Every new investor wants to dive into the business as quickly as possible. They watch their favorite investing show on TV and think things will be just as easy. Without knowing what steps to take you will run yourself into circles and not get very far. Regardless of what type of investing you want to pursue the steps to purchase are basically the same. It is important that you follow these steps and avoid taking shortcuts on a given deal. All it takes is one oversight or incorrect figure to turn everything upside down. Whether you are looking for your first deal or simply need a refresher here are the basic steps for any real estate investing transaction.
- Property Information. Numbers and data should dictate your buying decisions. You may personally fall in love with a property but if the numbers don’t make sense you need to pass. The first step of any deal evaluation is the actual property. You need to assess the current condition as well as what improvements are needed to maximize your return. Some of the improvements can be cosmetic while others will be more large scale. You need to put a price tag on whatever updates you plan on making. If you are not versed in estimating these numbers you need to reach out to a contractor that can provide real figures. If you notice we did not mention the current list price. That is because this is often just a starting point and not a final number. A homeowner can list for whatever they like but ultimately the market will determine how much it sells for. Only when you are finished evaluating every aspect of the property can you move on to step two.
- Seller Motivation. There is often a big difference in what you think the property is worth and the estimation of homeowner’s value. Ultimately the homeowner is the only opinion that really matters. You can support your argument with facts and data but if they don’t want to hear it they don’t have to sell. Generally speaking the best real estate deals are done with motivated sellers. These are sellers who have a desire to sell based on a pending short sale, foreclosure, divorce, death in the family or change in employment. As you evaluate the property you need to gauge the motivation of the seller. If they are not ready to sell now there is nothing you can say or do that will change their mind. You can follow up with them from time to time but you shouldn’t devote all of your efforts in trying to get them to change their mind. They will respond when they are ready and you can’t get too caught up or angry with their inability to act. Without motivation you should move on to the next deal.
- Financing. How you plan on financing the deal often has a huge impact on your offer. There is something to be said for the ease of transaction. If you have access to capital or hard money funds you can offer a little less with the ability to close quickly without having to wait for lender approval. On the flip side if you are using a lender you need to have all of the items for the loan ready to go upon submission of the offer. In most cases you only have 30 to 45 days to get your offer approved and cleared to close. Without financing in place you cannot make an offer and even if you can the seller will not accept it.
- Offer Amount. Your offer amount should be based on three factors: seller motivation, market demand and comparable listings and sales. You should always know who your competition is and what the demand is like. On properties with little demand you never want to bid against yourself and offer too high. You can always come up but it is difficult to go down. Properties with high demand your offer needs to be as close to asking price as possible. Always run your own numbers and come up with a price that works for you. Keep in mind that you need to have enough room to make a profit. Make your offer and if it is not accepted move on to the next property.
- Closing Process. Getting your offer accepted is only the first part of the process. Many would argue that your work starts after your offer is accepted. Regardless if you are using hard money or lender financing you need to get an inspection done immediately. Never skip this process just to secure the deal. Even the trained eye of a contractor can miss something with the foundation or structure. If you skip the inspection you are opening yourself up to risk. If you are using a lender you need to submit all loan items as soon as possible. The quicker you supply your lender with tax returns, full bank statements, business licenses and anything else they need the quicker they can start the process. It is important that you find an attorney who practices real estate and knows how to work with other attorneys and lenders. You never want to lose a deal because your attorney dropped the ball.
You should see the deal all the way through closing and be as involved as you need to be. There are always unexpected curveballs in real estate but these are the five basic steps towards closing.
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