I had just finished my last house refinance and received the funds on February 12th, wasting zero time I started to bid on units the next day. While going through the process there were a few unique situations which I thought would be valuable to share with those who want to buy rental properties. I decided to document the process as detailed as I could, a change from my usual ranting about high concept abstract topics.
The hard part of home purchasing for beginners is that it’s easy to learn the concept, but the details and the day-to-day operations aren’t often talked about. Houses aren’t lined up on a shelf like at a store; you have to HUNT for what you’re looking for, beat out competition and, and most times fit what’s available to what you’re trying to do.
Hopefully, this story will give some insight to those interested in what it looks like to go from search, to purchase. As the house is completed I will add that section and another for the lending portion.
Bid like a madman
I bid on 7 houses today, a few that I really think will be great and a few that I’m just feeling out the activity on the property. I fully expect the good units to come back and ask “highest and best price” which is common, and most I’ll just never hear about or find myself passing on as new information come in.
My realtor is GREAT and an invaluable member of my team, she sends me properties as often as she can, but I still spend a good chunk of time looking on my own. I’ll email wholesalers or other investors and see if they have any leads, I’ll check websites like bigger pockets, Zillow, Trulia, realtor sites, craigslist, and anything else I can think of. When in buying mode I like to be aggressive.
Highest and Best….and Pass
One of the houses I bid on came back with a “highest and best” response. The property looked great on photos and I really liked it, the numbers looked good and the location was good, but when I called my PM he told me it was a 3/2 and could not be converted to a 4/2. This is a BIG DEAL for my strategy because we use a lot of section 8 tenants, and section 8 pays by the number of rooms. So we convert 3/1.5 to 4/2 when we can to get more rent in case we use section 8. 4 bedrooms just commands a higher price point as well for a very low conversion cost. This house would rent for $900/month as a 4/2, but as a 3/2 we would only expect $750, that’s a HUGE difference and enough for me to pass on the unit. It’s important to develop a plan and then work the plan, not deviate out of excitement or fear. If I had gotten emotional (since I really like the house) I may have overpaid or made a poor decision. Hold steady and trust your strategy and your team.
On to the next deal….
Hold on the current bid, don’t get stupid
Living in Las Vegas has a really small but impactful benefit that I often consider myself lucky for: time zone difference. When my people get to work and start doing business at 9am east coast time, I’m starting my work day at 6am thanks to the time zone change. While going to work at 6am doesn’t SOUND great, I see it as an advantage that I can start working 3 hours earlier than my Vegas peers. Plus I find nothing more motivating than waking up to text and email with information that can help me make money.
So 6am I get an email about a house I had bid on that said: “highest and best on Walnut”. Houses move quick, no time to delay. I bring up Walnut on Zillow and start looking at details to see where I want to be, I also text my PM for his thoughts on the unit. I loved the area of the house, the price was decent $34,000 list and rehab would have been about $15,000. I figure the house would be worth $80,000 when we are done and it could rent for $700-750. These are close to my numbers, this is a deal I would be willing to do, but I could tell my PM wasn’t very fond of the area, and I know that $80,000 ARV on this house could be a stretch, any lower than that and it can start messing with how much money I can pull out of the deal afterwards. Bank will only lend 75% of value, and no less than $50,000, so an $80,000 house gives me a $60,000 loan, not much room for error. Based on these factors I figured I could bid up to $36,000 but I didn’t feel much reason to stretch so I held at $34,500, and I expect not to win the bid
Having no results is boring
President’s day made for an expected slow weekend, so, it also seems that most houses drop onto the MLS on Sunday night or Monday morning. Since this week started on a Tuesday after a vacation weekend, I didn’t get a lot of opportunities to bid on new units this morning that said I did find one small house I was interested in. It’s on Rim Road and I know this is a popular location, and very popular for rentals. It’s a straight shot to the military base, but far enough away to satisfy those who may not want to live close (this is common) or those who have no affiliation to the base as well. The unit was a bit smaller than I would like, I can’t convert it to a 4/2 and the ARV will be a lower than I usually like, regardless of all that I know this is a GREAT location for my strategy. I bid on this house at asking price, which may have been a little high honestly, but I would love to own a unit in this area and I want to be bidding on everything that’s even CLOSE to my goal. The name of the game for me isn’t “get the best deal of all time” it’s “get all the profitable deals I possibly can FAST”. Competition has been higher and increasing over the last 2 years here as well, so it’s not as wise for me to hang on and wait out for the best deal, it may never come. This one will make money so I bid on it.
Slow week, keep prodding
Had a long weekend and a bit of slow period here, not much action or conversation for a few days. Things got back in the groove this morning with an email for another house on street I had bid on a similar house earlier this week. I came across a house on Bemwick that I got excited about but quickly remembered that Bemwick had a house we bid on last week and ultimately passed on because the floor plan wasn’t what we wanted. Considering this house is only 2 doors down from the last one, I can safely assume they are similar designs, so I passed on this one. I was also told that I’m still in the running for the Walnut dr house and I still think that one will be a decent deal if I can snag it.
Patience is not my strong suit
My realtor texted me this morning and let me know we are still waiting for the Walnut property. I liked this unit but wasn’t too excited about it, but that’s to be expected when looking at ~40K beat up forec
losures: hard to fall in love with them.
Moment of truth
Got one! The email came through that my offer on Rim rd was accepted. As I started diving in to see what commitment I’ve actually just made I start to realize I probably should have bid a bit lower. I call my PM to see what he thinks, he saw the property last week like I did and looked through it already. He does this a lot because myself and other friends of ours are always buying houses so stay on top of what comes on the market in case he ends up doing the rehab or PM for one of. This allows him to help us make good and fast decisions, and it’s invaluable to me since I’m across the country. Regarding the deal, he says the same thing I thought: I probably paid a little too much, but it’s still a good deal as I expected.
Before I could even print out and sign my offer letter, I find an email from the selling agent saying “thank you!” Open it up and I find the offer agreement already has my initials and has been sent to the seller agent, the realtor must have done it for me. This is the value of GREAT people, my realtor did all my paperwork for me and my property manager already has been through the unit and has an expectation of rehab costs. The value of finding and relying on great partners cannot be understated.
Next thing I did was call my lender. I want to use a program through Fannie Mae called “delayed financing” and to do it the way I want requires some critical steps to be taken BEFORE I purchase the house. Getting your team in order early and ahead of your moves is an important albeit undermentioned strategy. I don’t want to buy the house and then go to the lender 3 months later only to find out he says I can’t do the loan for some reason. Get them involved early and often to strategize both short and long-term.
The devil is in the details
We are set for a 20-day close, starting on the 23rd. Lots to do in that time.
One key to real estate (maybe all of life) is to get AHEAD of your problems as early as possible. This means planning and lining up WORKING on everything you have to do as far ahead as you can.
• Pay EM (earnest money) immediately
• Prepare my settlement sheet with rehab included and get it to my lender to approve
• Talk to my rehab partner to make we have a solid estimate, and he can start as soon as the house closes. Idle time is expensive. If you don’t have a contractor lined up, waiting until you have a house to get one is a mistake!
• Speak with my photographer friend about taking GREAT after photos. This is not something that everyone needs to do at this level of rental, but I happen to find value in it. It helps make units look nicer on advertising and it’s great for before/after photos for the blog
• Get insurance estimates and prepare to have service started on the day of closing. Also, I will add this cost to the settlement sheet
• Start advertising for a new tenant IMMEDIATELY. It takes time to find tenants; I like to start telling them the unit will be available as soon as we start work on it. Sure not everyone will be willing or able to wait for it to be finished, but many will be! This is an easy and small benefit that costs nothing and can only help.
Once all this stuff is done we will close on the house. The rehab will start immediately and I expect it to take about ~6 weeks. In the meantime, I’ll be working with my lender to ensure a smooth underwriting process. Hopefully, this informal but thorough blog is useful to anyone who may be curious about the day-to-day of the closing process. It’s probably a boring one for most, but in my opinion, that’s a good thing. Closing on a house SHOULD be boring because nothing boring is scary and fear is what prevents people from moving forward on investments. So if this process seems mundane or easy then I consider that to be a success.
Is it easy? Yes. Does it go smoothly? Never.
I was waiting patiently for our closing date. I had spoken to my partner about getting invoices for total rehab which we needed prior to closing to use delayed financing. I had my HVAC contractor get me an estimate on a replacement system since the house had been gutted of the nearly the entire system. Things were going smoothly and I was feeling confident that this deal would go smooth
Then life came around and smacked some sense into me
This happened in the form of an email from the law firm who is closing the deal telling me they found out that the local water utility company will be doing some sewer infrastructure work to the unit in the future and it would cost approximately $5,000. OUCH! Time to damage control!
I emailed my realtor and asked if we could either
A. Bail from the deal completely
B. Re-negotiate our purchase price
This house had been on and off the market a few times in the past, this certainly gives me leverage. If I bail on the property I’ll lose $1,000 which is painful but not the end of the world. Far better to lose $1,000 now than get a property that doesn’t make money each month for the foreseeable future. If I can get the seller to eat the $5,000 then life is great, a really good middle ground would be if the seller will meet me halfway and eat $2,500 and I’ll eat the rest. This keeps all parties in fair circumstances and we get to keep moving.
After I did some research this expense doesn’t seem to be so painful. First, it’s scheduled for the future but at an unknown time, and the longer the I can stretch the deferment the better for me, in fact, I wouldn’t pay for anything until long after I’m dead if I could!! Defer Defer Defer! I also found out it’s not a lump sum charge but instead can be made in installments, and I don’t really have to get this paid until I sell the property, not that I would take this long, but it does mitigate the risk quite a bit. As I learned more about the situation I became less worried. I told the realtor my thoughts and we are hoping to come to an agreement once we find the sellers’ position.
Renegotiate to win
The seller was easy to work with and offered to split the $5,000 future expense with me by reducing the price of the home. So my new purchase price on the house is $38,500.
If I had bailed on this deal it wouldn’t the end of the world, this deal isn’t even that great. That said I didn’t want to bail on it I want to get it done, get it making money, then go find the next deal. Having worked this out with the seller allowed me to make a fair compromise and keep moving, happy to do it again.
Also on this day, my rehab guy sent me an invoice for the work to be done. This is a crucial step in delayed financing because I want the rehab costs on the HUD statement so I can pull the cash out of purchase price AND rehab costs later. I sent this invoice to the closing attorney so she could have it put on the HUD.
The last email of the day was a group message from the realtor and the lender advising me that we are set to close Wednesday, March 14th. Hopefully no more hiccups
I made this post probably longer than it could have been, but I wanted to express how laborious the process can be. Every deal is always one unexpected phone call away from falling apart, and keeping it together requires TENACITY and perseverance. Everyone will move along just fine and forget about you if you give up on deals or can’t see through to close. You must be diligent in solving problems as they arise, and you must be willing to always be the sole advocate for your success.
Today was simple, I got an email with the HUD early morning and I sent it to the lender
THIS IS A CRITICAL AND UNDEREMPHASISED PART OF THE DELAYED FINANCING STRATEGY
My lender and I have an aligned goal: get Alex as much of his cash back from purchase as possible so he can buy more. As soon as I sent the HUD over he told me to include a cost of insurance, good call too!
For full transparency I have placed the ACTUAL HUD here, also called a Settlement Statement, this will come with all your real estate purchases.
I have to come up with $58,553.36 and remember, I want to get as much as the possible back of this cash as soon as a tenant is placed. So if I think the house will be worth $85,000 when I’m done, and I know I can only borrow 75% of that. With delayed financing, the rule is you can pull 75% LTV or 100% of HUD whichever is LOWER. So I want the LTV number to be higher than my cash input, but not much higher because that means I’m leaving money in the deal.
Difference: $5,196.64What this difference means is that if I waited for 6 months of financing I could pull out 75% of that additional $5,757 or $3,897. It would be a little less actually since this takes into account taxes and other costs. Point is, I sacrifice a little capital (~$4,000) to get my money back in 2 months rather than 6: WORTH IT!
So with the HUD updated, lender happy, insurance quote in place, and lawyer set to close in 2 days, I expect my next update to be as boring as possible.
March 14 & 15th
ALWAYS BE CLOSING
The closing attorney sent me the docs to sign for the house. I filled them out, ALL 4 OF THEM, sent them back and wired the money. It’s 10x as much paperwork to buy a cell phone than a house!
On March 15th I got an email saying they had recorded the deed, I’m an owner. EASY
I will update this blog to include the rehab process and financing as they occur.