract. Before getting too excited, you want to get over to your future property and do one last check. This last check is called the final walkthrough, and this where you can check up on any repairs the seller may have done or uncover any last minute issues.
Sponsored Link Above
The final walkthrough is the last time you visit the house before ultimately purchasing or walking away from it. It could be five days before closing or as short as a few hours before closing.
Remember, the final walkthrough is NOT a home inspection! You really should have done this already, and if you hired a home inspector, he/she might have uncovered some repairs that needed to be done. This is where you check up on those repairs to ensure the seller completed those to your satisfaction. No longer is it the time to negotiate repairs or uncover major issues. You want to get in there, ensure the property is in the condition you expect, and make sure the property isn’t suddenly 6 feet under water.
Please don’t pass up the final walkthrough. Even if you are pressed for time, you want to make sure the property is in the condition you expect, especially if the sellers have moved out. Most of the time, the sellers are going to be moved out weeks before you get the keys.
You want to be the smartest person in the room the next time HGTV’s House Hunters comes on, and, do you want me to totally spoil the show for you? Guess what, 90% of the time, the house they end up picking is the vacant one! Yes, the show is often filmed backwards after the “stars of the show” already have a property ready to close escrow. If you don’t believe me, check out this article.
The point above wasn’t made to make you hate HGTV’s House Hunters, it was to make you realize that the state of the property could change a lot after your showing and initial inspection. It’s important to go back and check up on your property one last time. Your due diligence and inspection could’ve happened while the owners were still in the property. Who knows what could happen during their move out or what new stains/damage you could find once the furniture is gone. Don’t skip your walkthrough!
Finally, Close on Your Next Investment Property
It’s been a long time coming, but after the long process of finding and financing your property, running the numbers, negotiating and landing that deal, and doing your due diligence and final walkthrough, it’s time to go to the bank and close on your next investment property. If you are doing an all cash deal, grab your experienced real estate attorney and the seller and do whatever it is that you do (I am not a real estate attorney or a cash buyer yet, nor do I play one on the internet.) I found a nice article on Closing a Cash Transaction that you may want to check out if you are doing an all cash deal.
One thing I need to mention: Fannie Mae (FNMA) will be entering your life again. We discussed this organization earlier in the “Secure Financing” stage and how you need to be wary of Fannie Mae’s rules. If your lender forgot to mention it, you may be surprised by one important rule:
For investment properties, the maximum closing costs the seller can pay is 2%. These closing costs are more formally known as “seller’s concessions” and it’s really just a fancy term for how much of the closing costs a seller can pay for you. This catches most people off guard because these restrictions are much looser on owner occupied homes.
For example: you buy a $100,000 property and the closing costs are $3,000. Sorry, they can only pay $2,000! It’s important to know this up front so you can negotiate the right price. If not, you could find out that you are out $1,000, or you are going to have to get the seller to lower the sales price to $99,000.
If you don’t believe us, stop by Pages 403-404 of the Fannie Mae guidelines for more info (look at the top of the page and scroll up a bit to see the description, but it’s not a very friendly document, so happy reading! What more would you expect from a Government-Sponsored Enterprise?) We’re boiling this down for you so you don’t have to toil over that document.
The table above is from the Fannie Mae guidelines. The LTV ratio is “Loan to Value” and simply means “amount of down payment you put down on the loan.” This states that no matter how much money you put down, the seller’s concessions (how much closing costs they pay) can’t exceed 2% of the purchase price. Owner-occupied homes can be from 3-9% and the document covers that on Page 403.
By now you’ve navigated through the final processes of closing and you are happily signing documents with your lender and the seller. Check out this post on Property Fees: The Hidden Costs of Your Real Estate Investment to ensure you are well aware of the fees you will be paying during close and purchase of the property.
Congratulations! You now are a proud owner of an investment property! From this point forward, you’ll now need to take the keys and execute your investing plan, whether it’s finding a tenant and leasing it out as a “buy and hold” or calling the contractors, rolling your sleeves up, and turning a trashy property into treasure for a great “flipping” deal.
Before you leave:
Don't forget to check out our free rental property calculator. This will be a valuable tool in your arsenal as you analyze your existing or potential rental properties.
- Free version available.
- We'll calculate your offer price based on your desired cash flow or cap rate.
- See future property projections based on the economic outlook including:
- Enter your dwelling value and get your depreciation schedule.
- Analyze your profits after sale based on using a Realtor or not.
- Pick and choose from 12 different data elements (ex. annual income, expenses, cash flow...) to dynamically display your data on an interactive graph.
- Check out the useful links to help you evaluate your investment.
Thank you for your ongoing support and happy investing!
The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, AssetRover recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.