In the second ARTICLE, I laid out the next three steps to achieving success in real estate. My goal here is to dive into the final three steps: Submit, Due Diligence and Take Responsibility. Let me recap the Seven Steps (actually, I included Take Responsibility as an extra step).
So far, real estate has only been an abstract thought. You’ve learned how to analyze deals, pick a niche, select a market and educate yourself. Once you submit your first offer, the reality of investing hits you like a ton of bricks. It is an exciting but vital step in the process. This step is what creates momentum, and from your thoughts and desires, you are now entering the massive action phase.
How do you submit an offer? Once you have located a deal and performed your underwriting, it’s time to fill out a Letter of Intent (LOI). Click HERE to download an LOI that we used on one of our deals. A real estate broker should be able to furnish you with a blank LOI.
An LOI is a non-binding offer to purchase the property that contains general terms and conditions of the proposed transaction. It expresses to the seller your willingness to enter a Purchase and Sale agreement (P&S), which is the next step once the buyer and seller have agreed to terms.
Do yourself a favor and include a time frame for the LOI. For example, state in the LOI that it is only effective for seven days. Force the seller to give you a quick response, so he does not have time to “shop” your offer.
Once the seller agrees to your terms, the P&S is drawn up. Read over the contract very carefully with your attorney to make certain that everything that was agreed upon is spelled out in the P&S. Now it’s time to move to the due diligence phase.
I have found that most beginning investors underestimate the importance of due diligence. In my very first transaction, I was thrilled to be purchasing an investment property, and should have focused more on the actual numbers and condition of the property. I had no idea that the due diligence period came with a sixty day time-frame, in which I had to close on the deal. It never occurred to my lawyer to include an extension in the contract if I was unable to secure financing or complete the due diligence.
Due diligence can be broken down into 3 types and should be performed in this order:
Analyze the actual performance of the property. Request the last twelve months of operating statements (profit and loss, income statement, balance sheet). If the actual numbers are different than the ones you were given, you have two choices. You can go back to the seller and demand an adjustment in the price, or you can walk away from the deal. We have a clause in our P&S that the deal is contingent on the numbers provided to us in the beginning of the process.
The majority of deals that don’t go to closing are because of the financial due diligence. We recommend a minimum of a thirty-day due diligence period for inspecting smaller properties, and at least forty-five to sixty days for the larger properties. There is no sense in scheduling an inspection and wasting money if the numbers don’t work.
It’s time to schedule an inspection of the property. I recommend you search Home Inspector to locate a qualified inspector in your market. You can also ask for a referral, but I would refrain from asking your real estate broker. There may be a conflict of interest in getting the deal done, and the inspector may feel some pressure from the broker in not disclosing every minor detail. Try to hire someone who is independent and who has experience in the multifamily space.
The cost of an inspection varies from market to market. Expect to pay around $500 for a single-family home inspection, and a per unit cost for larger properties. We are currently paying $20 per unit for inspections on out apartment complexes
NOTE: Inspection costs are negotiable. Make sure the inspector enters and inspects EVERY unit on the property. The inspection report is used to demonstrate the deficiencies in the property to the seller, and a tool to negotiate money off the price or those deficiencies being rectified.
When you purchase a property, you want the property to have no encumbrances, or liens, to have good title, and to have a valid Certificate of Occupancy (C of O). Your title company will provide title insurance to protect you if there is ever any question to the title of the property. Check to see if the property has any type of liens, and have the seller “cure” the liens before you take over.
The property is finally yours. Now it’s time to get to work and follow the game plan you have developed to adding value. It is an exciting moment to realize that you are now in control of your own destiny. This final step is what separates the mediocre investment from the stellar performer. It’s the same way in life. Those of us who are responsible for our lives and actions tend to lead a more fulfilling and empowering life.
Let me know if this seven-step framework has led you to your first deal. As Jake likes to say, follow our yellow brick road to multifamily investing!