My First Investment Property, Part 3: Get to Closing

Once you’ve found the property you want, it’s time to take action. Unit now, you’ve just been "kicking the tires," so to speak. Visiting the properties is better than sitting at home reading and listening to podcasts without actually doing anything, but you haven’t really taken action until you close your first deal.

Make an offer.

Making an offer is not a big deal; but it is the first step towards taking action. What I haven’t mentioned yet in this series is that we actually made three other offers, but we had contingencies in the contracts so that we weren’t locked in to anything. I read posts on the forums about people losing earnest money, and I don’t understand how they get that far. We have a contingency for an inspection and securing the mortgage at a specific rate. One of the previous offers fell through because the seller had misrepresented the zoning information. It was a commercial property at the assessor’s office, so we could only get commercial financing. Not wanting the uncertainty of an adjustable rate or the extra inspection costs of a commercial purchase, we walked. Because the offer had a contingency for a 30-year fixed rate at 5%, we got our deposit money back. Don’t take advantage of these contingencies too much; you want to earn a reputation for someone who can close so that your future offers are taken seriously, but when you are first starting out, you want to make sure you keep your risks as low as possible.

On the property we ended up purchasing, I mentioned that the purchase price started to look like a steal once we factored in the third unit. At asking price with two units, the cash on cash return was just over 10%, basically my threshold for a property being worth considering. We estimated that adding the third unit and including those renovations in the acquisition cost would increase the ROI to 15%. But why stop there? This is a business. We’re interested in maximizing our profit, and we knew that the house had been sitting on the market for a while, one unit empty, and they had dropped their asking price by 5% just a few weeks before. So even though we knew we could work with the asking price, we entered at about 15% less, with contingencies for getting a 30-year fixed rate mortgage at under 5%, an inspection, and that the property appraise for the purchase price or higher.

Negotiate the offer.

As I mentioned, there were a lot of other things going on while we were looking at this property. This was the third offer we had made in about a month, the first falling through because of the zoning issue mentioned above, and the second being turned down in favor of a higher offer. Our first offer on this house was denied because of a higher offer, too. They were willing to negotiate, but they had a better offer. Not wanting to get in a bidding war and bring the price to where it wasn't looking as good, we moved on. We looked at another property, very similar to this one in that it’s major problems were that it was simply outdated, and there were some unused square footage that could add value. We made an offer on that one, too. That was a Tuesday.

On Thursday, our realtor called, texted, and emailed at 10:00am: “Call me ASAP!!!” It turned out that the better offers on both houses had fallen through, and the one we offered on Tuesday was ready to accept without even a countering. After months of research and searching, we had three viable deals in one day. Just starting out as a part-time investors, though, we only wanted one.

Even though the other two places had come back to us ready to accept our initial offer, we knew we wanted the potential three-unit. They counter-offered about 5% above our offer, and we ended up agreeing in the middle. The projected long term average cash-on-cash return at the actual purchase price ended up at around 19%.

Get inspection remedies.

Of course, the contract had contingencies for inspections, so we hired the same inspectors who had worked with us before to go check it out. They were overall satisfied with the condition of the building, but mentioned a few things that needed some work. There was an issue with an old oil line still being visible through concrete, the electric panels had some minor fixable problems, and the cracked windows I mentioned before were a safety hazard. We went back to the seller and asked them to fix those things, but they preferred giving us a check at closing. We also preferred that for a couple reasons. First, we ran the numbers and thought the amount they offered was actually more than it would cost to make the repairs, and second, that kept our purchase price where it was for tax depreciation, but lowered the amount we actually paid for it. The logistics of that are beyond the scope of this post, but worth looking into.

Close the deal.

The actual closing is simple. I haven’t focused on the financing or the attorney in this series because I just kind of got lucky there. Our attorney is a family friend who is great, and the financing bank was referred by my realtor. I do recommend using an attorney. As many people on BP mention, it is best to treat your investments like a business. Sure, you could save a few bucks by skipping the attorney, but is that how GE does business? Absolutely not!

Your attorney will tell you what you need to bring: most likely just two forms of ID and a bank check. At this closing, I needed just one, but at others, I’ve had to bring two or three in varying amounts. Expect to spend about an hour going through the documents, initialing and signing a bunch of places.

You and your realtor should do a walk-through on the way to the office where you will close. You want to make sure nothing changed since your offer was accepted and the closing day. I have one story straight out of the you-can’t-make-this-up file: I skipped the walk-through once, only to find that a tenant had installed a portable above-ground pool in the back yard! 

On this first purchase, the only thing wrong was that they had taken a refrigerator from the basement kitchen that we thought was going to stay. We called, they apologized, and added some money to the check they were giving us for inspection remedies. We went to the attorney’s office, handed over the check, signed the documents, received our remedy check and the keys. We officially owned a vacant, outdated multi-family home, but the work had barely begun.

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Coming up, Part 4: Actually Make Money.