You have gotten to know your market. You have a pretty good idea of what a good buy and hold deal is. You just negotiated an offer. It got accepted. It is your first deal! Now what?
That depends on what is in your purchase contract and how you are planning to purchase the property. No two contracts are the same but most have several standard parts. These can include:
- Buying the property “as is.”
- A property inspection period.
- A review of leases and financials.
- The need for some type of financing to close the deal, likely from a bank.
- A way out or escape clause.
So let’s go through each one.
- Many investors buy investment properties as is. Buying a property “as is” means exactly that. You are buying the property as it is where it is and the seller will not make any repairs. It is incumbent upon you to know what you are getting into and what, if any, repairs and upgrades are needed and what they will cost. To find all this out you need an inspection period.
- Just because you are buying a property “as is” does not mean you should not inspect it. In fact you should! During initial negotiations you may only have seen portions of the property. Now is the time to see it all. Your inspection should include all rental units, attics, basements, crawl spaces, roofs, etc. Anyplace you can get into. If you are new to this, you may want to hire a property inspector or at least take a trusted contractor with you. During this inspection period you should be doing two things, making a list of repairs needed and looking for major damage and/or problems you were not aware of. If you find major damage or problems, it may be time to go back to the negotiating table. If the seller will not renegotiate, use your escape clause and back away from the deal.
- Get copies of all leases and at least two years of past income and expense reports. Read these over carefully. You will be inheriting the tenants and they come with certain rights. You can’t just kick them out because you are the new owner, you will have to live with them for a while. Be sure you are aware of what you are getting into. Make sure utility payments jive with what you were told for example. Do the tenants really pay them, or are they listed as expenses on the expense report? Depending on what you find, you may need to renegotiate. Again, if the seller is unwilling to do so, you may need to back away from the deal.
- Finally, if you are getting bank financing, there will be an appraisal. Always, always, always go to the appraisal and meet the appraiser. This person can make or break your deal depending on how they value the property. Be helpful to the appraiser. Take them some comps if you can. Hold their measuring tape for them. Explain to them, or better yet provide a list of the repairs and upgrades you plan to make. Do all you can to ensure the appraisal goes well.
- This is pretty self explanatory. If something goes wrong, such as unexpected and costly repairs, you need a way out as we see in 2 and 3 above. But only use it if you absolutely have to. If you make an offer, you should have every intention to close.
Assuming all is in order and has gone well, your next job is to secure insurance for the property. Find a good insurance agent who understands your market and understands investment property. Trust me, not all of them do. You can often find one at your local REIA.
Finally, develop a checklist to make sure all of these various pieces get placed in their proper slots. Do not just assume that the appraiser has the proper address to send the appraisal. Do not just assume that your insurance agent has sent the proper forms to the right places.
It is your job to follow up with all of these people and make sure that everything gets to the right place in time to close. E-mail the bank to make sure they have the appraisal scheduled and that they receive the appraisal when completed for example. Nobody else cares about this deal as much as you do and often times you need to expend some energy to get all the pieces together.
Only then, once it all has been fitted together, then maybe, you will close on your first deal. Congratulations! Now the real fun begins.
