I’m under contract on a property. Should I go through with it or cancel?
This is probably the No. 2 question in the BiggerPockets Forums right now, second only to: “My tenant lost their job and can’t pay rent. How do I handle that?”
The question itself doesn’t provide any information about the details surrounding your contract. So, the short answer is yes, no, and maybe.
Of course, those are supremely unhelpful answers. Every real estate deal is different, and the circumstances that make YOUR deal a home run or a total dud may be different from someone else’s deal.
Let’s look at a few things you should consider.
What’s in Your Reserve Fund?
The reserve fund is for emergencies. You don’t touch it unless you NEED it. It’s there in case your tenants don’t pay rent and your roof needs replaced at the same time your furnace AND water heater blows. And the refrigerator breaks. In every unit.
Right now, the reserve funds are setting apart the prepared landlords from the landlords who are in over their heads. Right now—BEFORE you buy that property—is the time to REALLY assess your reserves.
How much do you have in your reserve fund, and for how long can that sustain your properties? How long can your 9-5 income sustain your properties before you have to touch your reserve fund?
We are in uncharted waters here. Lending institutions recommend six months of reserves, but that’s just a rule of thumb. Rules of thumb are going out the window. Let’s look at reality. If you have other properties, do THEY have adequate reserve funds? If not, don’t buy another one right now.
Can You Afford to Lose Your Earnest Money?
If you’re using every cent you have to buy the property, cancel the contract. Even if you’re going to lose your earnest money, even if this is going to set you back financially. ESPECIALLY if this is going to set you back financially.
If you can’t afford to lose your earnest money, you CANNOT afford to be going through with the contract.
Who Are Your Potential Tenants?
Colleges have closed their doors and moved to online courses. If you were considering buying a property that would be primarily for student housing, maybe it’s time to reconsider. Are there any other uses for the property? If it is only for student housing purposes, is now really the best time to buy?
On the other hand, if your tenant pool is made up of A-class tech workers, doctors, and nurses, they’re probably not in imminent danger of losing their jobs.
Look at your tenant pool to determine the odds of them being willing and able to pay rent.
What Did Your Local Market Look Like 3-52 Weeks Ago?
Like I said, every deal is different. What was happening in your local market in the weeks and months leading up to the coronavirus outbreak?
In my own local market, the Front Range of Colorado, the market was red-hot. Properties were consistently going for over asking price, no contingencies, all-cash deals. I had noticed a couple of months of cooler market conditions but had attributed it to the calm before the storm of spring selling season.
We were by no means in a buyer’s market—or even a balanced market.
Once the coronavirus has burned itself out, I truly believe that my local market will once again be red-hot. Here’s why:
- We have a shortage of inventory. We’re still recovering from 2008 when every builder stopped building houses.
- We have a hot job market. Prior to coronavirus, Colorado had a 2.6% unemployment rate.
What Are Your Current Job Prospects?
How does your job look—really? If you’re self-employed and barely hanging on, this isn’t a good time to buy. Ditto to the gig-workers.
Are you in a mainstream profession, one that will be necessary after the dust settles? Or are you in an easily replaceable or obsolete field?
Now is the time to be super honest with your job prospects. Because if you lose your job and your tenants stop paying, it’s not too long before you lose your investment properties, too.
Just How Hot IS This Deal?
If you’re under contract and the deal is mediocre at best, the decision is easy. Cancel the contract and walk away. Now is not the time to be overpaying—and on a mediocre deal, you’re ALWAYS overpaying.
But a home-run, slam-dunk deal? That’s an entirely different story. Again, look at all the other considerations. But if you’ve got decent job prospects AND a reserve fund, a smoking hot deal might be one you want to hold on to.
Assess Your COMPLETE Situation
Every real estate deal is different. No two buyers, sellers, or properties are the same. The circumstances surrounding each deal aren’t the same for different buyers, and what works for one person with THEIR situation, doesn’t necessarily work for you.
The only 100 percent deal breaker listed above is the reserve fund. No reserves, no deal. Period.
Look at the deal, and look at your job, the local market, your potential tenants, and most importantly, your reserves. After careful consideration, if you’re still not sure, then it’s time to back out.
It’s far better to wish you HAD invested in a deal, than to wish you had not.
Are you under contract on a property right now? What are you planning to do?
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