1301: Season 13 Opener - Purchase Contract Strategies and Mistakes to Avoid
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Welcome to Episode 1 of Season 13 of the Growing Empire Show. Our theme for this season is common investing mistakes that can be avoided. I have a lot to share this season, so make sure you stay tuned.
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Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
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We are here with season 13. And we're going to talk this season about all the common investing mistakes that I have watched people make. And when I make sure that you avoid making those same mistakes, I would love the opportunity to catapult you to financial success and freedom with your investment strategies. And to do that, we need to make sure that you don't tiptoe on the brink of disaster by making some of the same mistakes that other investors have made. This season, you can expect a whole lot of information. And I must say that I expect it to be the most valuable season yet. So make sure you stay tuned to all that season 13 has to offer. We are going to talk about the life changing real estate lessons that I have learned as well as other investors have learned. We're going to discuss the 12 pitfalls of investing and ones you want to make sure that you avoid. We're going to talk about the reality of managing your own investment properties and how to determine what your time's worth. We'll get into the worst investment mistakes you could ever make. We're going to talk about purchase contract strategies and mistakes to avoid when acquiring your assets as well as municipal requirements. What to do to make sure that you are protecting yourself and you're going to have buildings that are code compliant. And we're going to talk about how to avoid being that bad landlord. And I am positive that season 13 is going to be worth every minute of your time. So let's jump right in.
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Today we're going to talk about those purchase contract strategies, as well as mistakes to avoid when acquiring those assets. So let's first talk about the contract itself. There are many different factors of things that you need to consider when making an offer on a property. And how you go about the strategy has everything to do with the quality of the deal that you make. We're going to talk in more detail about your actual analysis of your investment. And obviously that is very much the first step before you make the actual purchase offer. However, I'm not going to elaborate too much on that analysis today. Because I want to make sure that we don't get sidetracked and I want to really focus on the actual purchase itself. We're going to assume that your investment analysis has been very detailed, very thorough, and that you're making good financial decisions. But with that being said, it's time to now make sure that the contract that you're about to execute will provide enough protection for you, as well as allow you to really fulfill that investment strategy, post acquisition. A couple of things to think about regarding the contract itself. Number one, are you familiar with Pennsylvania law, or whatever state you're investing in? And if you were not up to date on that information, the first thing you need to do is educate yourself. You can educate yourself by talking to your local attorney, you can educate yourself by talking to a very knowledgeable real estate broker. And I stress that it needs to be a really knowledgeable real estate broker. Because there are far too many agents out there and, with all due respect, they have a license to sell real estate. But they step way outside of their boundaries by trying to sell things to people, like investors, that would not know any better because they're trusting the expertise of that licensed professional. Well, the reality is, is that all agents are not created equal. And I've had more than my share of horrible transactions, all because the agent on the other side was not even close to being equipped to handle an investment purchase. When you're looking to acquire properties in an area that you don't know, it's going to be hard for you to find that real estate broker agent that you can trust. But the best thing you could do is ask for referrals and really do your own due diligence on the person that you're working with. Because after all, they're going to be advising you throughout the transaction.
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Regarding the contract itself, there's some really critical components to the contract that you need to consider before making your offer. Number one is how are you purchasing the property? What entity Are you purchasing it in or are you purchasing it in your name? If your intention is to set up an LLC once the property goes under contract, make sure that you have your attorney or your tax advisor ready to prepare the legal documents for you to create that LLC. I highly advise that you do not go to like a Legal Zoom or any other, you know, internet based attorney, reference material and do it yourself. You need to make sure that your operating agreements and your LLC is are structured in a way that allows you to buy and sell at your leisure, as well as protect you in the event of any kind of partnership or your death, potentially, you want to just make sure that you're well protected. So definitely, you do not want to take this lightly and make sure that you're prepared. But where I find investors fail in this very first step is, they underestimate the amount of time that it takes to create those LLCs. And if you are writing a contract, that is not an assignable contract, and you're writing it in your personal name, that means that you are obligated to close in your personal name, no matter how long it takes you to set up that LLC. So if you're not quick at doing it, you could be essentially making yourself in default of the contract by not adhering to the deadlines of that contract. So if your intention is to purchase your property, in an LLC, or some entity that you're going to form, you want to make sure that either A it's set up prior to you writing a purchase contract, or that you have all of the people on your team ready to execute those documents as quickly as you get under contract on a property. And you want to make sure that with that being said, you have enough of a timeline prior to closing to make sure that the state will give you those documents back. You do not want to take title to a property, and then try to transfer that title post purchase of that property, because you're going to be subject to transfer tax on that property. So make sure that, going into your purchase strategy, you know exactly how you're going to purchase that property, what's name or entity it's going to be in, and make sure that the contract is either set up to do that in that name or you have an assignment clause and make sure that you can get that assignment done prior to the actual acquisition of the property.
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The next thing you got to consider is how much escrow you're going to put down. Now remember, all states are very different in this respect regarding your escrow deposit. And in many cases, the general rule of thumb is, if you do anything outside the contract terms, you are in jeopardy of losing that deposit. Best case scenario is you get the deposit back because you have the proper due diligence, and you have the proper protections written in the contract. Worst case scenario is somebody can make your life really miserable by holding up your escrow. In most states, but specifically in Pennsylvania, escrow deposits cannot be released without the consent of both parties. So I want you to think about that for a second. If something happens in the transaction, where the buyer and the seller do not agree, do you think that the party that feels that they were affected by the decisions of the other party are going to be quickly to sign off on releasing the escrow back? Likely not. So you want to make sure that although it is important to consider the amount of escrow that you are putting down, you might want to ask your broker to first call the agent and ask how the seller values the escrow. Because the reality is you don't want to put more money on the table than you need to put at risk to get the deal done. Some sellers view that as your tolerance for risk. And the higher the deposit the more attractive the offer is. But the reality is is that, if the sellers, especially in the state of Pennsylvania, are educated by their broker, they're going to also understand that in no cases will they ever really see that money. So the amount of money that's held in escrow is probably irrelevant. So talk to your agent, and have that agent or broker call the other agent or broker, or the seller directly depending on whether or not it's a on market property, and find out their perspective on how important escrow deposits are. Now we get to settlement dates and other times of the essence states. Depending on the state that you're in. This will also differ greatly. But Pennsylvania is a time of the essence state. Meaning that every deadline is a hard deadline. And if you do not comply by that deadline, you are in default. So if you think that by offering the seller a quick closing that you ultimately know that you cannot commit to, you think that you're going to make your offer more attractive and that the seller is going to be willing to just extend the closing date, you are most likely making a very incorrect assumption. Once a date passes, no party has an obligation to do anything. Including continue the transaction. So before you go recklessly having your agent put a fictitious date on on the contract for sale or the purchase agreement, you're going to want to make sure that you know what is really truly feasible. If you're getting financing, you're going to want to make sure that the lender has identified or discussed with you the amount of time it's going to take to get your file to closing. Because again, no matter what the situation is, if your lender doesn't meet the deadlines, you're still out of contract, and the other party is going to have the opportunity to terminate the deal. So don't put yourself in that position, talk to your lender, find out how long it's going to take for them to close the deal, whether it's going to be 30 days, 60 days, whatever it may be, and make sure that the contract is written in a manner that allows you ample time to get all of your ducks in a row and essentially all of your contingencies completed.
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Make sure if the property is occupied, that you have something called a tenant occupied addendum or a tenant statement attached to the offer. You want to know how much security is on hand, you want to know if the tenants are paying rent, you want to know if there's any delinquencies, and you want to know these things ahead of time. Probably the worst mistake that I see people doing is failing to do due diligence on this specific topic. And if they do the due diligence, they're avoiding the obvious questions. And then they get stuck with a property where you have tenants that are not paying somebody vacates right before settlement, or you're not getting exactly what you thought you were buying into. So in order to avoid that common mistake, you will want to make sure that you have, number one, a portion of your contract that specifically states, the occupancy of the property, the security deposits that will be included with the transaction as at closing, you want to make sure that you know if the tenants are current on the rent, and if there's any delinquencies in addition to rent that you need to know about. Sometimes those things are done by the way of what they call a tenant occupied addendum. In Pennsylvania, that addendum allows up to five days or any date that's agreeable by both parties for the seller to provide copies of the leases. Those are not necessarily things that you're going to get access to prior to the actual offer to purchase. So make sure, in that due diligence not only do you get the documents that you're required to get within that five day period, but you analyze them, and specifically ask for a statement stating that the rents are current the deposits are being paid, and that there's a full occupancy on the building. Therefore, if anything changes, from the time that you go to contract to the time that you go to closing, you will have the opportunity to renegotiate the deal. In theory, what you need to understand is that any term that changes, anything about the property that materially impacts your ability to purchase and make the money that you thought you were going to make on the property, is an event that will allow you to likely renegotiate the deal, as long as your contracts are written correctly. So definitely talk with your agent or broker about those strategies as well.
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The episode will continue in just a moment.
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As an investor, we know it's important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you're interested in having these types of resources, as well as access to me and my team, I invite you to join the Empire Investment Club. A free service that gives you an easier way to make sense of today's and tomorrow's real estate opportunities. As a member of the Empire Investment Club, you'll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you're an active investor, passive investor, a combination of both or just starting out, the club is where you'll get what you need to build a portfolio you love. To join, just head over to JenniferdeJesus.com, sign up, and we'll see you in the club, where everyone's on a journey to becoming a better investor.
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Municipal requirements. Far too many deals go sideways, because the parties to the transaction have failed to discuss municipal inspections and then expectations on the part of both parties prior to the contract to purchase. Many purchase contracts have this included. However, if it is not, you want to make sure that it is identified very clearly what the expectations are. Locally here, I can tell you that generally, the requirement is of the seller, in both the purchase contract and by the municipal standards that the seller of the property, gets what is called a resale or a certificate of occupancy inspection that will identify any municipal requirements that are not being met or are failing to meet the standards that is set by that municipality as well as the general building code standards. In the state of Pennsylvania, that purchase contract also goes on to say that after that seller gets that required inspection, they are to deliver that inspection report to the buyer. And the buyer will have several days to review the report, ask for repairs, ask for the items to be cleared, or to terminate the deal if they don't like the result of that inspection. Where this gets a little bit more complicated, is when agents decide that they want to take the stance and pretend that they're real estate attorneys. And they go adding in clauses to the otherwise written agreement of sale. And what I mean by that is, I have seen more than my share of “as is” clauses. And I try to educate my agents at a minimum all the time that, any agent that takes it upon themselves to write in terms to a contract is not only risking their license, but it's also potentially doing their client a disservice. And the reason that I say that is unless you have some extensive background and understanding of what the terms are that you're writing, one of the most common mistakes that happens is that the agent writes in a clause and doesn't strike out the contradicting clause that was already written into the agreement of sale. So for example, I just told you about the municipal inspections. And that clause, already in the agreement of sale, states that the seller gets the inspection pays for the inspection gets the inspection provides the reports and the buyer and the buyer has all these options. Okay, so let's say that an agent gets the bright idea that they're going to add in a clause at the end of the contract that states that the buyer is buying in as is condition. Well, what is as is? As is as of when, and does that include the municipal inspections? Because as is generally means the condition of the property regarding inspections. So your roof, your boiler, etc. However, the municipalities have a different regulation that you have to be mindful of. And the reality is is writing it as is to a contract does not negate the terms of the contract that were already stipulated. If in fact, you are going to add in clauses, or your agent is going to add in clauses for you to make you more protected in the deal you need to make sure that any contradicting clauses are stricken from the agreement of sale. And I definitely advise that before you allow your agent to write any terms in an agreement of sale, that you have your legal representation, review those clauses to make sure that you are not getting yourself into any trouble.
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So let's talk a little bit about low balling offers and how low to go. Well, this can only ever go two ways. Either it's favorably received, and you'll get a respective counter offer, or you're going to upset the other party and you will never have an opportunity to buy that property again. But, before you make a decision to lowball any property you need to know and understand the market and what is currently happening. If you decide to lowball a property, when 100% of the property sell for asking or over asking, not only are you insulting the seller, but you're making yourself look like a very inexperienced investor.. Because you don't know the market and you're making wrong moves. While I 100% believe that you need to buy the property for the lowest possible price, you need to be educated to make sure that the method that you are using to try to get the best price is not creating this conclusion for the seller that you are inexperienced and are unable to get the deal done. If you're going to ever offer less than the asking price of a property, you want to make sure that you have a factual reason to do so. Not just a made up number, a fictitious number. And the reality is is that that would be based on comparables, your agent and your broker should be telling you what properties are likely going to be worth so that you make sure that you are not overpaying for the property, but you're also making a competitive offer that allows you to get the best deal. Should you do all cash versus a mortgage really depends on your liquidity. And that really, truly depends if you have cash on hand and might be smart to avoid the closing costs and interest associated with a mortgage. But then it also will reduce your liquidity picture. And now you have money that cannot be used for anything else. So it's definitely something to consider. You also want to consider the marketplace. In our current state of the economy I can tell you that mortgages are so generally acceptable that whether you offer cash or not, does not always necessarily mean the deal or no deal. So, generally cash is well received when the remaining terms also make sense. So cash and quick closing, with a sizeable deposit, those types of things would make the offer as a whole attractive. However, if you're offering cash, and then you're building in 100 different contingencies, your offer is no longer going to be appealing because it doesn't have the same flexibility that cash offers to a seller. In that case, you should just put the mortgage contingency in there or the financing contingency. But you're only going to want to do cash if your liquidity picture makes sense, and allows you to still have flexibility, should you find another deal that makes sense. The bottom line is this. The reality is is that investing in real estate if it was easy, everybody would be doing it. Fortunately, many of the struggles endured by investors can be avoided with due diligence and proper planning before signing a contract. And I expect that season 13 prepares you to avoid the struggles endured by many other investors like yourself, and lead you down the path of creating your financial independence. So until next time, take care.
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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com