Hey all,
I have to warn you all, this is a pretty long post and just wanted a disclaimer at the beginning for those not willing to read my ramblings. I'm primarily making this post to help solidify some concepts I've learned about Real Estate Investing, but if it helps people out, that's even better.
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I'm basically a newbie when it comes to Real Estate Investing, but I've been reading books, listening to audiobooks, attending networking events and conferences and generally just trying to learn, and make connections with people in the business. Getting up and going to networking events, talking to people, and actively being social without being forced into it is not one of my strong suits. I'm a Software Engineer by trade and that does not necessarily put me into the spotlight very often, so this is pretty out of my comfort zone.
I've been doing a lot of REI research over the past few months; analyzing properties that I get from brokers, and see on Trulia, Zillow, Keller Williams, LoopNet, etc., learning about the different places to get public information on a property (never knew I could pull records on a property without an attorney before), getting estimates on inspections and repairs, and a slew of other due diligence & closing cost type things.
I'm the type of person that needs to know the major steps needed before pulling the trigger on something major. I did this with purchasing my first car and do it every time I look into large purchases. I've compiled an incomplete list of the major steps I think are necessary to close my first deal from all my reading and listening here on BP and throughout the REI community. I would love it if you guys/gals could look over it and tell me what I'm missing, what I'm misunderstanding, what I have out of order so I may correct it for future newbies.
A bit about what I am working towards before I get into the list; I am working to get a few small multi-family deals under my belt before scaling and getting into larger multi-unit deals. I would much rather jump into large apartment complex deals from the start, but hey I gotta start somewhere with the zero experience I have.
I feel like I am entering into analysis paralysis because of the plethora of information that is available, so I am writing this to get my thoughts into a "concrete space" and to have a place to look to every time I feel I'm losing my way. I'm hoping this list will help others in a similar situation break out of their paralysis take their first step in closing their first deal.
Thanks in advance BP'ers!
Steps needed to close that first deal:
- Build your network: Your network will differ based on what your goals are but I think it is important to build it before making that first offer. At a high level, I believe you need to start connecting with Brokers, Attorneys, Investors, Title Companies, and Contractors, Property Managers. These people will play major roles in your deal flow. This is not an exhaustive list, because there will be other professionals that will come into play depending on what you are trying to do.
- Get leads: Reach out to a broker that deals in what you are looking for. Get in contact with more than one and discuss what you're looking for, what your financial status is, and the timeline you are looking to close on a property. There are many different ways to get leads, but I think this way has the lowest barrier of entry for a beginner. Some brokers will be able to walk you through the process and this will help tremendously.
- Analyze your leads: When you get leads from your broker or anyone else sending you leads; analyze them. This helps get you comfortable with looking at properties from an investor's mindset. I used to look at properties with a buyer mindset and was always impressed by how nice the property looked (Staging, nice floors, nice paint job, big kitchen, big backyard, swimming pool, etc.). After analyzing a bunch of deals, I'm still impressed by those novelties, but now I'm thinking about how much that will improve my cash flow and how much that will cost me in cash flow (did you know in-ground pools could increase your tax liability!?). Also, I've found that analyzing leads will create a different mindset on certain things to look for during due diligence. (Property record searches, Tax Assessments, etc.) Make sure to analyze them according to what you are looking for in an investment property so you can be ready to pull the trigger on any of those leads you've analyzed that meet your criteria.
- Make that offer: Now that you've built your network and analyzed those leads; once you find that deal you're ready to commit to, make that offer! What I've learned is that making the offer is that tipping point to actually getting into the intricacies of a deal. You can make offers with contingencies that will protect you. Offers contingent on touring the property, contingent on financing, contingent on partner approval, contingent on inspection, etc. There are so many ways to protect yourself after making the offer. Plus, if they don't like the contingencies, is it really worth opening yourself to bigger risk? Now don't go putting every contingency in the business, but put enough to make you comfortable your risk is sufficiently mitigated. A tip I'm keep hearing / reading: make a slightly lower offer than your actual goal purchase price. This leaves room to negotiate up to your goal price.
- Get that offer accepted: You've done your analysis, made that offer with tons of contingencies and maybe a discount from the asking price. Now you just need to get that offer accepted. This part can be the fastest part of the process, it could also be the longest part of the process. If you're the first to make the offer and there are no other offers on the table, a seller may accept your offer immediately. However, if you're not the only offer, it may take some back and forth, and possibly losing the deal to an offer the seller finds more appealing. Not a problem, just start the process with another lead.
- Get the property under contract: When you do get your offer accepted it will need to be put under contract with the specifics of your offer and contingencies. This is where your real estate attorney will come in handy. Have your attorney draft up the contract and get your signature on the contract. The one thing that bothers me with contracts, is getting a contract from someone asking me to sign without having their signature already on it. You're sending this contract to me and you haven't even agreed to it yet? Come on, sign your own contract before sending it. Having your attorney do this will cost money, so if you're comfortable, there are different documents available on BP in the FilePlace that you could use instead.
- Do your due diligence: You now have the property under contract. This is where certain strategies can come into play depending on what you are trying to do. If you're trying to do wholesaling you can now reach out to your network of Investors to try to get a fee for assigning the contract to them and that's the end of it. For my strategy, however, I'll need to do some due diligence. Get a house inspector out to your property as soon as possible. Your due diligence time starts as soon as the seller signs that contract (I think). You will want the inspector to look at aspects of the house that could be deal breakers. Foundation, roofing, water damage, mold, insect infestation(termite, bee, ant, etc.), possible signs of asbestos(might not come up during inspection because it may be in the walls and inspectors can't crack open the walls to check), lead paint, etc. Any negatives can work in your favor. You can lower the offer price based on these issues, which is a big positive. I once read someone on here saying, "Once you have the property under contract, you're in the driver's seat." You now have control over the direction the deal goes. You should also have a title search done on the property as soon as possible to ensure the property is in the clear. No hidden liens, no back taxes, permits for everything, clean transfers of ownership, etc. Any negatives in this search can work in your favor as well in the same way as an inspection. Performing due diligence will cost money so be sure you're ready financially for this. I'm unsure as to how you can defer payment of the cost of due diligence to closing costs but it would be awesome if that is the case. You should also get your contractor out to the property to give you estimates on any repairs that may be needed. Again, this is a concession that you can ask the seller for to get the purchase price down or to get them to do the repairs before closing.
- Get your funding: You should be working on your funding as soon as you contract the property, possibly even before. This should be done at the same time as your due diligence. If you have the capital, feel free to just use your own money. If you have absolutely no money to put down as a down payment, use other people's money (OPM!) Contact your investors and your lenders to get that funding! Joint Ventures allow for less risk for both parties. You can have your investors bring the down payment and the credit for the loan as long as they are fine with you managing the investment. This is why networking is the first thing you should do! You just need to make sure you've carefully considered your exit strategy for getting your partner's money out of the deal. This means contracts, between you and your investors/partners, to protect both of you. There is always a way to get money for a deal; you just need to learn what to do to get them.
- Put your money in escrow: Once you've completed your due diligence and funding phase, and found the property meets all the contingencies you may have put on it, you're going to need to put your down payment in an escrow account and start the closing phase of the deal. You can have the seller's attorney, your attorney or a third party be the escrow agent for this transaction.
- Close the deal: Ok, so you've done your deal analysis, made your offer with contingencies, done your due diligence, gotten your funding in order, and put the down payment in escrow. Now what? Just close the deal? Kind of. When you get to the closing table, unless you were able to get the closing costs financed into your loan or got the seller to pay your closing costs, you're going to need to pay the closing costs upfront. Make sure you've gotten this figured out before that day because this could delay the transaction and cost you even more.
- Post purchase strategies: Wow! You've closed your first ever deal! Congrats! Time to go out and celebrate, right!? Well, now you need to figure out how to implement your exit strategy. If you're going for cash flow, do you already have tenants lined up? Did you inherit tenants? Did your strategy include costs for a property manager? How long will it take before you get your property tenanted and cash flowing? Are you going for a fix and flip? How long before you can get the house back on the market? Did you consider holding costs? There are a bunch of strategies out there, what will work for you?
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I hope that wasn't too long. Again, I am a complete beginner to real estate investing and these are just the major steps I've come to a conclusion on as the steps needed for closing my first deal. These are probably way off from what real investors would do, so I encourage you all correct any misconceptions and add your thoughts on these steps.
