Latest / Cash Flow for Life / Chapter 16: From Offer through Closing: Your First Property
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- 00;00;00;01 - 00;00;28;11 Chapter 16 from offer through closing your first property. You did your searches, viewed properties, ran CMAs, and finally loved one set of numbers. You went back and viewed the property again, taking your handyman with you to help you spot condition issues that could change your numbers or opinion. You found a few small things to fix, but nothing jumped out to tarnish the deal. 00;00;28;14 - 00;00;55;07 This is a listed property and you're working through your real estate agent team member. So you call them up and make an offer. They've been with you to the property. It's familiar with your goals and they are ready to write up the offer. In this chapter, we're going to take you through the process from the first negotiations with the seller, through picking up the keys at closing, how much to offer? 00;00;55;09 - 00;01;18;29 You think it's a great house, but mostly you love the numbers. So the only way you want to end up the owner of this house is if you can negotiate a deal that fits your numbers and produces the ROI and cash flow that you require. The listed asking price for the home is $139,000, and it has been reduced in price one time. 00;01;19;01 - 00;01;43;01 You have enough cash to put 20% down for a mortgage. However, you've determined that the only way the numbers will work for you is to buy the home at 134,000 or lower. When discussing the initial offer with your real estate agent, you have several things in mind. It has been on the market longer than the average days on market for the area. 00;01;43;04 - 00;01;50;18 The price reduction was more than a month ago, but it was well after the property was first listed. 00;01;50;20 - 00;02;23;21 The current price is lower than comparable properties in the area, and it's the only home in this neighborhood. Priced such that your numbers will work. The home seems to be in great condition, and you shouldn't have to spend much money on it to make it rentable. Of course, this is pending inspection results after your under contract. Your rental research shows there is demand for comparable rentals in the area, and you should obtain a nice cash flow given the normal rents commanded by similar homes. 00;02;23;24 - 00;02;56;25 The sellers have owned the home for five years, so they should have some equity in it. A check at the courthouse shows that their mortgage five years ago is recorded in the amount of $110,000. You want to pay no more than 134,000 for the home. And a quick calculation from recent MLS sold properties shows sold prices coming in about 4% lower than list prices overall, which would be about $133,400 in this case. 00;02;56;28 - 00;03;20;19 A few other properties met your numbers requirements, so it would not be a terrible thing to walk away from this deal if you didn't get the price you wanted. Well, it looks like your price number is possible. You need to start with the first offer of $129,000. As you can see, there are many things to think about when you're going into a negotiation of this size. 00;03;20;22 - 00;03;46;08 It can help to find out the motivations of the seller or sellers. However, the area dictates whether you can get this type of information. It may simply be offered to you, as seen in the statement that they're moving for a job location. But sometimes you can't determine why they're selling. Of course, if it's a short sale situation, you know there's a motivated seller trying to get out from under the cost of the home. 00;03;46;15 - 00;04;12;07 If it's a foreclosure, we know the bank's motivation. In this case, you'll focus on the homeowners and their reason for selling the lowball offer. While this situation indicates that you should keep the offer reasonable, there can be situations where your offer would be well below the asking price. We talked about one when we discussed foreclosure properties in this book. 00;04;12;09 - 00;04;43;19 If you are bargain hunting and have other options, making low offers can work for you now and then. Sometimes it will backfire, upsetting a seller and terminating negotiations on a great deal. Sometimes they'll counteroffer and continue to negotiate for a while. In this case, the seller had reduced the price by $12,000 about a month ago. This seems to indicate that they're motivated to sell, but they're now at the best price in the neighborhood. 00;04;43;21 - 00;05;12;20 In fact, that's how they grabbed your interest through an email alert from your real estate agent system that showed an excellent price reduction. Balancing all of the considerations, including the fact that you already have interest from possible tenants, you think that 129,000 offer is the way to go? While you want to buy at the best possible price, settling in around 134 000 would be a roughly equal compromise between you and the sellers. 00;05;12;26 - 00;05;34;05 The purchase contract, whether you call it a contract, an offer, an agreement of purchase, a sale, or apps or something else, you'll want to get started on the paperwork in every area. This is called a little bit differently, so just find out from your realtor and attorney what the document is called that locks down the property for you. 00;05;34;07 - 00;06;01;18 In areas where attorneys handle this type of transaction. They'll prepare the purchase contract documents. It's far more common, however, for the real estate agent to prepare the offer using forms mandated by the state or province and provided by state or provincial real estate associations. These contract forms are usually developed by a team of attorneys and real estate professionals, and are designed to protect both buyer and seller. 00;06;01;20 - 00;06;15;13 In most cases, they are the forms the real estate agent must use by law, while the agent can modify them to a certain extent. Too much variation could be considered practicing law without a license. 00;06;15;15 - 00;06;40;05 Whether an attorney or a real estate agent handles the deal. The steps of a real estate purchase, as well as its contingencies, will be roughly the same. It's important to remember that the group of businesses and people involved in getting the deal through to closing generally all want it to close, while some will get paid even if the deal doesn't close, most will be disappointed and without compensation. 00;06;40;05 - 00;07;10;10 If it doesn't close, you're the one bringing the money to the table through your down payment and mortgage. So you should never hesitate to ask questions or require explanations for what's going on. Contingencies A contingency is a condition that, if it happens, will bring about a certain result. There are many contingencies in real estate contracts, some of which are expected to happen and some that you don't want to happen. 00;07;10;12 - 00;07;38;26 They can be as small and mundane as the stated contingency that earnest money will be deposited upon acceptance of the contract by all parties. In other words, we're negotiating. But when we agree and sign the contract, the buyer will put up the earnest money. There are many areas of a purchase contract that contain contingencies, and they can be part of every step of the path from contract to closing. 00;07;38;28 - 00;08;06;29 Here are some examples of contingencies or conditions. Additional earnest money will be required at certain stages of the process. The seller may be required to submit certain disclosures. The buyer must approve disclosures as they are provided. The buyer must obtain certain property inspections. The buyer's requirement for repairs after inspection must be met. The buyer must be approved for homeowners insurance. 00;08;07;02 - 00;08;34;19 The buyer's mortgage must be approved. Title insurance must be approved. Old liens and claims against the property must be extinguished. An approved survey must be provided. The property must appraise at or above the purchase price. Certain documents must be filed and deeds approved by the lender. The buyer and seller must approve various documents or actions along the way. 00;08;34;21 - 00;08;59;23 Obviously, you can expect there to be many places where a certain event can change or stop the course of a transaction. These contingencies also carry due dates and deadlines. You should not just rely upon your real estate agent or attorney to meet all deadlines, because missing just one deadline can create problems. Get a schedule of what needs to happen when, and then monitor the progress of the deal. 00;08;59;25 - 00;09;33;03 Reminding people of the deadlines if necessary. See yourself as almost the project manager, making sure your entire team is all working on time and on budget to get the deal done. In our example deal, the contract is being written up with all of the standard contingencies, including property inspections. However, in reading the listing and viewing the property, you notice that there is a really nice outdoor portable storage building that isn't mentioned in the listing as being included in the deal. 00;09;33;06 - 00;09;54;03 You have placed it in the contract as a contingency. Your offer is contingent upon the outdoor storage building remaining with the property and passing from the seller to the buyer. That's an example of a contingency that pops up often for items such as hot tubs, playground equipment, and even yard ornaments. 00;09;54;05 - 00;10;27;27 Disclosures. Disclosures are normally made by the seller as to the condition of the property and other factors that can influence the buyer's decision to buy, and at what price. Some of these disclosures are available prior to the contract. For example, many online MLS listings will provide access to certain disclosures about the property. Generally, the contract will specify the disclosures the seller must provide to the buyer when they are to be made available to the buyer, and the rights of each party. 00;10;27;28 - 00;10;52;20 If there are disputes over the disclosures before making an offer. Read and understand any disclosures that are already available during the process, from contract to closing. There may be further disclosures. Be just as careful to go over them and take action if required. If you are unsure, you can always ask your real estate agent or real estate attorney. 00;10;52;25 - 00;11;23;08 They are there to help. The offer and negotiations. Submission of the offer. If you are working with real estate agents through the MLS, your next step after signing an offer is to give it to the seller's agent, who then presents it to the seller. In some areas, you or your agent can be present when the offer is presented, though you must then leave while the seller and his or her agent discuss it. 00;11;23;10 - 00;11;47;16 This isn't done often because real estate agents usually don't like this procedure. In fact, real estate agents usually don't inform the buyers that this is even possible. Generally, unless you have reason to be concerned that the offer won't be presented at all. The process will work just fine without you being there, and you'll get a response from the seller within the time specified in the contract. 00;11;47;18 - 00;12;12;25 If you are working directly with the seller, you would then be presenting your own offer or your real estate agent could present it for you if they are involved. This can happen with the For Sale by owner or fishbowl properties that advertise. They will pay a commission to an agent bringing a buyer. You could also be presenting your own offer in a short sale situation. 00;12;12;28 - 00;12;42;27 The hard line deal. There is nothing wrong with the strong negotiation stance that works the seller down to his or her rock bottom price, or even lower. However, remember that there are still some negotiations to come. If your inspections turn up issues that cause you to ask for repairs or monetary credits. The seller may have no room to give deals, fall out over repairs and other post price negotiating items all of the time. 00;12;42;29 - 00;13;07;07 Just be prepared for a no to further concessions. If you've really nailed the seller down tightly on price, the counteroffer, of course, the seller could accept your very first offer as written, but that will rarely happen if you're making offers with the strategy of getting the best price you can. So the response from the seller will normally be a counteroffer. 00;13;07;09 - 00;13;38;15 Counter offers aren't always about price. Almost any contingency or condition in the contract can be negotiated through a counter-offer, such as the following. The price or earnest money amount required closing dates or other delivery and deadline dates. Buyer financing such as down payment. That storage building we mentioned earlier. Who pays certain closing costs? 00;13;38;18 - 00;14;05;14 Item three buyer financing such as down payment, is questioned by some buyers. If the contract has the buyer outline the type of mortgage he or she intends to get and a proposed down payment, as many do, the seller can negotiate those items as well. Let's say that it's a decent market. Sellers are getting showings, and the home you're offering to buy hasn't been on the market very long. 00;14;05;16 - 00;14;33;12 You make an offer and the contract has. You spell out that you're going to get a conventional loan with 10% down. The seller could counteroffer that. They want you to agree to a 20% down payment if it's needed to get the mortgage. They are simply looking for a stronger buyer and more assurance that this deal can happen. This can happen even when you've submitted a pre-approval letter from your mortgage broker. 00;14;33;14 - 00;15;05;21 The sellers won't care if you end up using only 10% down, because they just want the strongest possibility of approval from the onset. Pre-approval for mortgages. If you need financing to purchase a home, you should always get a pre-approval letter from your mortgage broker or lender for at least the amount of the purchase price. This letter states that preliminary checks have been done on you, and based on the appraisal of the property and other factors, the lender is pre-approved you for a loan. 00;15;05;24 - 00;15;28;24 This is sometimes called a proof of funds letter, but not always. It's definitely not a full approval or a final approval, and things can turn up that may cause you to be turned down for the loan. But it's the best you can do before it's a deal. This letter is required by many sellers before they'll even consider an offer, because they don't want to take their property off the market. 00;15;28;25 - 00;15;51;04 Get it under contract for a contract that could easily fall apart over financing. Counter offers can go back and forth, with some deals getting done with 1 or 2, and others requiring many more sign backs. The good news is that it's not a dead deal as long as you're still negotiating. 00;15;51;07 - 00;16;16;08 Using tenants to get into financing. Because we're on the subject of financing. Let's talk about how tenants can help you obtain a mortgage in some cases. Having tenants waiting to lease the home you're buying is great from two perspectives. You know you'll have income very quickly after closing, unless the property requires major work and renovation before the tenants move. 00;16;16;10 - 00;16;39;29 You can also get a letter from the tenants, sometimes called an intent to lease. This is a letter stating that these tenants want to lease the home starting on a certain date and at a certain price. Most property purchases can close anywhere from 30 to 60 days after the purchase contract is signed, and this happens to be about the same time in which most tenants are going to move. 00;16;40;01 - 00;16;49;13 They usually give 30 days or more notice to their current landlord, so their timing and yours are usually in line. 00;16;49;15 - 00;17;15;06 This letter can help you qualify for the mortgage rule changes, and all lenders have different requirements and limits. But sometimes this letter will make the difference in getting a loan or receiving favorable terms for the loan. Your goal for a first property purchase should be to keep it simple. Find a property that doesn't need major work and will be ready to generate rental income almost immediately. 00;17;15;08 - 00;17;32;01 Use that tenants list that we built in the book. Quick Start to cash flow and get the tenants in as soon as possible. Timing your closing date close to the end of the month will allow you to put that tenant into the property just days after you own it. 00;17;32;03 - 00;17;56;29 Rent for first payment cash flow in US mortgages, interest is often paid in arrears, meaning that when you make a payment, the interest portion is paying for the previous months interest or use of money. For example, making a payment on March 1st would include the interest for February. So let's say that you're closing your US loan on April 27th at closing. 00;17;57;03 - 00;18;16;02 You'd be charged the amount equal to the interest for the loan for the period through the end of the month in April, which is three days worth of interest. This means you won't have to make your first payment until June 1st. The June payment would pay the interest for May, and the remainder applied towards the principal amount of the loan. 00;18;16;05 - 00;18;40;09 In Canada, it works very similar, but some lenders are different, so be sure to ask your mortgage broker or lender how they calculate the interest payment upon closing. Think about how it will improve your initial cash flow to have your tenants ready to move in. If they're moving in on May 1st, you get first and last month's rent, which you can use to pay for some of your closing costs. 00;18;40;11 - 00;19;03;29 You'll get another rent payment when your first mortgage payment is due. This is pretty nice cash flow management because your rent is more than your payment and you're getting three months rent by the time your first payment is due in some cases. How we bought our second property. Hey, Michael, I found the perfect second house to start making this a real estate business. 00;19;04;02 - 00;19;16;13 Now it's your turn. Go find some money. Okay, Scott, you go find some tenants because I'm going to get us some low money down financing. But we'll still need closing costs. 00;19;16;16 - 00;19;33;02 The second property that we bought didn't come as soon as it could have. We didn't have the knowledge and the tools that we have by now and were sharing for you with your business. However, by the time we did figure it out, our second deal was quite a breeze. 00;19;33;05 - 00;20;01;03 Once you own a property or two, you can often use the equity in your owned properties to partially finance the next one. For example, using a HELOC or home equity line of credit, or simply refinancing one income property can free up enough cash for the down payment on another. Lining up your tenants and having them ready to move in can provide the remaining cash that you need for closing costs to get the home purchased and occupied. 00;20;01;05 - 00;20;28;02 It's a deal. What's next? Once you're past all of the counter offers and you can agree to all of the terms in the contracts and counters, you sign the deal firm and start the process towards closing. While processes overlap and the specific sequence varies depending on which state or province you're investing in. Let's run through the things that are going to happen between that contract agreement and getting the keys at closing. 00;20;28;04 - 00;20;58;15 Title insurance, search and binder commitment. While the process can differ in the United States and Canada, title insurance is a factor in most deals. Once the policy is issued at closing, it ensures the legal owner against threats to ownership that arise later. These threats could involve anything from mortgage fraud to encroaching fences, or outright claims by others that they own all or a portion of the property. 00;20;58;18 - 00;21;23;25 When the deal is presented to the title company, a search of the property's title history is the first order of business. If an attorney is doing the closing, then that attorney or someone of his or her choosing will do the title search. This search is designed to trace the ownership of the property back in time, as well as to discover any liens or potential problems with title. 00;21;23;27 - 00;21;51;02 Once the search is complete, assuming there isn't some really bad cloud on the title, the title insurer will issue a binder or commitment document that promises that the policy will be issued at closing. This document will specifically state any contingencies that must be satisfied for the issue of the policy, as well as items not covered. These are called requirements and exceptions. 00;21;51;06 - 00;22;23;07 Requirements include things such as payments of all taxes up to the date of the closing, satisfaction of all mortgage, and leans against the property and even some documents that may be required due to a divorce or joint ownership. These are normal requirements and usually are handled quickly and easily. Exceptions are normally not a problem either. Anything that's recorded in relation to the property, such as easements, will be accepted from coverage. 00;22;23;09 - 00;22;47;10 An example would be an easement for the electric company along a property line of five feet of the property to maintain buried electrical lines. This is already something that's been agreed to by the previous owners, and it's a matter of record, so the title company will not cover you. If you build a nice patio on that five foot border, and the electric company jackhammers it to work on its line. 00;22;47;12 - 00;23;12;26 The more common example would be recorded homeowner association Documents and covenants. If the recorded documents say that you can't have your boat parked in your driveway, then you can't later make a title insurance claim that the homeowner association is restricting your rights as an owner. You knew this going in because it was in your binder. Inspections very quickly after contract signing. 00;23;12;29 - 00;23;37;04 You'll want to begin the process of setting up property inspections. There will be deadlines for inspections and for any demands or objections you may have as a result of what the inspections find. You'll want to be present for all inspections, especially at the start of your business. Feel free to ask questions because you're usually the one paying for the inspection in some areas. 00;23;37;06 - 00;24;01;25 This is accomplished with an option period, during which you have a certain number of days to satisfy yourself as to the condition of the property. If you make no demands or objections during that period, then the inspection contingency is considered removed and you move on towards closing. In many other areas, the process is managed by actual due dates in the contract. 00;24;01;27 - 00;24;27;15 You will need to have inspections completed by certain dates, and you'll have a certain time frame in which to object to conditions and ask for repairs or other concessions. If you miss deadlines, you can miss your chance to get out of a deal due to inspection results and have your earnest money returned. If unexpected problems turn up by inspections, there will be a process for dealing with this outlined in the contract. 00;24;27;17 - 00;24;51;13 You will be able to enter another negotiation phase with the seller and ask for repairs, or perhaps monetary concessions due to the inspection problems. At this point, if an agreement can't be reached, the deal will be terminated according to the terms of the contract. Appraisal. We discussed earlier that you will want to try and be present during the appraisal, and give reasons for you to be there. 00;24;51;15 - 00;25;15;17 If the appraisal comes in low, it will either kill the deal or result in price negotiation. If it comes in at an acceptable number, the lender will proceed to work towards full approval of the loan. Survey A survey outlines the actual and legal lot lines on the property. When the survey is ordered depends on local custom, who's paying for it and the contingency dates in the contract. 00;25;15;21 - 00;25;34;21 As a survey is generally usable for only a certain period of time, the tendency is to order it to be done only after a certain or other contingencies are met, so that the money is less likely to be wasted due to a failed deal. The surveyor will do his or her job, and you don't have to be there as the buyer. 00;25;34;26 - 00;26;01;15 You'll be given a copy of the completed survey, so you have the chance to review it and make sure that there aren't any surprises. If there are, such as an easement for 1,000,000,000 volt power line over the top of the house, you could take the action outlined in the contract for survey issues. Mortgage. The lender will be working through your application and loan documents, and will also receive copies of the title, insurance binder and survey. 00;26;01;17 - 00;26;27;02 The lender will be sure to protect its own interests and will have an endorsement for coverage under your title. Insurance deals that don't close on the planned date. Are frequently those with mortgage document problems. The problem may not even be your loan qualification. It is more likely that the certain documents haven't reached the lender in the time frame that allows its underwriters to do their job. 00;26;27;04 - 00;26;58;28 Just be aware that you should take an active interest in the movement of documents and the meeting of all deadlines. The closing. Let's get some terminology figured out here. Closing can be the same as settlement in funding means that the money has changed hands. Generally, you won't get the keys until the seller gets their money. Don't time your deal too close to the end of the month in case there's a problem with closing and funding. 00;26;59;01 - 00;27;04;15 Sometimes funding may be a day later than settlement. 00;27;04;17 - 00;27;18;00 Depending on local custom and other factors. You may or may not ever meet the sellers, because many closings are attended by only the party or parties on one side of the deal. 00;27;18;02 - 00;27;40;03 You'll sign a large stack of documents that are mostly related to the mortgage. You'll receive copies of everything you sign, and there will be other documents sent to you later. Your deed, signed by the sellers, will be recorded at the courthouse or municipal office after funding as evidence of your ownership, and you will receive an official copy of that recorded deed. 00;27;40;05 - 00;28;04;14 You'll also receive instructions on how much your first and subsequent payments will be and where to send them. Then you'll get what you came for. The keys. Go check out your new rental home and start getting it ready for those tenants you have ready to move in. Action steps. If you're not ready to actually write up a deal on a house, no problem. 00;28;04;16 - 00;28;25;29 If you are, then just implement what you've learned in this chapter. Otherwise, meet with your local real estate agent and ask for blank contracts so you can become familiar with them with the terms and conditions. What's next? We're going to go to market for tenants. Learn about applications and talk about the tenant interview process.