10 Minute Real Estate Lesson 1-Nine steps to closing your first property
Updated: Apr 14, 2020
You can't accomplish your goals if you don't take action. But what action do you take? What does it consist of? It's easy to get overwhelmed and be scared to put $$ on the line to pursue your dreams. It's also easy to take action.
I've talked to a lot of investors who have been learning about real estate much longer than me, yet in 6 months of focused and applied learning and serious action I've accomplished far more. The same things come up in each conversation-
"It seems like a great deal but I'm nervous about ___________ (insert obscure concern)"
"I wish I'd started months/years ago"
"I need to read these 6 books before I can get started"
The bottom line is people don't get started because they're scared; they're scared because they're stepping into the unknown, and because they don't know what to do. My goal is to change that and encourage you to take action.
This is the first of what will turn into a series of "How to" posts, where I'll get into the topics that aren't the most sexy but are tactical and important. The goal of this first post is to provide an overview of the entire process (which I had to split into two posts due to the length), and each step will ultimately be broken out into subsequent posts of their own. In the end, I'll link each individual post back here so this can serve as the hub for all content.
Let's get started!
SECTION 1: PURSUIT
Step 1-Identify your niche
You need to start with the end in mind. I'm not going to get into goal setting and planning at this point, but you should begin Step 1 once you know what you're ultimately seeking to achieve.
Once you have your goals in place, you need to narrow the field of investments. A simple unfiltered search for "Charlotte, NC" on realtor.com produces 3,953 results. That includes single family, multi family, condos & townhomes, land, and mobile homes, and prices ranging from $8,000 to $7,000,000.
You need to find what you want to focus on based on your goals. Are you looking to flip single family houses? Rent out multi family houses? Invest in land? Buy and hold high end condos? Is your goal appreciation? Cash flow? # of doors? Or something else?
In order to become proficient at analyzing, you need to know a lot about what you're going to invest in. Each of the property types have different considerations when it comes to income, value, financing, etc. Additionally, the same property can have very different considerations based on whether you're investing for cash flow or appreciation.
Pick something and go with it. If you don't like it, you can always change it later. But pick something and stick with it to start.
Step 2-Start finding deals
In order to buy houses you have to make offers. And to make offers you need to analyze properties. To analyze properties, you need a pool of properties to analyze.
Now that you've identified your niche in Step 1, you can start looking for properties that meet your criteria. There is a lot of talk about how you can't find deals on the MLS, and the only true deals are off-market. I can tell you that's not true based on the fact that all 10 units I own were found on the MLS, however there is validity to the argument. I'm not going to get into that here, but just know that you have the ability to find deals both on the MLS and off-market.
A great starting point is to set up filtered alerts on the MLS and on apps like Trulia, Zillow, Redfin, and Realtor.com. Remember that list of 3,953 properties in Charlotte? When I change my filter to only look for multi family properties under $400k, I now have 3. I also have notifications set up so that any time a new property comes on the market and meets my criteria, I get alerted.
When you pursue off-market deals, your options expand even more. You can look at marketplaces like Facebook & Craigslist; you can drive around and look for properties that are for sale by owner; you can check foreclosures and auctions. As you get more advanced, you can send out letters to targeted owners, review various listings from the city/county, and do a lot more.
Step 3-Analyze the deal
So you've found some potential deals that meet your criteria. Great! Now what? How do you decide whether or not to pursue? How do you decide what to offer?
There are so many different aspects to deal analysis that I can't possibly list them all (which is why I wrote a separate post just about this topic). But here are a few key considerations, both financial and other:
-Value of the property
-Rental income (if applicable)
-Cost of ownership (property taxes, insurance, HOA fees, etc.)
-Condition of the property
-Cost of repairs
-Types of fixtures & component materials (e.g. slate vs. asphalt roof; updated wiring vs. knob & tube; window units vs. centralized HVAC)
-Neighborhood/location (e.g. crime; growth; type & condition of nearby properties)
It's important to err on the side of caution and pessimism in your analysis. If average rent in the area is $1,000/mo, don't run your numbers on the assumption that you're going to be the outlier and get $1,500. If values are around $300k, don't assume your flip is going to be worth $400k. Better to get into a deal and be pleasantly surprised based on conservative estimates than get into it underwater because you planned for the best case scenario.
What about walkthroughs? If you want good deals, you probably should wait until the due diligence period to do your walkthrough. I can tell you that if you refuse to put in an offer without seeing every inch of the property, your chances of getting a deal shrink rapidly. I'll dive into that deeper in the detailed analysis post.
Finally, don't get scared off by the listing price. My first property was purchased for 25% below list, and my second 15% below. Find out what price makes sense for you, and go into your offer knowing your maximum purchase price that you'd be comfortable accepting.
Step 4-Make an offer
The more offers I put in, the more I realized that there's so much to an offer besides the price. You can pull multiple levers to be competitive in your offer and make yourself stand out. I'll go into detail later, but for now here are the primary levers:
-due diligence deposit (if required in your area)
-earnest money deposit
-type of financing
-due diligence/inspection period dates
Pulling any one of these levers can strengthen your offer and make up for weakness in other areas. Understanding what each one means and what it communicates to the seller is extremely important, which is why it will likely be my first deep dive post. More to come!
**it's important to note that from this point on, execution is a little different when you are buying through an agent vs. representing yourself (like in an off market deal). I'm going to focus on going through an agent, but realize that there are differences**
This could probably be combined with Step 4, but depending on the situation each one can be very very important on their own.
In most cases, the seller isn't going to accept the first offer you put in. They may counter directly, reject the offer without a counter, or notify you of multiple offers and a "bidding war". Any answer you get tells you a lot about the seller and what they want, so pay close attention.
If they counter well below their listing price, you're in a strong position. If it's been on the market for 24 hours and it's a bidding war, you need to find a way to stand out. If you're doing verbal negotiations prior to submitting a signed offer, realize that any agreement you come to means nothing until you get it signed (as I almost learned the hard way in my first purchase).
The most important (and sometimes most difficult) part of negotiating is remaining analytical and not getting emotional. That's why it's so critical to analyze the property thoroughly ahead of time, and have a target number that you don't exceed. It can be easy to think "I've put so much time into this already, I'll give in a little more so I can win." All this does is put you in a precarious position...you already ran the numbers, you already know what works for you and what doesn't, so if you can't come to an agreement at that price walk away!
SECTION 2: DUE DILIGENCE
Once you have the signed and executed contract from both parties, you can get to work during what's called the due diligence period. This is where the rubber meets the road!
Step 6-Set your team in motion
It takes a village to put a deal together, and the village requires a signed contract to start their work. Hopefully you've engaged these partners ahead of time to give them a heads up, and now they can start making it official.
Lender: If you haven't done so already, you'll need to submit your mortgage application. You'll have to provide a bunch of documentation with or following your application, one of which will be your signed contract. They will need to underwrite you for the loan which takes time, and they also are going to schedule an appraiser to come out to the house. You want this started ASAP.
Insurance: You're going to need to have insurance in place in order to get to the closing table. Depending on the company and on the property, they may need to send someone out to take a look at the house before inking the agreement. Again, start ASAP!
Property Management: If using a property management company, this is a good time to engage them. They will more than likely need a signed management agreement to start doing any work, but they can work with the existing property managers (if applicable) to collect documentation, deposits, and keys upon closing.
Inspector: While not required, if you're getting an inspection you'll want to get that scheduled ASAP. Depending on how long of a due diligence period you have in the contract, you may not have much time to get them out. Get it on their calendar!
There are a lot of moving pieces, but luckily if you're buying through an agent they should help you stay on track with all of it (if they don't, find a new one!) Get all of these people set in motion so you can move on to the next step.
Step 7-Check out the property!
To this point there has been a lot of paperwork, pictures, phone calls, and maybe you've briefly driven by the property. Now it becomes real-you get to really see what you're buying!
If at all possible, it's good if you can go at the same time as the inspector. This way you can hear first hand what they see as they walk the property, and you can form your opinion as well. It's also a good option to get the property manager on site as well at that time, allowing them to see what they'll be managing.
Everyone walking through the property will be looking for different things; the inspector will look for real issues with the property (e.g. foundation, electric, plumbing, structural issues, etc.); the property manager will be looking to ensure the property is livable, and get a feel for what they'll be marketing; you'll be looking for opportunities to improve the place and major concerns that stand out.
WHATEVER YOU DO, DO NOT LET THE APPRAISAL TAKE PLACE AT THE SAME TIME THE INSPECTOR IS THERE!!!
Inspectors and appraisers look at very different things, and inadvertently skewing the appraiser's judgment can wind up costing you the loan (it happened to me unfortunately).
Once you and everyone else has finished (make sure you take lots of pictures and videos), it's time to finish out the due diligence period.
Step 8-Review and renegotiate as needed
Getting information from each party can provide you with a list of things that need to be done. Some may be show-stoppers, some will be nice to have, and some can be ignored. The results you receive will inform your next steps and decisions, as well as provide an out if things are too bad.
If there are items that are a show-stopper for the lender, those will need to be addressed in order to continue. You'll need to negotiate with the seller to make necessary repairs and improve the condition to the minimum required by the lender. If there are other issues that don't come up from the lending side, you can still negotiate those here. Serious issues like mold or a cracked foundation that are found in the inspection can be handled by either having the seller make the repairs, or negotiating the price down a reasonable amount and handling the repairs once you close.
It's important to reiterate that the due diligence period allows you the opportunity to back out altogether with minimal loss. You will be out any money you paid on an inspection, appraisal, or due diligence deposit (if required in your state), but you'll receive your earnest money deposit back if you withdraw before the period ends. The cost of those expenses is nothing compared to the cost of buying a bad deal, so make sure you make informed decisions and not emotional ones!
The final piece of information outside of general condition is the appraised value. On a standard loan with 20% down, the lender will only loan 80% of the purchase price or appraised value, whichever is lower. So if you're buying a house for $200k but it only appraises for $175k, you're not going to get a loan for the full amount. At this point you can go back to the seller to notify them and renegotiate down to the appraised value. If that fails you then have to decide whether you'll cover the difference or cancel the contract, but otherwise you've made it through due diligence!
Step 9-Getting to the closing table
At this point you should have everything wrapped up...the loan is fully approved, insurance is in place to start on the date of close, and the property management company is ready to take over management of your property on day 1. You're almost there!
The only major piece left at this point is to get your finances in order.
When you close you'll need to wire the funds for your down payment into the escrow account held by the closing attorney. This means you need those funds readily available! If the money is coming from places other than a bank account (i.e. brokerage or retirement account), make sure you initiate the transfers to centralize the money in a liquid account. Check with your bank if you're not sure, and confirm that you can do a same day wire.
The sellers may or may not be at the closing table with you, but make sure that if the units are rented you get a check for pro-rated rent. Then sit down with the attorney, sign on all of the dotted lines you're told to, and you've done it! Once the funds are confirmed in the escrow account, the closing attorney can take care of the rest and get your deed filed!
Make sure you take a picture or find a way to commemorate the moment, hopefully the first of many more to come!
Congratulations! You bought your first investment property!
As I mentioned at the start, this is barely scratching the surface. These are the high level steps, and what follows will be a deep dive into each one of them. In the end we'll have a comprehensive guide from start to finish, with actionable steps and considerations along the way!
If this is helpful to you, please share it with someone else! I want to be able to help as many people as possible, so if this content can help someone in any way I hope it reaches them!
If there's more information you want to see, other topics you want covered, or other questions you have, please don't hesitate to comment or reach out via email or social media!