What to Expect From Your First Real Estate Transaction
Going through your first real estate transaction can undoubtedly be like going into the unknown — confusing and stressful — but gaining a better understanding of the process will allow you to remain calm and have the confidence needed to secure the right deal!
step one — lock down the funds
First and foremost — you must figure out where you are going to get the money to purchase real estate. Before you even start shopping around for real estate, you want to make sure you either have the funds available or have your leverage figured out. If you are leveraging your first property, you want to make sure you know how much real estate you can afford. To find this out you will want to talk to several lenders, find the best financing options and secure a prequalification letter prior to investment shopping. Proof of funds or a pre-approval letter along with the written offer is the only way to show the seller of the property you are a serious buyer and qualified to purchase the property.
Step two — find an agent
Find a trustworthy agent/broker that is knowledgeable in investment properties and the specific market you’re interested in investing in. This part is HUGE! You want to make sure you have a top-notch agent in your corner to ensure you’re seeing the best properties and getting the best deal. A great agent will coach you through the process and will have your back during negotiations as well as educate you on what type of properties to stay away from.
Step three — offer, offer, offer
You should expect to make several offers before finding a good deal. In a highly competitive market, speed counts. If you take to long to “think” about offering, the property likely will be gone. Instead, I recommend building in a due diligence period that allows you to terminate the deal should you find something that does not make sense. Take the time to talk to your agent/broker about your offer strategy. Plan ahead for these common items needed in your offer so that your agent can prepare a sales agreement when you locate a good property. The key items you should discuss are:
Purchase price
Deposit amount (aka “escrow”, “good faith deposit”, or “earnest money”) — This is the money that you provide along with the offer to show the seller that you’re making a serious offer; Your deposit is held in an escrow account and used as part of the down payment. The amount is typically 2-5% of the purchase price. A higher deposit amount will be more appealing to the seller. Just make sure you have options to terminate the contract without risking your escrow if you are not 100% certain going in to contract that this is the right one.
Closing date — if you’re leveraging the property, this will most likely have to be 30-45 days from the agreement date to allow time for underwriting
Property inspections you wish to complete during the due diligence period (if any)
Contingencies — mortgage, appraisal, etc.
step four — negotiate
Once your offer to purchase has been submitted, it will be time to negotiate. The seller has the right to review the offer and then counteroffer with the price and terms they would like to see or accept or reject your offer. Will you agree to a higher price or walk away? Will the seller accept a lower price or decide not to sell to you? Will there be multiple offers? All of this uncertainty can make this part frustrating however, if you have a plan for each offer and stick to the plan when negotiating, it will be just fine. Remember that it takes several offers to get one accepted!
step five — Appraisal, inspections, and repairs
This step is where all the pitfalls and concerns arise amidst the transaction. If you’re leveraging the property, the lender will want to make sure the property appraises for the purchase price so they will send an appraiser to do a complete anaylsis on the price and condition of the property compared to other similar properties in the area. Lenders typically only lend 75-80% of the purchase price. This means if you’re purchasing the property for $250,000 and your lender is requiring a 25% down payment and their max LTV (loan to value) is 75%, your loan will be for $187,500. If the property only appraised for $175,000, you’ll have to cover the extra $12,500. If you can’t bring that extra cash to the table, then you will need to negotiate with the seller to reduce the price or terminate the deal— be sure your agent elects the mortgage contingency and the appraisal contingency if you’re leveraging the property. This contingency allows you to walk away if the property does not appraise.
If you’re electing any inspections, you’ll want to get them scheduled ASAP. You typically only have a ten-day due diligence period following the agreement execution date to get all inspections completed, including any financial investigations (looking over the income and expenses), and submit the “reply to inspection” to the seller. On the “reply to inspection”, you can request the seller to make repairs to items found during the inspection, request a dollar amount credit covering the repairs for you to do yourself, or propose a lower purchase price. This opens negotiations up again to determine if:
the seller will be completing any repairs found during the property inspection
the seller will be giving you a credit at closing to make the repairs yourself
the seller is willing to lower the purchase price
If the seller does not agree to any of the above, you can usually terminate the contract.
If you waive the inspection contingency- you will lose the option to ask for repairs and/or negotiate further with the seller based on condition alone.
Step six — title & insurance
Once you pass the due diligence period, it is usually all systems GO. Now you’ll want to select a title company to handle all the title work and prepare the closing documents. If you’re leveraging the property, the lender will also require you to show proof of homeowners insurance at or before closing so make sure you shop around and get that squared away early. Keep in mind — you will want to make sure your offer is contingent on the seller providing clear and equitable title. It’s fairly standard in PA but never assume as this is a really critical step. Clear title or NO DEAL!
Step seven — Closing day!
Once your lender has confirmed a clear to close meaning the funding and final mortgage documents are ready to go, they will send them to your title agent. The title agent will prepare the closing statements, notify you of the money you need to close and schedule a day and time for closing to take place. I always recommend you attend your first closing to get familiar will all the documents you need to sign but once you attend one, you can likely handle future closings remotely. All money changes hands this day and the keys will be delivered to you upon completion of closing.
That’s it in a nutshell, so you should be ready to make those offers — Good Luck!
This information may not be used as a substitute for legal and/or financial advice and you should consult your attorney and or financial advisor for professional advice if you have any questions relating to this advisor guide.