How to Land Your First Real Estate Deal - Part 2

How to Land Your First Real Estate Deal - Part 2

Landing your 1st deal can be an exhilarating experience. In part one I went over some of the first steps towards finding it. If you missed it, check out How to Land Your First Real Estate Deal - Part 1

Here is a quick summary of the steps from Part 1:

• Determine how you want to invest
• Line up your financing
• Learn the local market
• Build your team
• Build your buyers list
• Start a marketing campaign

Now onto the next steps in landing your first deal

Identify your Target

It’s important to identify your target so that you can develop a strategy that speaks to put it under contract. If you keep up with your efforts, you should start getting some prospective properties to look at. Once you've have seen some deals and have run the numbers, you are going to have a few candidates to choose from. Compare them and decide which ones make the most sense for your objectives and be sure to run all the numbers. Have your agent, lender, or trusted investment acquaintances go over the numbers with you to make sure that you didn't miss anything - sometimes little things can slip through the cracks – like the price of insurance or taxes – or maybe closing costs – something you may have forgot to include in your expenses.

Be sure that you have checked out the local comparable sales, and that you are not paying more than it is worth. This is where a lot of investors get caught up. It’s easy to fall prey to analysis paralysis at this stage of the game. You have several options on front of you and some seem better than others. One property has a better long term potential but is slightly more than you wanted to spend up front – you have another property that would be easier to get right now, but doesn’t have as much long term potential as the other one. On top of that, you just ran the numbers on a couple of deals your wholesaler sent you and now those look even better, but you will have to move much quicker on this one to get it done. It can be completely overwhelming to have so many options in front of you – especially when you are new to the game and aren’t sure what the consequences of your choice is going to be. One way to get over that hump is to start by going back your original objectives. 

Make sure that the deals you are looking at match up with what your long and short terms goals are. This is important because it will help you to identify whether or not these investment options are going to be the right vehicle to get you where you want to be. If you are looking at multiple deals and some of them don't meet those needs, then eliminate them and focus on the ones that do. If you still have more than one deal you’re looking at , scale back even further by using a matrix that clearly identifies key metrics that are a must have. 

For example, you can put together a sheet of paper and make a simple list of things that you feel are most important to focus on. You might have a price point that you cannot exceed. There may be a location that it needs to stay within that particular area, such as a 5 mile radius of the downtown area – or 2 miles from the local college. You can also have metrics such as projected cap rates (basically your profit) - perhaps you have decided that it’s not worth your time to work on any deal that do not yield a 15% return on your money- so if any of the projects you’re looking at doesn’t meet that specification, you will eliminate it. 

There are several metrics that you can use to determine what is going to be the best type of investment for you. When all is said and done, you might have a sheet of paper that says you are only going to buy a single family home, under $200,000, that has an average after repair value of $275,000 or more, within 20 miles of your city, that can be rehabbed for $30,000 or less. Now that paints a clear picture of what you’re looking for. If you have six deals in front of you and you’re trying to determine which is the best one, it’s unlikely that all of them are going to match those specific parameters. So one by one, they will eliminate themselves from your list and your decision becomes much easier because you know that you have identified something that most closely matches your investment objectives. It may not always match your needs perfectly – it’s quite normal in real estate to have a set of stated objectives and still have to compromise on something – as long as it’s not something that is completely material to your overall objective – for example if you found a property that met all your requirements, but was actually 26 miles from your town instead of 20 miles – that’s something you can probably work around if all the other objectives were met. Once you have identified the properties that you want to take down, it's time for the next step.

Make an offer

This is where the rubber hits the road. When you submit an offer, you want for it to be taken seriously. This means that it needs to be a strong, realistic offer and the seller needs to have the confidence that you can close on it. If this is your first deal then you should probably have a real estate agent or other investor help you put together an offer. They can help make sure that your interests are protected and that the contract has the right contingencies built in. They are likely to advise you to always include your proof of funds, letter of per-approval, and a good faith deposit check – even if it is only $50 – include something that shows you are serious. Showing that you have the financial backing to follow through with the deal goes a long way towards your credibility. Sellers don't like to waste time with buyers who cannot follow through with the deal so they like to see early as possible that you can complete the transaction. Before you submit one – make sure that it meets a few basic requirements if you want the seller to seriously consider your offer.

Just offering a competitive price does not guarantee that you will win the bid. In recent markets, I have seen offers for $30,000 over asking price and still get beat out to other offers. How does something like that happen? Sellers are not always looking for the best price – keep in mind that in most cases when someone is selling a house – they are actually trying to solve some kind of problem. Perhaps that problem is that they need to sell the house to move out of state and it’s more important to close quickly than to get a higher price. Maybe the property can’t be financed by conventional financing and requires cash only - even at less than asking price. There can be a myriad of reasons why someone will accept or reject an offer. Before we start offering something that the seller is not interested in try to find out what the seller is looking for. This is not always easy and sellers are or their agents are not always forthright with what they are really looking for but if you ask enough questions you may be able get a better idea of what might get them motivated.

Depending on the type of sale – you may be talking directly to the seller or their agent. Either way - a few strategically placed questions could reveal their motivations – Ask them why they are selling – this seems obvious, but we may never know if we don’t ask. Surprisingly you are unlikely to ever hear the words – “cause I need the money.” You may hear things like – the house is going to go into foreclosure, or we are moving out of state, we inherited this house and don’t want to deal with it, we are getting ready to retire and are getting out of the business. There are so many different reasons why someone would sell their property and if you can identify that reason then you are one step closer to making a solid offer.

You can also ask – how soon would you like to close escrow? This is important because many investors will offer to close the deal with cash in 10 days - while this might seem like a great offer on the surface – what if the seller is trying to do 1031 tax exchange and needs an extra month to identify his next property – closing in ten days may not have any appeal to that seller at all. Knowing that they have a longer time horizon before you make the offer can help you to structure it in such a way that it is more attractive. This is why it is important to do a little homework and try to understand the motivations of the seller so that you can write up an offer that speaks to their specific situation, potentially giving you an advantage over your competitors.

Perform Inspections

If your offer is accepted - congratulations! – now it’s time to bring in the inspectors and go through it with a fine tooth comb. Be sure to carefully inspect the foundation, the roof, electrical and plumbing systems and the general condition of the appliances. It helps to get an idea of how old appliances are – most do not have a lifespan longer than 10 years. Anything older than that will likely need replacing in the near future.

This inspection period is also where you get a chance to find out how much your repairs are going to cost and how long they will take so your inspector is not the only phone call you should be making. You will want to bring your handyman or contractor with you to give you an idea of how much the repairs are going to be or to give you an idea of what you can do to add value. Having them on hand will afford you the opportunity to ask questions about pricing, timing and how important or complicated something would be. It’s good to know ahead of time that the addition you’re looking at making is going to put you a few thousand dollars over budget. 

It’s just as important to know if other things are going to cost less than you thought to help you get your numbers tighter. I was once waiting for my contractor to show up for a bid and I was looking at the damaged siding on the house and contemplating on how expensive it was going to be to replace so many 4x8 panels. I was feeling anxious about the seemingly increasing price of the materials for this job. Once my contractor showed up however, he immediately dismissed my concerns as he explained how he was going to simply cut out the bottom of the existing panels and replace it with new pieces and that we would only need a couple of boards – not the 8 or 9 boards I would have went out and bought had I not known any better. His experience was invaluable and saved me a lot money. This is why you want your contractor with you during the inspection process – they will be a big help for you to understand the scope of work that needs to be done. 

Many times newer investors get excited and overbuild on a project – primarily because they don’t know yet what really adds value and what doesn't but they still want to make the best impression, potentially costing a project thousands more. Experienced investors know that not every single item of the house needs to be rehabbed and they can walk you through what is important and what is just fluff so it might even be a good idea to have another more experienced investor join you to help determine what you should be focusing on and what things to ignore. If there is too much work to do and it will cost too much to be profitable, you can negotiate with the seller to try to get better price.

Negotiations

Here is where you can really make your deal shine. After you have seen the property from top to bottom and have a good idea of what your upgrade costs are going be, you can start to put all the pieces together to make the case for your offer – perhaps the comparable sales you ran indicate lower home prices than the seller indicated – perhaps there is more work to be done than first anticipated. You may be able to get leverage by using these items to help you negotiate a better price or terms with the seller. If they are unwilling to work with you, then you may have to walk away – unless the numbers still make sense to you. Don't be greedy, but don't be so eager to land your first deal that you pay too much for a house that is going to lose you money. Keep in mind whether you are buying for long term or short term profits. If you’re buying to hold long term then project the income and expenses for at least 3 years out to get a better idea of what your returns will be. You may undervalue the property if you are only looking at your first year returns. Don't fall in love with your deal and always be ready to walk to away if the numbers don't pencil out.

Escrow

Once you have an accepted offer, are satisfied with the terms of the offer and have made all of your inspections, it time to fund the deal and close escrow. If you are buying with cash than this is a very easy and fast process – simply get a cashier’s check written out to the title company for the final amount owed. If you are getting your funding from a lender, then there is a little more time to wait as the underwriters get all the paperwork together and do all of their own due diligence. They will likely ask you for information or signatures throughout the process. Normally , they can have you funded in 30 days or less.

Close the Deal

Once everything is finalized, all parties have signed off on the right paperwork and money is exchanged, you receive your keys and the deal is done. It just has to be recorded with the local county recorder office so that the law knows that the property belongs to you ( or your company)now. It's time to start getting your property ready for production- are you going to clean it out and rent it to some tenants right away? Or are you going to start demolishing the place to get it ready for a complete rehab? It's totally up to you – you've made it this far.

Congratulations – you've landed your first deal!