URGENT AGAIN: Offer Accepted - NOW WHAT?

Question

It's me again, with my urgent advice needed threads. For some reason these deals always creep up on me!

I found a property in New Providence, NJ last night. I saw it this morning @ 10 AM, i put in an offer at 1 PM, 7 PM the offer was accepted.

Whats next?

All of my properties are fix and hold for rental purpose. I have never done a flip... but it was a good deal and hard to pass on.

Purchase Price: 305K

Repairs: 80K

ARV: 560K

I have the financing figured out with a hard money lender which i guess is the most important process to start.

But now whats next?

I would like to do due diligence, what type of letter do i need to send to them to get things moving etc? I do want to make some changes inside the house, knocking down a wall etc. Im assuming i need an architect to get this done and get the permits taken out? What items should i be looking at, checking for in my due diligence before closing?

This might have been a big leap forward but im sure I can do this with the help of all the BP members!

Just to clarify, finding a crew to get all of the things done is the easy part for me. I am in the construction industry, i have renovated a few properties so that's not the issue. Its everything else in between!

Help?

Please.

Thanks

Dan

Brie Schmidt · Answer

Step by Step

Part 1: Attorney review, inspections and credits

These are the initial tasks once a buyer is in contract, and are most often done in parallel to Part 2: The mortgage process:

• An offer is accepted by the seller and a contract is signed. The attorney review process begins. During this period, usually 5 days, either party can get out of the deal without consequences as their attorneys negotiate the final contract.
• Concurrently, a deposit, or earnest money, is paid to the broker or attorney (never to the seller directly).
• The buyer reviews and signs off on any disclosures. These disclosures vary based on property type, but often include things like known flaws with the property, prior improvements or repairs, and potential environmental hazards. A form called a residential property disclosure report (see a sample form from the Illinois Association of Realtors® here) is provided by the seller on or before the day the contract is signed. Sellers may see this as beneficial to themselves, and believe that buyers will build these pre-disclosed facts into the contract price (and thus sellers may be reluctant to provide any credits for these defects).
• The buyer elects to perform inspections on the property as agreed upon in the contract. These inspections must be completed by a certain date, which can be called the inspection contingency date (though is officially referred to as a number of days from the contract date wherein a buyer must notify the seller of any defect revealed by the inspection). The types of inspections vary by property type and situation (and locale), but in Illinois, a licensed home inspector generally inspects the home first, and other inspections and tests (for things like lead paint, asbestos, etc.) can be ordered if revealed to be necessary by the initial inspection.
• Based on the outcome of inspections, buyers may elect to ask the seller for repair work, closing cost credits, or a reduction in the sale price due to flaws that were uncovered. Sellers have three options: agree to all of the buyers’s requests, offer a modified solution back to the buyer, or decline to make any amends. In response, the buyer can continue to negotiate, accept the seller’s position, or in some cases, end the transaction and recoup their earnest money.
• The buyer functionally removes or waives the inspection contingency by agreeing to a signed inspection response with the seller, or by failing to make an inspection response request to the seller before the number of days indicated in the contract has passed.

Part 2: The mortgage process

or those borrowing to purchase their home, the mortgage process is usually the the most stressful and opaque part of the transaction. It’s best to start as early as possible and be ready to produce lots of documentation. The following is the general process in Illinois:

• A buyer submits a loan application to their lender, either directly or through a mortgage broker. See a sample Uniform Residential Loan Application used in Illinois.
• Within 3 days, the lender sends a “Good Faith Estimate,” or GFE, to the buyer that is a breakdown of estimated closing costs. The final costs are likely to deviate from this estimate. See a sample GFE at hud.gov.
• Before the buyer is ready to write an offer, a pre-approval with a lender should be acquired. The buyer sends a series of personal financial disclosures to their lender. These vary by situation, but the most commonly requested documents are:  Several months of statements for each bank account a borrower holds (including any investment accounts)Several months of statements for any outstanding loans, lines of credit, or other liabilities. This can also include documentation of rent payments.Up to two years of tax returns, released to the lender via an authorization submitted by the buyer using IRS form 4506-T.Recent pay stubs and contact information for each borrower’s employer. The number of pay stubs varies by situation.Any other disclosures that are material to a borrower’s financial situation. This includes but is not limited to marriage licenses, divorce settlements, child support, liens, bankruptcies, or judgments. If there’s something that affects how much money you have on hand that isn’t shown by simply looking at your salary, be prepared to document it.Explanation of any credit inquiriesSubstantiation of any large deposits or cash gifts that aren’t regular income. In some cases, a large cash gift may look similar to a personal loan by a friend or family member, and lenders will require gift letters from those that gave you the cash gift, stating that the gift was not a loan. They may also ask for itemized deposit slips. The exact amount that triggers this requirement varies by situation (for instance, a $1,000 cash gift may be material to a single borrower that makes $35,000/yr but may not be material to a borrower that makes $350,000/yr), so it’s good practice to ask your lender if you suspect you might have a material cash gift or large deposit – so you aren’t surprised by this at the last minute.Repeated and updated documentation of any of the above. Keep in mind: to a lender, anything can happen to a borrower’s personal financial situation and credit during the escrow process. Thus, you may be asked more than once for the same type of document so that your lender has the most recent pay stubs, rent receipts, bank statements, or other disclosures that may change over time. Any material changes in these documents -or any element of your personal financial situation- may require the lender to reassess your eligability for the loan for which you’ve applied.
• Several months of statements for each bank account a borrower holds (including any investment accounts)
• Several months of statements for any outstanding loans, lines of credit, or other liabilities. This can also include documentation of rent payments.
• Up to two years of tax returns, released to the lender via an authorization submitted by the buyer using IRS form 4506-T.
• Recent pay stubs and contact information for each borrower’s employer. The number of pay stubs varies by situation.
• Any other disclosures that are material to a borrower’s financial situation. This includes but is not limited to marriage licenses, divorce settlements, child support, liens, bankruptcies, or judgments. If there’s something that affects how much money you have on hand that isn’t shown by simply looking at your salary, be prepared to document it.
• Explanation of any credit inquiries
• Substantiation of any large deposits or cash gifts that aren’t regular income. In some cases, a large cash gift may look similar to a personal loan by a friend or family member, and lenders will require gift letters from those that gave you the cash gift, stating that the gift was not a loan. They may also ask for itemized deposit slips. The exact amount that triggers this requirement varies by situation (for instance, a $1,000 cash gift may be material to a single borrower that makes $35,000/yr but may not be material to a borrower that makes $350,000/yr), so it’s good practice to ask your lender if you suspect you might have a material cash gift or large deposit – so you aren’t surprised by this at the last minute.
• Repeated and updated documentation of any of the above. Keep in mind: to a lender, anything can happen to a borrower’s personal financial situation and credit during the escrow process. Thus, you may be asked more than once for the same type of document so that your lender has the most recent pay stubs, rent receipts, bank statements, or other disclosures that may change over time. Any material changes in these documents -or any element of your personal financial situation- may require the lender to reassess your eligability for the loan for which you’ve applied.
• The lender renders an approval decision, and if approved, issues a loan commitment letter, stating its willingness to fund the mortgage provided certain conditions are met. These conditions usually include appraisal (so the lender can confirm that the property you’re buying isn’t worth far less than you’re paying) but will also generally include any material change in your situation -or the property- as initially disclosed to your lender.
• The financing contingency, or loan contingency is removed by the buyer by the loan contingency date as defined in the contract. Buyers often ask the seller for an extension to their loan contingency date if they have not yet received their loan commitment letter. In Illinois, a buyer must submit their request for extension in writing, and the seller has a set number of days (usually indicated in the contract) to respond negatively if they do not wish to grant the extension.
• An appraisal is ordered by the lender or mortgage broker via a central directory of appraisers (often called an Appraisal Management Company or AMC). Choosing a specific appraiser is not possible, but a mortgage broker can reject an appraiser and ask for a new one. If the appraisal comes in lower than the purchase price, a lender can decline to approve the borrower unless a change is made to the purchase price or the size of the downpayment.
• homeowners’ insurance is purchased (or substantiated, if the property being purchased includes homeowners’ insurance as part of association fees or similar arrangements), and proof of homeowners’ insurance is submitted to the lender. Your lender may also require you to get title insurance.Tip: As this process can be long, arduous, seemingly arbitrary, and is often critical to your homebuying transaction, try to prepare these documents (or at least figure out how to prepare them) in advance. Also, do not make any changes to your employment or credit until your transaction is complete (not just until you get a loan commitment letter). This means not switching employers even if it results in a higher income, as counterintuitive as that may sound. It also means not leasing or financing a car, opening a new credit card account, or anything else that can affect your credit report.

• Several months of statements for each bank account a borrower holds (including any investment accounts)
• Several months of statements for any outstanding loans, lines of credit, or other liabilities. This can also include documentation of rent payments.
• Up to two years of tax returns, released to the lender via an authorization submitted by the buyer using IRS form 4506-T.
• Recent pay stubs and contact information for each borrower’s employer. The number of pay stubs varies by situation.
• Any other disclosures that are material to a borrower’s financial situation. This includes but is not limited to marriage licenses, divorce settlements, child support, liens, bankruptcies, or judgments. If there’s something that affects how much money you have on hand that isn’t shown by simply looking at your salary, be prepared to document it.
• Explanation of any credit inquiries
• Substantiation of any large deposits or cash gifts that aren’t regular income. In some cases, a large cash gift may look similar to a personal loan by a friend or family member, and lenders will require gift letters from those that gave you the cash gift, stating that the gift was not a loan. They may also ask for itemized deposit slips. The exact amount that triggers this requirement varies by situation (for instance, a $1,000 cash gift may be material to a single borrower that makes $35,000/yr but may not be material to a borrower that makes $350,000/yr), so it’s good practice to ask your lender if you suspect you might have a material cash gift or large deposit – so you aren’t surprised by this at the last minute.
• Repeated and updated documentation of any of the above. Keep in mind: to a lender, anything can happen to a borrower’s personal financial situation and credit during the escrow process. Thus, you may be asked more than once for the same type of document so that your lender has the most recent pay stubs, rent receipts, bank statements, or other disclosures that may change over time. Any material changes in these documents -or any element of your personal financial situation- may require the lender to reassess your eligability for the loan for which you’ve applied.

Part 3: The closing itself

The closing process itself takes place at one table (either at the office of an attorney or title company), where buyers sign all documents related to their loan and the transaction itself. After all documents are signed and payments exchanged, buyers generally take possession of the keys unless a separate agreement has been reached to allow the seller stay in the property for a period after closing. The detailed steps that make up closing are:

• A title search is run just prior to closing to determine if there are any liens or assessments on the title. Provided the title is deemed ‘clear,’ the closing proceeds as planned. Note: buyers can ask for this title search in advance of closing (sometimes for an additional fee), and it may reveal material information regarding the property that may be good to know well before closing.
• A buyer’s attorney begins preparing the paperwork for changing the title / deed and will file an application for title insurance if the lender requires it, and a final closing date is scheduled on or around the date indicated in the contract.
• A final cash figure for what a buyer needs to bring to the closing in the form of a cashier’s check is calculated. This is based not only on a mortgage’s closing costs but factors like property taxes and utilities paid in to date by the seller.
• At the closing, or settlement, table, the buyer (and seller) sign all closing documents, including the HUD-1 (see a sample HUD-1 here), and the final loan documents.
• The buyer pays the remaining funds in their downpayment to an attorney or a representative of the title company (who is present at closing) via cashier’s check.
• The representative from the title company or your attorney will then record the transaction and deed with the appropriate municipality.
• The buyer receives the keys and, unless indicated differently in the contract, officially takes possession of the property.

Michael T. · Answer

@Daniel Daskaloski honestly, if you're asking these questions at this point and you're this far into the process it is probably in your best interest to not continue through the process.

You either need to learn more or have a qualified real estate agent help you.

My concern is you're going to get yourself tied into a contract and be financially liable for something that you're not ready for.

Russell Gronsky · Answer

@Daniel Daskaloski, if you are under contract, you don't need any letters to send to the sellers, just get your GC to do as walk-through with you and tell you what you need and what permits will be required for it. If the walls you want to remove are not load bearing, you don't need a structural engineer for this project. Usually, your GC will pull any necessary permits but you can do it yourself if you want to save some money on your project. If you want to pull your own permits, contact your local building department once your GC tell you what permits you'll need and they will tell you how to apply for them.

Architects are useful if you are doing a full gut rehab or building custom homes. If all you're doing is moving/removing some walls and maybe adding a bathroom and finishing the basement, you don't need an architect.

As far as what items to look for in your due diligence...again, this is where your GC will come in. And anything you see that looks odd/weird/fishy, show it to your GC during the walk-through and they will tell you what it might be.  There are far too many items to look for to list out in a forum. Since this place is in NJ, humidity is a factor, much like Maryland so you'll want to look for any discoloration (i.e. mold), especially in the bathrooms, under the sink, basement and attic. Look for carpenter bee holes in wood and termite damage. Look to see how many Amps are going to the electrical box. You want at least 150 amps but ideally, 200 amps for a modern house. Windows should be double pane, not the old, aluminum stuff. The aluminum stuff needs to be replaced. Look at the furnace, HVAC and boiler to make sure these items are in proper working order. If the house has an A/C unit, check it as well. These things can be old but should be in proper working order.

Roof should be inspected as well. If the house has a basement, look for water stains on the basement walls or where the wall meets the ground. If you have water stains there, chances are, the house will need an indoor or outdoor french drain as you have water seeping through the walls and/or where the wall and slab meet. Also, if you do need to replace windows or doors, measure them to verify they are standard size that you can easily buy without having to special order all the windows and doors for the house as this will drive your costs up significantly (trust me). If you can remove a light fixture from the ceiling in a room (dining room is usually easy since there is a light above where the dining table should be) and see what kind of electrical wiring is used, this will be a great help. Depending on the age of the house, the wiring might have to be replaced so seeing the wires and their condition will give you and your GC an idea of what this will require. Re-attach the light fixture back how you found it after you are done inspecting.

I can go on and on but like I said, you can't capture everything in forums. I'd recommend picking up J Scott's book on flipping houses. He does a fantastic job of taking you through the big things you need to look for in houses you plan to flip.

J Scott · Answer

Why would you send them an LOI when they've already agreed to sell?  Send them a contract, and ensure that it's a legally enforceable and valid contract.  Better yet, ask to meet them at their house tomorrow morning to sign in person...

J Scott · Answer

Is there a written contract signed by both parties?  If not, you do NOT have an accepted offer.  Real property contracts cannot be verbal -- they require a written, signed contract with at least several basic terms included.  Without that, there is no legally binding, enforceable contract.

Assuming you do have a written contract, it should say in the contract how long you have for inspections and what rights you have with respect to entering/inspecting the property.  If this isn't in the contract, you need a new contract.

Daniel D. · Answer

Thanks for all of your input. Unfortunately, i backed out of this one because the comps were not really comps. The numbers were not adding up so i decided to pass.

Melody R. · Answer

Congratulations!

From reading your questions and comments,  a real estate agent to help guide you through the process would serve you well. Hire a great agent who has the time to hold your hand. Your agent will look out for your best interest, draw up the contract, schedule inspections and make sure you are meeting the contract obligations (for example, completing inspections by the deadline).

Find an agent to join your team before you finalize the purchase agreement. Best wishes!

Daniel D. · Answer

Makes sense! Thank you for the tip. Ill see what happens tomorrow morning.

Thanks

Dan

Daniel D. · Answer

Scott,

I understand. I am having something written up as i type this. They accepted my offer, i will now send them a LOI to purchase the property and go from there.

Thanks

Daniel D. · Answer

Thank you guys.

All i did was email them the offer. I got a reply that it was accepted.

I asked them for 2 weeks to do due diligence. In the mean time i will get a plumber, electrician and the GC to get some estimates to see if my #'s are correct.

URGENT AGAIN: Offer Accepted - NOW WHAT?

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Step by Step

Part 1: Attorney review, inspections and credits

Part 2: The mortgage process

Part 3: The closing itself