Put it under contract THEN do you due diligence

General Real Estate Investing
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Put it under contract THEN do you due diligence

Dean Julie
Foreclosure Specialist · Pleasant Grove, UT · Member since 2008 · 41 posts · 2 votes

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

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Timothy W.
Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
17y

I've done it when lenders have backed out, but it's not good practice in general. Soon enough your offers get cylindrically filed by realtors and asset managers who think you're wasting their time.

The bigger issue is to really pin down what kind of properties you want and know your market well enough to know if they're a yes or no. All I need is purchase price, property taxes and a walk through to know anymore so my due diligence is about 20-30 minutes per property then await my title insurance policy paid for by the bank. Now I buy REOs where the title is clean before I get it so my due diligence is probably less hairy than others but the real trick I've found with this is to simplify it big time and just do a DD on your entire market so when a property pops up at a certain price in a certain area you already know to buy it.

Tim

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  • Timothy W.
    Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
    17y

    I've done it when lenders have backed out, but it's not good practice in general. Soon enough your offers get cylindrically filed by realtors and asset managers who think you're wasting their time.

    The bigger issue is to really pin down what kind of properties you want and know your market well enough to know if they're a yes or no. All I need is purchase price, property taxes and a walk through to know anymore so my due diligence is about 20-30 minutes per property then await my title insurance policy paid for by the bank. Now I buy REOs where the title is clean before I get it so my due diligence is probably less hairy than others but the real trick I've found with this is to simplify it big time and just do a DD on your entire market so when a property pops up at a certain price in a certain area you already know to buy it.

    Tim

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    17y

    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).

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  • Tom C
    Real Estate Investor · OH · Member since 2008 · 1k+ posts · 86 votes
    17y

    Same as Mike and Tim. I already know before I even go the property whether or not I am interested in making an offer. If the house meets my criteria during a 15 min walk through, I make an offer on the spot. There is no point in looking at a property, going back, running numbers and then looking at it a second time. By this point, if it's a good deal someone else will have it under contract.

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  • Joel NA
    Real Estate Investor · Bloomington, IN · Member since 2008 · 119 posts · 8 votes
    17y

    Great thread! Thanks...

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

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  • Timothy W.
    Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
    17y

    I don't because 90% of my buys are from banks who have addendums that will trump a purchase agreement. I do read those addendums carefully.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    17y

    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.

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    17y

    Yes, I always have blank purchase agreements with me.

    Mike

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  • Douglas Christian
    Real Estate Investor · Charlotte, NC · Member since 2008 · 368 posts · 42 votes
    17y

    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

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  • Account Closed
    Manhattan, NY · Member since 2008 · 801 posts · 61 votes
    17y

    Understand, this is appropriate for smaller deals. No one is going to buy an apartment complex of any size without verifying the details.

    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.

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    17y

    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.

    Curt Davis - KAIZEN Realty538 Reviews
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  • Jeff TumbarelloPro Member
    Real Estate Broker · Fort Myers, FL · Member since 2008 · 1k+ posts · 323 votes
    17y

    I use the inspection period for inspections. I have already modeled as best I can prior to making an offer

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    17y
    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)

    Podcast Guest on Show #130
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  • Scott Allan
    Real Estate Investor · Fort Myers, FL · Member since 2008 · 115 posts · 27 votes
    17y

    My opinion is to look at it...If you think it has a chance of being a goodie, lock it up with a 10 day inspection period. Some sellers may give 5 days so you need to honor that and move your tail to get your DD done. You also have to put yourself in their shoes.

    That said, I am sure sellers will make their property "active contingent" meaning during your inspection period they can take backup offers.

    I just contracted an apartment complex and the seller gave me 3 business days but I got 3 free days since one day is today, Memorial Day, so essentially I got 6 days! I know how to do a good level of DD so that was plenty for me.

    Just don't waste the seller's time or word will travel fast.

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  • Account Closed
    Real Estate Investor · Hartwell, GA · Member since 2008 · 35 posts · 6 votes
    17y

    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.

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  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    17y

    Does one use a Letter of Intent or a full purchase contract when making an offer on the spot? I just started working with a wholesaler.

    Thanks

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    17y

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

    Mike

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  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    17y

    Thank you

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    17y
    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.

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  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    17y

    This is all good to know, thank you.

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