Buying investment property and negotiating a real estate contract mean two different things, depending upon which side of the transaction you’re on.
If you’re buying an investment property, you want the lowest possible price. And if you’re the seller of the flip you want the highest price possible based upon local market conditions. Either way, negotiating a successful sales contract for a flip is a critical part of the process.
The Flip Inspection
When negotiating an offer, know ahead of time the condition of both the property as well as the buyer. Know the local market and understand what similar homes in the area have recently sold for. This information can be provided to you by your real estate agent who will research recent home sales.
The condition of the property can be discovered before or after your initial offer is made. Make an appointment to inspect the property before any offer is made to give you an idea of the overall condition of the home.
And don’t do the alone, when you can, have your contractor accompany you at your first visit.
Look for major problems first BEFORE you buy investment property.
Look at the foundation and look for telltale cracks in the walls indicating a possible problem.
How does the roof look, do you see any sagging or missing shingles or tiles, a worn out and/or broken HVAC system ? Any evidence of water problems in the basement or other major issues? If not, then take the next step.
How is the house overall, is it in good condition? Are there any signs of disrepair or specific cosmetic changes that could be fixed easily? If the home appears to be in good shape then the owner has likely kept up on any needed maintenance while owning the home.
While making your offer, provide a time frame for an inspection and an opt-out clause that you can exercise should you simply change your mind.
If you didn’t have your home inspector accompany you on your first walk-through, now is the time to have a complete inspection from basement to attic.
The inspector will check through a hundred or more items from checking light switches to ensuring the heating and air conditioning systems are in good working order.
Once the final inspection is complete, review the items that need repair and deduct the costs associated with the noted repairs from your initial offer along with a list of the things needing repair as prepared by your inspector.
In some cases an “opt-out “ clause will be considered a weak offer, especially if another buyer is willing to close cash with the house in an “as is” condition. What type of an offer you submit is dependent on your current opportunities, you capitol and the potential of this particular flip.
The Flip Seller
As the investment property buyer, an important part of negotiating a flip contract is knowing the condition of the buyer. Why is the owner selling?
While this may seem an obvious question there’s a big difference with someone who is retiring and seeking to downsize and someone who is facing foreclosure.
A seller who is desperate may not go into any details of their situation but there are ways you can independently determine the mindset of the seller.
If the owner is experiencing financial difficulties and their lender is threatening to foreclose, you can visit your local county recorder’s office, pull up the property address or owner’s name and see if a Notice of Default or Foreclosure notice has been filed.
Both such filings are a requirement for lenders as they begin a foreclosure process and are a public record. If there are such filings, you know that the seller is highly motivated.
You can also contact the attorney or title agent on your team to provide you with a preliminary title report. A title report will not only show the current legal owner but also any other liens that have been filed on the property.
Are there any back property taxes due the county? If so, there will be a lien filed. Any past due federal or state income taxes or any outstanding child support payments? Again, such filings will appear on the title report and indicates the seller might just entertain any offer you present.
Close Super-Fast
And the best negotiating tool? A cash purchase.
Buyers who need financing may or may not have applied for a mortgage before shopping for a home. Most sellers today will require that buyers present a loan approval letter from a lender showing they’re qualified to buy the home.
Yet even an approval letter isn’t bullet-proof. A complete loan approval from a bank can take up to 30 days or more as the lender evaluates tax returns, credit and bank statements provided by the buyer.
A loan application that is not properly prepared and documented can be declined weeks after an initial offer is made. This means the seller can accept an offer and find out three weeks later the deal is dead.
When you tell a seller that you buy investment property for cash and can close within a few days, your offer will carry greater weight compared to offers from other buyers.
Even if you don’t have cash in the bank, if you have access to the funds needed to buy the home with a line of credit or you have a private lender lined up, by closing quickly you can put yourself ahead of any other offer and help the seller get out of a potentially desperate situation.
The bottom line when buying investment property… Know your market, know the property and sometimes most importantly know the true reasons the owner is selling.