Welcome to our third installment in the Investment Purchase Process. If you’ve been keeping up, you’ve been following us through this process from the cradle to the grave. Here’s what we covered so far:
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!
(Photo: Mark Moz)
Make Your Offer
Once you’ve found that perfect investment property (or three), it’s time to make an offer. This is a serious step and often means you are committing to buy the property if your specific demands and pricing is met. You typically need to be pre-approved for a loan at this point so the seller knows you are serious about buying and financially capable of doing so. There’s a lot to making an offer and you need to make your real estate offer stand out. This is where true negotiation tactics take place and where you can quickly make thousands of dollars. Imagine getting this property you had eyes on for 10 or even 20 percent under the assessed or appraised values.
To ensure you are negotiating your deals properly, read these two posts if you haven’t already: 5 Tried and True Tips for Negotiating Deals and Tapping Into Your Inner Real Estate Negotiator. As mentioned in these posts, be careful not to insult the seller with your offers. It’s not good for your reputation to go around your town setting low-ball offers on every property on the MLS, especially if they are unwarranted. You will want to have justification for your offer price by running solid numbers ahead of time. If you did your homework up front, you can look for any weaknesses in the property that would help you negotiate a better deal. Of course, the motivated seller is a key consideration.
Your team plays a part in this step as well. Your real estate agent is likely to be the one working the negotiations directly with the seller, according to your wishes. If you’ve worked without a real estate agent, you will definitely want to call the attorney in to look over the purchase/sale contract, which is the offer letter to make an offer on the property.
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When making your offer, and when your agent or attorney writes this purchase/sale contract, you will want to put contingencies in place. A contingency is a way for you to cover your bases from the unexpected or ensure certain conditions are met before you take ownership of the property. Some examples are:
- Financing: If you can’t get a loan from the bank, or another source, you can break the contract.
- Appraisal: If the property doesn’t appraise at the purchase price or greater, you have the right to walk away from the deal. You certainly want to be able to negotiate a lower price if the appraisal is below purchase. This may be tougher to negotiate in hot markets where properties are believed to appreciate greatly in the coming years.
- Insurance: You must be able to get insurance. If your contract is denied, you don’t have to buy the house.
- Condition of Property: You went into this purchase assuming this property was in a certain condition. If it has mold, foundation issues, flood damage, or Orangeburg pipe, you know about it and hopefully you are getting a steal on this property. Even small things such as old ratty carpets, walls that need to be repainted, and missing appliances should have been worked out up front. The problem is that you most likely have not had this house fully inspected yet since you don’t want to pay an inspector until you are sure you’re going to buy. Make a contingency that allows you to renegotiate or back out if the whole house inspection uncovers any new major defects.
- You Selling Your Current Home (Rare for Investors): This contingency allows you to ensure that your old house is sold or successfully rented out before agreeing to purchase this new home. This really applies more to purchasing a home you will occupy. For an investment property, this is rare considering you are going to either rent this house out or flip it. You don’t plan to leave your actual home in that case.
- Seller Buying Another House: Of course the seller may have contingencies too. The seller may want to ensure he/she can buy another home before giving his/hers up to you.
Due Diligence Phase
Welcome to the due diligence phase. If you made it this far, that means you have an accepted offer! The due diligence process is your final chance to make sure you are getting the amazing property you think you are getting. This is also the period of time where your purchase goes “into escrow” and is between the accepted offer and the final close of sale.
If you don’t know what due diligence is, please read about this process which is described in our post Do the Due: Inspections and the Due Diligence Process. Due diligence is your chance to ensure you are fully pleased with your choice to purchase this property. You should obviously be very serious about buying this property, given it meets all of your initial expectations. Indeed, your contingencies are in place
Remember in our first post in the Investment Purchase Process where we discussed the important members of your real estate investing them? As I told you, there are many valuable team members, and the due diligence phase is where you need to bring out a few more we haven’t discussed in our investment purchase series.
Home Inspector – A general inspector is a very important part of the due diligence process unless you know a lot about construction, plumbing, roofing, etc. Even if you are an expert, consider the point of view from an inspector who has firsthand knowledge with looking at houses.
Roofers and “Rooters” – Specialists may be required for older homes to determine useful life on a roof and “root out” drainage problems and potential pitfalls such as Orangeburg pipe. Your home inspector is a valuable resource, but major issues may need a closer look. Investigating these issues is in your best interest since the problems can help you negotiate a better closing price or give you an opportunity to back out if the purchase terms are no longer desirable.
Insurance Agent – You’ll want a good insurance agent who understands investment properties and how to insure them. You’ll need proper insurance anyway since you are buying a home, but this is especially true since you are going to be a landlord. Chances are, the typical homeowners insurance policy isn’t going to cut it. It should be no surprise that most policies have the owner-occupied homeowner in mind! Consult with other real estate investors in your town (or your Real Estate Investment Club, hint hint) to see who they use.
Along with the new folks you bring in during this purchase process, your trusty real estate agent will be with you throughout the closing of your home and your property manager can help you strategize rent charges and even start advertising your rental. In some cases, if you, or your real estate agent, has a good relationship with the seller’s agent, the property manager may even be allowed to show renters the home while it is in escrow. This gives you a great head start since you could have a renter by the time you close on the property!
Well, by this point you should feel really good about yourself. You’ve made an offer on a profitable investment property and got it accepted, presumably at a price you are very happy about. On top of that, you also went through the due diligence phase and negotiated a lower price if major issues were found. If all is well, then you found a great investment property.
Stay tuned for our next post where we cover the final walkthrough and closing of the property!