After analyzing 20 property leads we received from our real estate agent, we finally have found a house that meets our selection criteria and passes the 1% rule. So now what? There are two ways to proceed. The first option is to make a sight unseen offer for a price that would make sense based on the information you currently have. Once you have the property tied up with a contract to purchase, you then begin the due diligence process (we’ll discuss this in detail with a future blog). The advantage of this approach is that you lock the property down quickly while you investigate further. This may be a good strategy in a competitive market where deals move very quickly. The use of a termination option, inspection period, third party financing addendum, etc will allow you some time to analyze the deal, renegotiate if needed and then walk away if the deal doesn’t make sense. Not a bad strategy, but not necessarily a favorite among sellers and their agents. You can develop a reputation of being a tire kicker and may not get serious consideration in the future if you never close these deals.
The second and more common option is to schedule a visit to view the property with your agent. I highly recommend finding someone to tag along that has knowledge of construction quality and cost of repairs. Perhaps you have a residential inspector friend or a home construction contractor buddy. Anyone who has knowledge you can borrow to determine what it will cost to repair any issues needed or to estimate the cost of upgrades you’d like to make. This information will be invaluable when making a fair offer for the property. As you become more experienced, you’ll be able to estimate the cost of repairs on your own.
Whether you choose option 1 or 2, there will come a time when you need to make an offer. I like to start with the market value of the property when it is rent ready and then work backwards. You may need to use your real estate agent to help you determine the ARV or After Repair Value. The ARV is the market price of your property if you were to elect to sell instead of keep as a rental after you make all of the upgrades and repairs. Start with the ARV and subtract the costs of repairs/upgrades and the percentage of profit/equity you’d like to have in the property. For example your property will be worth $150,000 (ARV) upon completion less $20,000 in remodel/repair and closing costs less $15,000 (10% profit/equity) = $115,000. You may not want to start with an offer of $115,000 as most sellers prefer to negotiate, but you have determined the highest price you are willing to pay.
Some folks say for every 100 leads they make 20 offers to get only 2 accepted of which only 1 ultimately closes. These metrics vary from location to location, but I think the point is to not get discouraged if your offer is not accepted. Don’t chase deals, do the numbers and let the numbers guide you.
Once you have a contract on the property, you’ll want to begin the due diligence process to confirm all of your assumptions are correct. Part 4 will go into more detail regarding a reasonable due diligence process that works for all properties.