Closing Your First Cash Deal

Introduction

This past Spring I closed on my first buy-and-hold real estate deal, a cash purchase from a fellow Bigger Pockets member. The property was a 3 bed/1 bath in Metro Detroit, which we purchased for $40,000. For your first deal, I would recommend purchasing properties the “conventional” way off the MLS with a licensed agent, until you are comfortable with the whole process. Unable to heed my own advice, I chose to dive into the deep end.

I researched many “How to Buy with Cash” guides AFTER my verbal offer was accepted, but they missed some key details. I hope by sharing my story and lessons I learned, you will be better equipped to buy cash deals and avoid my mistakes.

(Note: I do not dive into finding, analyzing, or raising money for deals. I start at a point when you have a deal in hand, what to do before and after that point.)

Financing

Financing includes gathering the necessary capital to purchase a property with cash, have enough for repairs, and leaving some cash reserves for unexpected occurrences.

My Mistake(s)…

My brother and I had agreed that we wanted to start buying real estate together, but were mostly looking on the MLS for deals using conventional financing. Therefore, our purchasing plan only required 20-25% down on a targeted $40-60k property. We had NOT planned to buy a $40k property with cash, and had to scramble when the deal arose. Fortunately, between our cash reserves and some private money (i.e. our generous mother), we were able to gather the necessary money in time.

My Lesson…

Have the necessary cash readily available, accessible from your bank within a couple days. Transferring money takes time, whether it’s from one of your personal accounts (savings, 401k, money market fund, etc.), private sources (family, friends, acquaintances), or a hard money lender. The greatest benefit of cash purchases is closing quickly, which is difficult if you need to source and transfer money after finding the deal.

You should also know at this time how you want to structure the deal, as that will affect financing. Will the title be in your name? In an LLC? Are you purchasing as a partnership? There are numerous articles online regarding these structures, choose yours before making an offer.

Purchase Agreement

A purchase agreement is a legal contract between a buyer and seller of a property that outlines the terms of the ownership transfer.

My Mistake(s)…

I did not have my own purchase agreement ready before my verbal offer was accepted. I had 24 hours to quickly research several online documents, determine the most important stipulations, and get the official offer to the seller. Truth be told, I did not completely understand each item within the contract I was signing. I got lucky.

My Lesson…

I recommend either using a purchase agreement from a licensed agent or have a specialized lawyer draft one up for you. Yes, it may cost a couple hundred dollars to put one together, but you can use that purchase agreement for the rest of your career. All it takes is one deal gone awry and you will be wishing you had a bullet-proof contract.

Learn about the different contracts used in real estate, the terminology, and the various contract contingencies. Make sure you are tactful when selecting your contingencies, I would recommend only putting an inspection clause in your contract for a cash purchase. Anything more may deter the seller.

Title Search

Before purchasing a property, it is imperative that a title search is completed in order to confirm the title is “clean”. I highly recommend having a reputable title company perform the search and insure the title, but some investors opt to complete this step on their own.

My Mistake(s)…

I had been working with a real estate agent at the same time as this deal, and took her recommendation for a title company to use. Rather than doing my due diligence and calling around for closing timeframes and quotes, I blindly followed the agent’s advice. The recommended title company specialized in conventional home purchases, they did not cater well to my quick cash closing request. What should have been a standard two week title review process quickly turned into a six week, headache plagued ordeal that resulted in switching to a new company.

This was my biggest mistake of the closing process. I had put my reputation on the line and let down the seller by not closing on the agreed upon time frame. Don’t do this, it sucks.

(P.S. if the seller happens to read this, thank you for being understanding throughout this whole process!)

My Lesson…

As with everything in real estate investing, do your due diligence. Research title companies, try to get recommendations, and call a few prospective options. You should ask if they specializing in cash closing deals, how quickly they can close, and what the closing process looks like. If you choose to perform your own title search, you need to be even more careful. I think this process is so critical in cash purchases that I am going to devote an entire post to it soon.

Landlord Insurance

Landlord Insurance is a special type of insurance for rental properties and differs slightly from normal homeowner’s insurance.

My Mistake(s)…

Fortunately, this is about the only area I did not make a mistake!

My Lesson…

Learn about the different types of coverage, they vary quite a bit. Get a few quotes from different insurance agencies, quotes can vary a lot as well. Make sure coverage starts at least the day before you close, and you should be all set. I err on the side of conservatism, so opted to get $1,000,000 personal liability insurance for an extra $100 a year.

Property Management (for first time property managers)

Property management means handling all the day-to-day activities that are centered around the piece of rentable real estate. It may involve seeking out tenants to occupy the space, collecting monthly rental payment, maintaining the property, and upkeep of the grounds.

My Mistake(s)…

I was so busy with everything listed above that I forgot one of the most important items, what I do AFTER I own the property! Here I am with my first rental property and an inherited tenant, and I don’t even have a system in place for accepting rent. A true savior was reading Brandon and Heather Turner’s, “The Book On Managing Rental Properties”. I crash coursed property management in a few days, using this book to establish vital systems and capitalize on the forms/documents they share with the reader. It was a stressful week following closing, but now all systems are running smoothly.

My Lesson…

There are hundreds of books and articles online that can teach you how to be an effective property manager. Get started early, do your research and develop systems BEFORE closing. If you buy a vacant property and THEN learn the tenant screening process, you will miss out on several weeks of missed rent, or worse, end up with a bad tenant.

Conclusion

If you have never purchased a property before, please be cautious doing a cash deal first. There is nothing wrong with buying a property through a licensed agent off the MLS, using their Purchase Agreement, their title company, and relying on their expertise along the way. Paying a slightly higher price on a deal might be worth the education you get on the closing process.

If you are like me and want to go straight for the cash deal, do your homework. Have your cash ready, a solid contract, management systems in place, and a reputable title company on speed dial. Doing your due diligence now will save undue stress and possibly disastrous mistakes in the future.