5 Steps to Do It Right
By: Ruth Lyons
Updated: July 10, 2019
There are a lot of good reasons why real estate assets should be in your investment portfolio. And there are many ways to achieve that diversification. If you’re buying an investment property outright, rather than passively investing via crowdfunding and real estate investment trusts (REITs), here are five key things you’ll want to make sure you get right.
1. Research and Analyze
Make sure you do proper due diligence on all aspects of every deal. There are a lot of so-called “deals” touted, but you need to make sure you get it right. How much will rehab cost? What are the monthly holding costs? What permits do you need and how long will it take to get them? The list of questions you need answered is extensive.
Never (and I do mean never!) buy a home unseen. Even if I know the neighborhood and can view hundreds of photos online, and even if the price is so low that I know it’ll be scooped up quickly if I don’t act immediately, I don’t make an offer on any property unless I’ve walked inside it personally. A seller isn’t going to post the picture of the standing water in the basement corner.
A property is a huge investment, not a consumer product that can be returned if you don’t like something about it. That foundation crack will need to be fixed and will be expensive. The mold in the back of the closet might need professional mold remediation, which is also expensive. It’s way too easy to go into the red on a property. Checking it out personally before I buy is simply a must-do every time.
Obviously, make sure your numbers are right when evaluating deals. I frequently see investors focus on the listing price of active comps (similar properties currently on the market for sale) when estimating a property’s after-repair value. The listing price of a property is really just a guestimate arrived at by an owner or real estate agent. The real market price of a house is the final price agreed to by the buyer and seller. Recently sold properties are more indicative of a similar property’s market value than active or even pending listings.
It takes knowledge, experience and persistence to research and analyze deals. And you’ll always regret it if you don’t do so thoroughly!
2. Submit Your Best Offer
Make an informed offer in writing using state-approved contracts. And back it up with proof of funds that you’re able and willing to quickly close if your offer is accepted. Along with your offer, you’ll typically need a copy of the bank statement from which your down payment will come, a pre-approval letter from your lender if you’re financing the purchase, and an earnest-money deposit check.
There are a lot of negotiation strategies, and it seems everyone has an opinion about what works best. However, after several deals, I realized that haggling is counterproductive most of the time (and gets extremely tiresome very quickly). I make my best offer initially and walk away if it’s not accepted. I don’t enjoy sparring — investing isn’t a sport. There’s a price at which my numbers make sense. If I can’t acquire the asset for that price, I move on and look for a deal I can get done where the numbers do make sense.
3. Always Get an Inspection
Hiring a professional licensed inspector is a not-to-be-missed step. He will inspect the condition of the foundation, roof, plumbing, electrical, HVAC, appliances, etc. Then he’ll give you a report of what needs immediate repair and what will need fixing in the near future. For example, the water heater may work fine now, but the report reveals that it’s past its intended useful life. You’ll want to know this so you can decide if you want to replace it before you put tenants in the property or budget for an immediate replacement when it stops working.
I broke this rule myself and got burned. I decided not to get an inspection on a home that was well maintained and looked in great shape. Both the seller and I wanted to move forward quickly. I had my team ready to start the renovation. Everything looked good to my contractor and me during the final walkthrough. I took the word of the owner that all systems and appliances worked. She was living in the house and seemed trustworthy. But it turned out the plumbing in the second bathroom had to be completely redone. (Perhaps the seller didn’t know about the issues because she lived alone and had been using only one bathroom for years.) An inspection would have revealed the problem. I could have avoided a repair cost that put me over budget and diverted precious rehab resources from their intended use.
Investor Tip: If you’re planning on renting the property, get your inspector to do a rental inspection simultaneously, which will save you time and money.
4. Hire the Best Professionals
As the buyer, you get to choose the many licensed professionals involved in the transaction, including the real estate agent, mortgage lender (if you’re not buying with cash), title company and appraiser. (If you’re financing the property, the bank wants to make sure it’s worth what you’ve offered to pay.)
Choose wisely! You want to work with seasoned and licensed professionals. And don’t just pick your professionals from a Google search. Talk to a trusted real estate agent and ask for recommendations. Compare and contrast the services and cost structures of several companies, as line items can differ dramatically. And look at online reviews.
Make sure you’re getting trusted and highly qualified professional partners who can anticipate and navigate through the bumps in the road. While nothing about buying a house is rocket science, working with qualified, responsive and experienced professionals may save you time and money and will make everything more efficient, smooth and pleasant.
5. Do a Final Walkthrough Before Closing
Likely a few weeks have gone by since you made the offer and it was accepted. Be sure to schedule a final walkthrough to make sure the property is still in good shape. If the property has been sitting vacant, it could have been vandalized. If tenants just moved out, they could have carelessly damaged walls during the move. The toilet could have overflowed and ruined the carpet in the lower level.
Once the paperwork is signed at closing, the ownership is transferred to you. Do the final walkthrough the morning of closing or the day before and make sure the property is in the shape it was when you made the offer on it.
Buying a property is a longer-term investment than buying a stock and involves a large cash outlay and high transaction costs. Make sure you do your homework. Hire top-notch professionals. And stay actively involved throughout the transaction. You’ll save time, money and frustration.