Ordering a home inspection and closing process in wholesaling
Investor/Agent · San Francisco, CA · Member since 2016 · 77 posts · 25 votes
Hey guys,
I'm gearing up for my first wholesale and I've been trying to understand the home inspection/closing process. A few questions:
1. Would the buyer order the home inspection to ensure that there are no major structural defects in the property (ie: plumbing)?
2. Further - if the buyer backs out after I've initiated the double-close, how would this affect me? Would I get the contract back or would the entire deal not go through?
3. When doing an assignment or double-close, do I take the deal to the title and escrow company or is that the buyer's job?
Thanks BP!
You want to set yourself up to succeed! You want to put yourself in a situation that you are not put on the spot or hung out to dry. It is important to make sure that you structure your contract to help you out in all these scenarios.
1. If you were buying a property, would you want to get a home inspection? I go in assuming that the buyer is going to want to do a home inspection, and have his contractor come look at the property as well. When you are negotiating with the homeowner you need to look to do 3 things; Access, Time, and Price. Access- You will need to make sure that you will be able to have your buyers come through the house. You need to tell the homeowner that you will have partners on this purchase and they will need to see they property before they make the investment and commitment. (This ties in a little with your second question) Time- You will need to make sure that you have an inspection period! Let the homeowner know that you will need to have this inspection period in order to do more research on the comps and have your partners look into the deal. Try not to have an inspection period for less than 10 days. The ideal amount of time for an inspection period is 15 days, or longer if you can get it. During this time you will need to secure a buyer, have all inspections completed and be ready to coast to the closing. If you are unable to find a buyer during your inspection period you should cancel the contract. The homeowner will be a little upset but they will usually be pretty reasonable because you set the expectation that you could cancel during this timeframe. If you cancel outside the inspection period, watch out! People can get pissed! Price- get a good price! You can try to renegotiate during the inspection period and cancel if you can't get the price that you need to sell the property.
2. When you have a buyer set and ready to buy the house, you need to make sure that they put in a non-refundable earnest deposit. This deposit is usually between 3k and 5k to make sure they don't back out of the purchase. If the buyer backs out and doesn't follow through with the purchase, you will keep the earnest deposit, it does not go to the homeowner! If you are unable to find a replacement buyer in time, you will have to cancel the purchase of the house. The homeowner will likely be super pissed. Let the homeowner know that your partner backed out and you are unable to move forward. You will lose your earnest money, but that will be that. I have had a few people say that they were going to sue and whatnot but it never happens, like ever! After the contract expires you are no longer obligated to purchase the house.
3. Immediately when you have a completed contract take the contract to the title company and let them know that you will be working with them on this property. Do it right away, do not wait till you have a buyer. As far as earnest money goes to open escrow, you should do what I do with the wording; Earnest money due before the end of the inspection period. This way you will be able to have the end buyer's earnest money in to cover your earnest money as well. If you don't find a buyer, you will cancel in the inspection period and not have to worry about putting the earnest money in.
*Make sure you know that your title company can do a double-close and assignments. Some title companies won't do it. Also, make sure you know a title agent that you will likely be working with. I use an app that will scan the contract and put it into PDF format, you can then send the file to title and you will be done!
@Armand Farr - I'll get some info over to you later today about your questions, a little tight with time right now
You want to set yourself up to succeed! You want to put yourself in a situation that you are not put on the spot or hung out to dry. It is important to make sure that you structure your contract to help you out in all these scenarios.
1. If you were buying a property, would you want to get a home inspection? I go in assuming that the buyer is going to want to do a home inspection, and have his contractor come look at the property as well. When you are negotiating with the homeowner you need to look to do 3 things; Access, Time, and Price. Access- You will need to make sure that you will be able to have your buyers come through the house. You need to tell the homeowner that you will have partners on this purchase and they will need to see they property before they make the investment and commitment. (This ties in a little with your second question) Time- You will need to make sure that you have an inspection period! Let the homeowner know that you will need to have this inspection period in order to do more research on the comps and have your partners look into the deal. Try not to have an inspection period for less than 10 days. The ideal amount of time for an inspection period is 15 days, or longer if you can get it. During this time you will need to secure a buyer, have all inspections completed and be ready to coast to the closing. If you are unable to find a buyer during your inspection period you should cancel the contract. The homeowner will be a little upset but they will usually be pretty reasonable because you set the expectation that you could cancel during this timeframe. If you cancel outside the inspection period, watch out! People can get pissed! Price- get a good price! You can try to renegotiate during the inspection period and cancel if you can't get the price that you need to sell the property.
2. When you have a buyer set and ready to buy the house, you need to make sure that they put in a non-refundable earnest deposit. This deposit is usually between 3k and 5k to make sure they don't back out of the purchase. If the buyer backs out and doesn't follow through with the purchase, you will keep the earnest deposit, it does not go to the homeowner! If you are unable to find a replacement buyer in time, you will have to cancel the purchase of the house. The homeowner will likely be super pissed. Let the homeowner know that your partner backed out and you are unable to move forward. You will lose your earnest money, but that will be that. I have had a few people say that they were going to sue and whatnot but it never happens, like ever! After the contract expires you are no longer obligated to purchase the house.
3. Immediately when you have a completed contract take the contract to the title company and let them know that you will be working with them on this property. Do it right away, do not wait till you have a buyer. As far as earnest money goes to open escrow, you should do what I do with the wording; Earnest money due before the end of the inspection period. This way you will be able to have the end buyer's earnest money in to cover your earnest money as well. If you don't find a buyer, you will cancel in the inspection period and not have to worry about putting the earnest money in.
*Make sure you know that your title company can do a double-close and assignments. Some title companies won't do it. Also, make sure you know a title agent that you will likely be working with. I use an app that will scan the contract and put it into PDF format, you can then send the file to title and you will be done!
@Andrew Brannick this is super helpful, thank you so much!!! If you have time, I just had 2 other questions:
1. Does the buyer have the same inspection contingency as I do with the original seller? My understanding is if I get the property under contract and find anything "unexpected" in my inspection, even if it's minor, I can back out and not lose my EMD.
However, if a buyer orders his inspection and finds something he doesn't like, can he back out as well because his EMD isn't due yet? Could he back out for something as minor as a broken door or something as major as termites/plumbing?
2. After doing your first walk through of the home with the motivated seller, do you make a verbal offer in-person, on the spot? Or do you go back and run the numbers after you've estimated repair costs?
My concern is while I might have a ballpark idea of the property value, I don't know if I'm comfortable immediately estimating repairs and doing a 70% ARV-repairs analysis in my head to come up with an offer.
Can't thank you enough for your help here.
**I have a personal opinion as how to approach the canceling of a contract. In the past, I canceled a contract and told the owner that something minor was the reason that I was canceling. It was usually an awkward experience and with problems. The minor issue that I cited for us to not purchase the house was not typically the issue. I was most likely unable to find a buyer. Now I will tell the owner the truth and it makes the experience much better. I let the owner that during my due diligence my partners and I have decided that the value of the property was less than what we expected and we will need to cancel the contract or get a price reduction. The owner will either cancel or drop the price. If you are able to get a price reduction, know what one of your buyers was willing to buy the property at and come in below your buyer and make your cut.
1. (For a double close) You will sign the initial contract with the seller, the AB contract. This contract will have the price your will be buying the house at (100k), your 15-day inspection, a 30-day close, and your 1k earnest.
Then you will have the contract that you will give to your buyer, the BC contract. This contract will be completely different than the one that you will use with any homeowner. This contract will be cut and dry with no outs unless you are unable to have the AB contract go through. The buyer will need to have done their inspections and due diligence before signing the contract. The earnest money that they deposit will be non-refundable. The buyer will still not be forced to follow through with the purchase of the property but they will not get their earnest money back. The reason that the earnest money is 3k to 5k is so that the buy doesn't walk away form the purchase of the house. So the BC contract will be more like price (120k), no inspection period, 7 day close, and 3k earnest. You will be dealing with cash buyers and these terms are very standard.
2. Lets say that I have an incoming lead. I will speak with the person to see if they are motivated before I head over to their house. I will get their address and I will run comps on the property and look at the google earth view and see the outside condition of the house and make a guess as to how much the repairs to the house will be. I will guess on the repair costs with 10k increaments and I try to aim high.
**I am not to sure if the correlation will apply in Palo Atlo, I am looking at houses between 100k-300k. A house that looks like it is market ready - 10k rehab; a house the needs an update, less than 2000sqft, 20k-30k and add 10k more if the house is larger than 2000 sqft; any house that is in bad shape - start at 50k rehab and add 10k every 500 sqft above 1500 sqft; high end homes have rehabs that are more expensive and need to factor the area in, to get an average house in a higher end neighborhood to go from 300k to 500k can take between 50k and 80k even up to 100k, higher end finishes are much more expensive.
So I will try to have a rehab estimate in my head before I go to the house. I will also have looked over the comps in the area. As I am going to the house I will have a number in my head as to what I will offer the seller. I will tell the owner prices around the neighborhood and their orginial purchase price and gauge their reactions. I try to guess what price they are thinking they want as I am talking with them, I wanna try to see their mindset towards their house. After we have walked the house and we are getting ready to discuss numbers I will target their motivation and let them know my offer.
My basic formula for offer:
(Total house sqft) × (high comps sqft; avg top 3) = arv
Title closing costs and realtor fees=closing costs ~ 8%
Arv - closing cost - rehab = typically market value
(ARV-Closing Costs) * 0.15 = profit for fix/fliper
ARV - Closing Costs - Rehab - Profit - 10k = Offer Price
An example:
(2500sqft home) x ($190 per sqft) = arv $475,000
(CC~8%) x (arv $475,000) = $38,000
(arv 475k) - (cc 38k) - (rehab 50k) = $387,000 (Typically market value and almost always what the homeowner is looking for you to offer)
(arv 475k - cc 38k) = 437k x 0.15 = $65,000 Profit for rehabber (the rehabber is looking to make like 15% return on their investment)
(arv 475k) - (cc 38k) - (rehab 50k) - (rehabber profit 65k) - (your cut 10k) = $312,000 Offer Price - You would then send this property to your buyers list at 322k!
In the example above... 70% of ARV minus Repairs is 475k - 50k = 425k @ 70% = 298k
70% of ARV is 475k @ 70% = 332k
I am not too sure what you were taught about the 70% of ARV, but breaking down the number how rehabbers are looking at the deals is how I want to look at the deals. I can then put my cut in and have a much safer number to push out to my buyers. If I make a mistake I can then go into my formula and make the change necessary to have the right numbers, either the rehab costs or high comp number.
@Andrew Brannick you're the best. Super insightful stuff - this makes things much clearer and I can't wait to do my first wholesale.
Amazed by the amount of info you can get from posting on BP - thanks again for the help!
Awesome I really learned a lot from this post thanks @Andrew Brannick