NOTE: this is a guest post from long time reader and subscriber, Ray. He has been investing in real estate as his career for over 20 years and has agreed to share a few of his experiences. Thanks Ray!
The process of buying an investment property is probably the most challenging and stressful step in real estate investing, especially for beginners. Over the course of several decades, I’ve refined the process into the following seven easy-to-understand steps. But be forewarned, just because they’re easy doesn’t meant there will not be any difficulties along the way! But generally, you should be able to follow the steps below to make your investment property purchase go as smoothly and profitably as possible.
Hopefully, you’ve already decided which of the six property types you’ll invest in. If not, check out Six Property Types to Consider for Real Estate Investing.
1. Make an Offer
The asking price is the price at which the seller has listed the property. Whether you should make an offer for a price lower than the asking price depends on a couple factors:
- Is the seller motivated? Real estate investors favor buying from motivated sellers, who often entertain offers considerably below the asking price.
- Is it a buyer’s market? A buyer’s market is a market in which the supply of property exceeds demand, giving buyers the upper hand in making offers. A seller’s market favors sellers, since the demand for property exceeds supply—forcing buyers to compete for homes and make offers above the asking price.
What Price Should You Offer?
If you’re buying from a motivated seller and/or it’s a buyer’s market, consider making an offer 5–10% below the asking price. Buyers usually make an offer through a real estate agent, but there’s nothing stopping you from contacting the seller directly to explain the terms of your offer, as long as you haven’t yet signed an exclusive representation agreement with a realtor. The seller will likely respond with an counteroffer between the asking price and your lower offer. Once you reach a compromise price, you’ll be ready to draft a purchase agreement.
2. Draft a Purchase Agreement
A purchase agreement, or sales contract, should contain:
- Timing/amount of down payment and other payments
- Contingencies under which the purchase price can be reduced further or the agreement annulled. For instance, if the home inspection uncovers major repair issues, the buyer often can abandon the deal.
Standard purchase agreements include other parts as well. Usually, local laws require real estate agents to work from the same boilerplate agreement, making slight amendments when needed, such as changing the price or closing date. Since either you or the seller will likely be working with an agent, start from the boilerplate and negotiate the terms until you’re happy with the finished agreement.
3. Negotiate the Terms of the Agreement
Here are a few tips on negotiating the terms of the purchase agreement to create a win-win deal for you and the seller:
- Seek seller financing: Seller financing, in which the seller lends the buyer money at below-market interest rates for a limited period of time, can lower the buyer’s interest payments and ensure that the seller receives the asking price.
- Look for possible concessions: If a seller refuses to lower the asking price, seek concessions, such as repairs, that would otherwise cost you money later.
- Play with fix-up costs: Notify the seller that you’d agree to overlook certain required repairs or replacements, such as new appliances, in exchange for a reduction in the asking price. Some sellers will prefer to offer a price cut rather than dealing with the hassle of coordinating repairs or replacements.
- Close quickly: Often, sellers are in a hurry to close and move. If you commit to closing by a certain date, sellers will often agree to reduce the price.
4. Have the Property Inspected
Never consider a home inspection optional. Inspectors are trained to uncover problems with properties that most buyers would otherwise miss. Specifically, inspectors look for:
- Patent defects: Obvious problems, such as peeling paint, cracked windows, or broken appliances
- Latent defects: Concealed problems that require specialized testing to uncover, such as gas leaks, corroding pipes, or local building code violations
Types of Home Inspections
You’ll need to hire three general types of home inspectors:
- Physical inspector: Inspects the physical condition of the property, focusing on plumbing, electrical, zoning, and structural problems
- Pest control inspector: Inspects for infestations and structural problems caused by pests or mold
- Environmental inspector: Inspects for potential environmental problems on the property, such as soil, air, and water quality issues
If possible, try to find inspectors on your own by searching online or in the phone book, or by getting referrals from people you trust. To ensure an unbiased inspection, avoid using inspectors referred by real estate agents. Inspectors usually charge by the square foot—expect to pay anywhere from $150–400 per inspection.
5. Review Existing Leases
A lease is the contract a tenant must to sign in order to rent a property. When a property is sold, the seller usually provides existing property leases to the buyer.
- Be sure you understand and agree to all of the lease’s terms, such as mandatory rent increases and tenant restrictions, before buying the property.
- If any terms of the lease are unacceptable, investigate whether you have the right to modify the lease.
6. Do a Walkthrough
As a buyer, make sure to request a walkthrough before the deal closes. The walkthrough gives you a last-minute chance to inspect the property, usually on your own or with your real estate agent. If your walkthrough uncovers issues that might make you reconsider the deal, such as a broken major appliance, this is your last chance to demand changes to the agreement or walk away.
7. Close on the Property
The closing refers to a final meeting at which the parties sign contracts and hand over checks and other documents, usually in the presence of real estate agents and others involved in the transaction, such as lawyers or lenders. As a buyer, you should expect to do the following at the closing:
- Sign the documents required to exchange the property, including the purchase agreement.
- Make the necessary payments to the seller and lender, usually by hand-delivering cashiers checks.
- Obtain the keys and the deed, the legal document that officially transfers ownership of the property to you.