BiggerPockets

I have heard this tactic/strategy/philosophy/(BS) taught and suggested by many. The theory is, if the property turns out to really suck, you just renig on the contract (with some contingency) and you're on your merry way. However, when I've went back to these people that said it and offer them deals, all of a sudden, they want to do miles and miles of due diligence before they even get close to considering putting properties under contract.
So, those that really do do real-estate, what do you do? Do you do your due diligence first? Or do you put it under contract first?

Dean

I agree with Tim. If, by due diligence, you mean getting comps, determining area rents, getting a house inspection, getting a termite inspection, getting a loan, etc, then I don't have any of that done. I typically spend a few minutes looking at (inspecting) a house and then sign a contract right there on the spot, without contingencies for any of these things. Of course, I do have a title search done before the closing to ensure the title is done. With apartment buildings, I also make the seller sign an estoppel letter detailing the lease terms for each apartment (tenant names, rent, and dates).

However, when I've went back to these people that said it and offer them deals, all of a sudden, they want to do miles and miles of due diligence before they even get close to considering putting properties under contract.]/quote]

That's because the vast majority of these people are newbies and have no idea what they're actually doing. Even if you're offering them a GREAT deal, most won't follow through because they won't be able to get past the analysis and actually make a decision. If you're wholesaling property, then you need to identify the successful investors in your area. Someone that actually knows what they're doing will put a GREAT deal under contract IMMEDIATELY!

Mike

Great thread! Thanks...

So do you guys arrive with your own purchase agreements in hand?

I too agree to lock it up first (first meaning after you know it meets your price points for the area etc) then complete the DD process. That is what your inspection period is for.

If you do the reverse (which I have done in the past), you stand to lose the opportunity to another investor beating you to the executed PSA. Not a fun thing to happen.

See its simple. You have just heard from investors who are successful or on there way. The ones that you are dealing with are like MANY as Mike as stated. They are the tape and book readers and the ones that sound good and I concur when you go back to them now all of a sudden they are changing their tune.

I make my analysis immediately with 30-1hr and I sign right then and there if it is a deal. I bring my own 1 pg contract and then I put no contingencies. I then go back and do all my work. One contingency if you are to put one is that structual or termite damage is found then you can back out. If it is a EXCELLENT DEAL and the price is there and you can get those things repaired after you have an inspector look at it then I will still buy it.

Stop dealing with the TIRE KICKERS.

SUCCESS BREEDS SUCCESS

Dean,

You will need to do your due diligence in advance of putting the home under contract. It does not take long to figure all this information out. You do not want to get a reputation for being the guy who always backs out of contracts. Most REO banks do not give you any due diligence.

For SFH we do exactly what the others here are saying. We have no inspection contingencies. In fact, the only contingency is clean title.

However, for the apartment complexes we buy, our private lenders and partners REQUIRE proper due diligence be completed.

No doubt and I agree. Of course with apartments, you must still complete your initial due diligence quickly and lock it up or stand to lose it as well. In your PSA, you will want to stipulate a reasonable amount of DD time (inspection period) to complete the items of importance necessary to satisfy you and any partners/investors.

Earlier this year, I lost out on a smoking deal to someone who did not beat me in price, but by two lowsy days. I spent too much time pre-analizing the deal, rather than locking it up with the seller and completing the balance of my DD during the inspection period. Learn a lesson from me and don't make the same mistake. That is what contingencies are for - to exit freely out of a PSA with your EMD refund in full (sometimes less a small amount of condieration)

The big repairs are mostly plumbing, electrical, HVAC, roof and siding. Paint can be expensive too, depending upon what is needed. I just walk into most deals with the mindset that 3 or 4 of those items will have to be done and so it's priced in.
I just price in what I THINK might need to be done and add 30% to that figure.
For instance, I just bought and rehabbed a house with an ARV in the low $100s. I paid about $35,000 for it.
Well, I just priced about $25k in repairs and that was putting me at about $62,000 with closing costs. Still a pretty good deal on a house that I could easily rent for $1000 per month.
Turns out, the repairs came in at about $13000. So I am in it for $51000.
People try to be too analytical. When you are buying homes for WAY less than replacement cost, there are not too many ways to lose money, so I'm not much on contingencies. In fact, I have never backed out a of a wholesale deal once it was under contract, and I have yet to lose any money.
And I don't sell to buyers who want any contigencies either.
Like Larry Goins says, "If you need a calculator to think the deal through, then it's not a DEAL."
I swear, if a person cannot make money in this real estate market, they absolutely need to be doing something else. It doesn't get much easier.

I always use a purchase contract. A LOI isn't worth the paper it's written on because it is NOT BINDING.

Mike

I always use a purchase contract. A LOI isn't worth the paper it's written on because it is NOT BINDING.

I agree that this statement is true but in several cases with larger apartment complexes, the seller (particularly banks) require a LOI first before they will entertain a PSA. This is not to say always, but in some cases.

I had an LOI with a seller who agreed to my terms, then I paid my attonrey to write up the PSA (needed to in this case as their where some legal hurdles to cover in the PSA for my protection) and then the seller wnet back on his agreed upon word via the LOI and more negotiations had to be done. That was very frustrating which proves LOI's are not legally binding or worth anything other than starting some negotiations between parties.