Wholesaler · Culver City, CA · Member since 2015 · 185 posts · 56 votes
Hey folks...
Within the past month, I've heard on a number of occasions "just get it under contract." To give it a little more context, pretty much these people were saying don't worry about how much the rehab costs are, just get it under contract, then renegotiate later.
If a contract says you are going to buy the house for a certain amount, how is it even possible to go back and renegotiate? A contract is a contract, right? Sounds to me that it's a recipe for disaster.
As a newbie, it's confusing, yet frustrating when you hear one side say adamantly say "just make an offier, get it under contract and renegotiate later;" then the other side says "never make offers without knowing your rehab costs."
The JUST DO IT concept reeks of ignorance to me. You'll only make profits if you understand as much as possible and can tolerate major expense where you do not.
Got a couple of Million to play with? Then gamble await - - even a blind pig finds a truffle once in a while.
Your contract should give you as many outs as you can get. For example, you contract could say your going to pay a few hundred thousand, but it's depending the property passing inspection to your liking, and the terms would allow you to exit for any reason or request a change in price to be compensated for whatever you deem. The seller could then agree or reject your adjustment in price. If they reject and you can not come to an agreement, then the contract in void.
You can do the same thing with funding, etc. Just don't word it in such a way that allows the seller to force your hand by going with another bank, or some unreasonable loan terms.
You could get things under contract, but then have you and your contractor look at it and give you a written quote for the work needed. Bring that back to the seller and say you need a discount for the work outlined to bring the property to market value.
If you are doing a contract in good faith, meaning you are truly interested in buying the property, you should indeed put some contigencies.. an Inspection, financing if you are not a cash buyer, time to close..You should have an idea of rehab costs, orherwise you are wasting your time and the other person's time
What if you do all of the work to see what rehab is and then someone buys it out from under you? I think that it is OK if you are earnestly looking at the property to re-negotiate the contract if there are costs which are not up front. Eg. if the roof is visible and needs to be replaced price that into your first offer or accepted contract, if not you come back and say "well the roof is crappy" and it was known, that will likely not fly. Just use some common sense when you make the offer pointing out the deficiencies that you see and making room in the contract to run or re-neg if there are more hidden challenges.
One house that I purchased, I had the sewer line scoped and it needed to be replaced, which is common where I live, I got an additional 10,000 at closing to cover the sewer cost.
The JUST DO IT concept reeks of ignorance to me. You'll only make profits if you understand as much as possible and can tolerate major expense where you do not.
Got a couple of Million to play with? Then gamble await - - even a blind pig finds a truffle once in a while.
As a newbie, it's confusing, yet frustrating when you hear one side say adamantly say "just make an offier, get it under contract and renegotiate later;" then the other side says "never make offersclosewithout knowing your rehab costs."
I crossed out "make offers" and added "close." With that minor correction both sides of the debate are right.
You make some very rough estimates of costs based on your experience (which may be limited).
You make offers.
Yay, offer accepted!
Now, you're in a position to get inspection and have contractors to come out and submit proposals / bids for the work.
If you don't like the costs and the numbers do not work ("the numbers" being a combination of rehab costs plus any price reductions you are able to negotiate), invoke your inspection contingency and back out. Those bids from contractors are a form of inspection. You are inspecting what it will cost to fix the place up.
The standard CAR RPA allows you to recover your full earnest money deposit when you back out and invoke your inspection contingency, assuming of course that you wrote an offer that had an inspection contingency.
If the numbers work, proceed to closing.
Here is what I have seen in the past, the alternative approach:
Buyer doesn't want to write offers until they are certain they want it.
They pay $400 per property before writing a single offer. Some of them go under contract with another buyer before the inspector has time to come out, but some manage to get the inspector in there in time.
Six inspections later, they like the inspection results and write an offer.
Like most offers in the Bay Area, the offer is not accepted.
So they are out 6*400 = $2400 in inspection fees, and don't even have a property identified yet!
Thanks for your input. It totally makes sense now. If I may regurgitate what I understand you all saying...when making offers be sure to disclose that the offers are subject to an "acceptable inspection" (AKA contractor bidding the rehab costs and the numbers work). Make sure the contract terms have a clause that will allow an adjustment to the purchase price after the inspection; or allows an exit if the seller and I cannot come to an agreement.
@Jeff B. ...you know, I hear this notion of "just do it" from "reputable" podcasters without any other context; and when I hear this, I cringe (then I get mad out of frustration). And perhaps since they are so experienced, they just fail to say "you should have clauses in your contract...blah, blah, blah." What others have mentioned on this thread totally makes sense to me. But to just say "just get it under contract" with no other information is questionable indeed; and/or reeks of ignorance.
Thanks for your input. It totally makes sense now. If I may regurgitate what I understand you all saying...when making offers be sure to disclose that the offers are subject to an "acceptable inspection" (AKA contractor bidding the rehab costs and the numbers work). Make sure the contract terms have a clause that will allow an adjustment to the purchase price after the inspection; or allows an exit if the seller and I cannot come to an agreement.
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It's already spelled out in the standard CAR RPA with your agent just having to put a number in for how long you anticipate your initial inspections will take.
Speaking of which, I'm going to guess that you haven't spoken with any agents or lenders yet have you? Go do that.