Buying an investment property is a big decision and a long process. Take the right steps to make sure that everything goes smoothly.
Determine How Much You Can Afford
In order to be successful at house flipping, you need to honestly assess what you can afford to pay upfront and each month thereafter until the property is sold. Decisions have to be made as to whether you have enough cash for the project or whether you need to finance it. If you choose to use all cash, make sure you have considered all expenses and have enough cash to see the project through to the end. If you choose to finance, be sure consider how much you can quality for. Are you confident you will find a lender? What are their terms? How long is the loan for? What happens if you do not pay off by the maturity date of the loan? Have you been pre-approved for the loan, subject only to the appraisal of the property?
To adequately understand what your options are, you need to understand the economics of the project. Rehabbing and flipping always takes longer and costs more than you think it will. Add at least 20% to your timeline and budget to make sure that you can get the project finished. First, identify how much down payment you will have to pay out of pocket and how much your closing costs will be. Next “cost out” your project by month. How much is your loan payment if you’re financing the project? How much are taxes and insurance monthly? How will your contractor be paid? How much are monthly utility bills going to be? You need to make sure that you have enough cash, or access to funds, to sustain you through the project.
Never plan a project that takes you down to your last dollar, because something can, and will, go wrong. You need to have emergency cash when this happens. The successful house flipper is one who has thought the project out and minimizes the exposure.
Make an Offer and Negotiate to a Contract
Look at a lot of properties before you decide to make an offer. Review the comparables in the area for both reasonable “as is” and “as repaired” values and calculate your expenses to make sure that you are making an offer that you can afford, and entering into a project that you can make money on. Write down the maximum amount you are willing to pay for a property and stick to it. While you may offer less, don’t get so involved that you lose sight of what your maximum purchase amount will be. House flippers that fall in love with a property and lose sight of its true value end up with unsuccessful projects.
Once you make your offer, expect that the seller will counter offer. First offers are rarely accepted. Expect that there will be a back and forth negotiation between you and the seller, but remember, DO NOT go above the maximum purchase price that you wrote down previously. You will not get a contract on every property you put an offer on. That is part of the discipline of being a successful house flipper.
There are things you can offer a seller that can help in getting your contract accepted other than increasing the price. The fewer contingencies in your contract the better. If you are paying cash, then make sure the seller knows that. If you are financing, make sure they know if you are pre-approved and provide a proof of funds letter. Offer a quick closing date, offer a larger than normal down payment, etc. All of these things will help to induce a seller to consider your offer over others.
When purchasing an investment property to flip, there is one contingency you should never give up, and that is the right to an inspection and the right to terminate the contract based on the results of the inspection. It is easy to see on the surface that walls need to be painted and that bathrooms and kitchens need to be updated. What is not as easy to see are plumbing and electrical issues, mechanical issues, roof problems and structural defects. These things are extremely expensive to remedy and can be the difference between success and disaster if you do not know about them ahead of time.
When choosing an inspector, do your homework and pick the inspector yourself. Do not take recommendations from the seller or real estate agents involved in the transaction, as the inspector may not be impartial. You need to make sure that you are using a qualified inspector who is on your side and will find hidden problems if they exist.
If the results of an inspection are unfavorable, don’t be afraid to go back to the seller and renegotiate based on the new information about the property. If you believe that there are problems found that were intentionally hidden and not disclosed, you may want to reconsider whether to buy the property or not, as there may be other things that a dishonest seller is hiding. If you and the seller cannot come to terms on a price after the inspection, do not be afraid to walk away from the deal. In the end, you need to make sure that you will make money from a deal, and a deal that is wrong from the beginning rarely turns out right in the end.
Work with the attorney or title agent that is closing your transaction to make sure you understand what is expected of you and what you will need to bring to closing. Ask them for a timeline of things to be completed prior to closing. In addition, if financing your purchase, make sure you have given your lender everything they need in a timely manner. Processors at lenders are busy, and will frequently move a file to the back of the line if they are not getting what they need from a borrower quickly. Many get paid for loans closed, not loans worked on, so you want them to want to get your file completed and moved through the process.
If you are buying the investment property with cash, make sure that you have liquidated anything needed to come up with the cash so that you will have the funds ready for closing.
Know ahead of time what your closing costs are both from your lender and the title company. Each will have their own fees. Settlement sheets are not always correct – make sure you review everything on your side of the settlement sheet and understand what your costs are and why they are being charged to you. Once the transaction is completed, it is very difficult to fix errors. Check that the interest rate and term of your loan is correct. Make sure your monthly payment is what you expected it to be. Also, review your agreement of sale with the settlement sheet, to make sure that title charges, transfer taxes etc. are being paid for by the correct party.
Make sure that you are obtaining a title policy that will protect you in the event of a title issue. You will also need to make sure that you have your homeowner’s or builder’s risk policy set and paid for in conformity with your lender’s requirements prior to closing. Many closings are held up when the policy is not in place, or does not name the lender as loss payee or mortgagee.
There are a lot of moving parts to closing, but by making sure that the small details are taken care of ahead of time, the process of buying an investment property can go smoothly.