How To Buy A Rental Property | Part 5: How To Make An Offer & Due Diligence

How To Buy A Rental Property | Part 5: How To Make An Offer & Due Diligence


what’s up guys it’s James Allen The
out-of-state investor and today we’re gonna continue with our mini-series and
get into part five of how to buy a rental property where I’m gonna talk
today about how to make offers on a rental property renegotiate if you have
to and conduct your due diligence period to make sure that the deal you found
really is a deal after all these things I’m going to talk about today have
helped me to win competitive deals and also understand the important things to
look at in order to mitigate risk on a property that I’m purchasing now if
you’re just tuning in and you haven’t seen parts 1 to 4 of this series yet be
sure to check out those videos to get a complete picture of how to buy a rental
property I’ve attached links to those episodes in the description below now
before I get started go ahead and smash that like button and subscribe to the
channel to get notified for new real estate videos just like this one with
that said let’s get started when making offers on an investment
property you’re gonna need to start off by understanding if you’re in a buyers
market or a seller’s market in a buyers market listings take longer to sell so
there’s more room for negotiating whereas in a seller’s market properties
can go into escrow within a few days of being listed and can have multiple
offers you can get an idea of this actually by just talking with your
Realtor or you can figure this out on your own by just taking the total number
of houses currently on the market and divide that number by the amount of
houses that sold last month this will tell you how many months of inventory
there is typically six months of inventory is seen as a balanced market
below that would be a seller’s market and above that would be a buyer’s market
now before you start making offers it is important to know what a good deal looks
like and aside from running the numbers on the property and figuring out your
return on investment and all that good stuff a good way to know what a good
deal looks like is to analyze at least a hundred deals in your area to get
familiar with what a normal deal looks like run the numbers and check the
price per square foot on every property you analyze and eventually you’ll come
across a deal that will be a lot cheaper than the others when it comes to price
per square foot this could be the great deal you’re looking for
now the reason I bring this up is because depending on the kind of house
you’re making an offer on you’re gonna have to adjust your strategy accordingly
for instance if I’m looking at a nice retail priced
turn-key deal on the market and it’s a buyers market then I might be able to
take my time schedule a showing check it out with my realtor and then I can make
an offer that’s about 10% below asking price and have a pretty good chance of
getting it now if there’s a house that’s been sitting on the market for 200 days
you’re likely to have some flexibility from the seller no matter what the
general market is like but if you find a good deal and it just hit the market
let’s say it’s noticeably cheaper than all the other properties and the numbers
on this property work great as a rental property well the thing is is every
investor in town is going to jump on that deal and try to get that for
themselves so in these cases I’m gonna give you seven tips of how you can
compete against your competition so that you have a chance to win these kind of
deals number one cash is king for the best deals that are listed on the market
a cash offer is an absolute must if you’re gonna stand a chance against the
other investors if you don’t offer cash and it really is a home run kind of deal
then there will be others that are willing to offer cash now oftentimes
sellers would actually rather take a lower amount of money in cash rather
than taking the risk of accepting an offer from a buyer getting a loan now
the reason for this is there’s a much higher chance of buyers with loans
falling out of escrow and if they did fall out of escrow
then the sellers house might be on the market for thirty or forty days at this
point and that could be very frustrating for a desperate seller that’s trying to
get rid of their house number two terms it’s not always the highest price that
wins the terms of a deal can play a huge role in determining which deal that the
seller ends up taking terms are going to include things like your due diligence
period your closing date earnest money is there an appraisal or finance
contingency or any other contingencies that you might have put in the contract
so with all that said typically the quicker and easier you make it for your
seller the better you improve your odds of having your contracts accepted but
you want to be careful and make sure you’re still protecting yourself I’ve
seen some crazy offers before one of them when a buyer in a hot Atlanta market
offered way over asking price with zero days due diligence and about a thirty
thousand dollar earnest money deposit without ever seeing the property I
highly recommend never getting that crazy with your offers my point is
though is there is a happy medium in all this be competitive but make sure that
you’re protected enough to where you feel comfortable with the deal that
you’re offering on number three be the first or the last so what do I mean by
this I mean that you want to be either the first person making an offer or the
last one you want to be the first because you may get the seller to jump
at your offer and sign it before all your competition arrives and that bumps
up the price making it into an all-out bidding war you want to be the last
because the houses that have been sitting on the market for a long period
of time will be more than likely to have extremely motivated sellers that just
want to get rid of their house at a discount price these are often great
people to send lowball offers to and they may end up countering anything that
you throw their way just to get some sort of action going other than houses
with a lot of days on market expired listings can be another thing you can
actually target which your agent will be able to help you with these are sellers
that have their houses on the market for a long period of time and weren’t able
to sell them successfully these could be great leads to follow up with and can
turn into good deals number four make offers sight unseen on really
competitive deals you may have to skip that showing with an agent and make an
offer sight unseen to even have a chance to compete make sure you protect
yourself if you’re making these kind of offers by giving yourself ample time and
your due diligence period understand that in most states you will have the
opportunity to pull out of escrow without any fee if something came up in
the inspection that you didn’t expect but with that said make sure that you
check all that stuff with your agent before you make any offers sight unseen
number five stick to your numbers it’s so easy to
convince yourself and think it’s just $5,000 more or try to justify in your
head then maybe you should just take the deal even though it doesn’t fit your
numbers now there can be some valid exceptions to this like if it’s
really close to your numbers and you’re factoring in the opportunity cost of
finding another deal like that but don’t completely compromise your goals just to
jump in on some average deal stick to your numbers and it will eventually work
out you won’t get every offer accepted and honestly you really shouldn’t be
getting every offer accepted otherwise you’re most likely overpaying for the
property number six escalation Clause an escalation Clause can be a great tool
to use in a multiple offer situation it basically lets a home buyer say I will
pay X price for this home but if you receive a higher offer from another
buyer I’m willing to increase my offer to Y price an example of this would be
if I made an offer for ninety two thousand dollars but I put an escalation
clause up to a hundred thousand dollars you see you can actually set your
increments to whatever you like for instance if someone offered higher than
you you could set it up so that your bid will automatically be about a thousand
dollars higher five hundred dollars higher two thousand dollars higher until
you reach your maximum offer just make sure that you’re positive it’s going to
be a multiple offer situation otherwise you are basically laying all your cards
on the table and that definitely won’t help you out when it comes to
negotiating number seven multiple offers another way to increase your chances is
to make multiple offers like I mentioned before some sellers are more interested
in terms and some are more interested in price so one example of giving multiple
offers would be if you made a financed offer with a longer closing time for
$70,000 and made another offer all cash with quick close and little to no
contingencies for sixty thousand dollars now the seller has a choice on which one
suits his needs better now there is one more tip that I recommend although it
has nothing to do with being competitive for properties that are already rented
out whether single-family or multifamily you should request to receive the
security deposits and prorated rents at the closing table the prorated rent is
when you just divide up the monthly rent into the amount of days that the month
has left for instance if you were to close on the 20th of April then because
there are ten days left in the month you would actually get 1/3 of
the rent at the closing table this is definitely not seen as uncommon practice
but on one of my first deals the owner refused to give it to me because it was
not stated in the contract so I learned from that point to never assume that
they’ll give you the security deposit and the prorated rents protect yourself
and always put it in the contract once you finally got an offer accepted you’re
officially in escrow you’ll likely have to pay your earnest money deposit within
the next few days your earnest money deposit is basically a tiny deposit that
you contribute after getting a deal accepted it’s kept in an escrow account
and normally buyers will offer about one percent of the purchase price for their
earnest money now the earnest money deposit does count towards your down
payment or purchase price of the house and it’s also kept as sort of a security
in case you were to pull out of the deal after all your contingencies were done
and if you were to pull out after these contingencies then you would end up
forfeiting your earnest money now with that said when you start the escrow
process your due diligence period also begins the day you sign a binding
agreement so you’re gonna want to get moving right away and start this process
the way I break this down for one to four unit properties is into two
different categories financial and physical so let’s start with financial
for your financial due diligence I always ask for my tenant leases rent
rolls a 12-month operating statement a list of any recent major repairs done on
the property and I asked them which tenants are current or behind on their
rent I also recommend having your contractor
to walk through the property and give you a bid on any repairs needed in the
property if you haven’t already done that also use this time to double check
on other things like if the property is located in a flood zone get your
insurance quotes sorted out as well if you haven’t already done so and double
check your comps to make sure you’re not overpaying because you always make your
money when you buy and not when you sell for your physical due diligence this
comes down to your inspection you’re gonna want to book this immediately
especially if you just have a short due diligence period this is because
inspectors are often busy and may not be available right away so you want to book
them and ask them how long it take for them to send you the report
once the inspection is done this way you have an idea of the latest date that you
should be having the inspection inspectors are trained in finding things
that contractors aren’t which is why it’s important to have an inspection
done when they send you a report look it over with your real estate agent
contractor and even reach out to your inspector if you have any questions
you’ll start to get a better understanding of this report as you gain
experience along the way but start with the major components of the house such
as the roof electrical plumbing HVAC and the foundation those are most likely the
biggest expenses that you’re going to come across so it’s a good place to
start after that look over all the little things that come up and ask
questions when you don’t understand understand that it can be a little scary
to look at your inspection report and see a bunch of problems listed on the
house it’s okay if there’s a lot of minor things listed they are inspectors
and they are supposed to find all the little problems that lie within a house
and you should expect to see a lot of things that need fixing not all of these
things need to be addressed though and if you’re unsure about which ones you
should fix speak with your team members and get their thoughts other than that
if you feel like there’s a possibility of termites maybe because it has wood
siding then go ahead and order a pest inspection as well this will probably
only be an extra fifty dollars out of your pocket
after you’ve finished your financial and physical due diligence you may or may
not feel like it’s still a good deal for you
that’s fine either way but if there’s nothing too serious as a complete
deal-breaker you can always renegotiate during your
due diligence period and try to get the price that will make the numbers work
for you don’t get into the habit of putting out a bunch of offers and just
pulling out because of little minor problems that you see you’ll start to
come across the same agents and they’ll stop taking your offer seriously don’t
get me wrong I’m not saying to take a bad deal or take a deal that doesn’t
meet your criteria but at the same time try to renegotiate rather than pull out
of the deal altogether unless the items that come up our complete deal-breakers
then you really do want to pull out at that point in conclusion these are the
things I recommend when you’re making offers and conducting your due diligence period
there can be a lot of risk involved when buying real estate especially when
you’re buying houses that need repairs or major rehab and look when you’re
getting started you’re not going to know all the answers yourself so make sure
you really lean on your more experienced team members or reach out to your mentor
if there’s something you’re not sure about
as always guys thank you for watching this video I hope you gained some great
insight today I’m really trying to break this down as straightforward as possible
for you and I’m posting new videos every Friday if you enjoyed this video go
ahead and smash that like button and subscribe to the channel if you haven’t
already done so also comment down below and give me your thoughts on the video
it really motivates me to keep making these videos when I see your feedback
lastly stay up to date with me on Instagram at the out-of-state investor
thanks again for watching and I’ll see on the next one

2 thoughts on “How To Buy A Rental Property | Part 5: How To Make An Offer & Due Diligence

  1. Hope you found this episode helpful! Which of the tips on making offers did you find the most helpful?

  2. Hey bro. Small tip you should Film in a Smaller room makes the audio sound a lot better.

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