Are you serious about purchasing your first property?
Do you have the ability to make an offer on at least one property in your area of interest right now?
If you are currently incapable of making an offer on a property in the area that you are trying to invest in, there’s nothing wrong with that. There are many reasons why you might not be able to — lack of funds, credit, or commitment. I’d encourage you to keep reading and learning about real estate here on BiggerPockets and take the plunge when you are ready.
On the other hand, I sometimes run across folks that claim to be ready to buy real estate, yet do not have the basic capability of legitimately offering on property. I have to disagree with their belief that they are ready – they aren’t.
But I have some good news for you: It’s really easy to be taken seriously as a buyer.
It may not be really easy to find a great deal, to do all the proper due diligence on a property, or to get your offer accepted, but it’s really easy to put yourself in position to make a legitimate offer on property right now.
All you have to do is demonstrate that you are capable of purchasing the property to three parties:
- The Seller
- The Lender
Below, I’ll list the ten ridiculously easy steps you can take to demonstrate that you are serious about buying real estate, and put yourself in position to make an offer on a property tomorrow, assuming there’s a good deal available. If you are unable to complete any of these steps, then it may be a good idea to question whether you are fully ready to purchase real estate worth tens of thousands or hundreds of thousands of dollars.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
10 Actions to Take Today if You’re Serious About Purchasing Your First Property
1) Gather all your financial information in one place.
If you don’t know how much money you are making, spending, and investing right now, how can you possibly be considering buying real estate, a business where people lose money all the time?
Once upon a time, organizing your finances was a challenge and took a dedicated effort. Luckily, we now live in 2015, and compiling and tracking your finances is easy to the point of silliness.
There are a whole bunch of financial software systems that make this ridiculously easy. You only need one, though, and I personally use Mint.com. Do yourself a favor and spend one hour or so connecting the following things to Mint’s (super easy to use) system:
- Bank accounts
- Investment/retirement accounts
- Property (house, car, other large assets — it will suggest how to find market value)
- Credit cards, loans, and other debts
- Anything else that impacts your net worth
2) Examine your expenses.
Now that you’ve hooked up your bank account and credit card to Mint, spend just one hour categorizing each of your expenses in the last month. Take action based on the results.
I personally do this each and every month, and after the initial setup, it takes me just 10 minutes to examine my spending. Be honest with yourself about which expenses were unnecessary, and make sure you don’t get hosed by your bank, credit card company, or with any other unusual expenses (though once again, as a Mint fanboy, I have to give them credit — they usually email me right away when any of those things come up).
If your life is currently cashflow negative, you might want to re-examine whether you are ready to buy property. You are about to play a high stakes financial game, and if you are unable to control spending in your day to day life, that is an indication that you are not ready to purchase real estate. I’d rectify your personal finances first, then move forward with your real estate goals.
3) Decide where you want to buy.
It’s my opinion that you aren’t serious about purchasing property if you don’t have a region, city, or neighborhood that you are committed to focusing on.
You are going to work with professionals that are local, banks that are local, contractors that are local, and anyone and everyone else related to the property will be local. If you aren’t sure where you want to buy, you aren’t ready to buy.
4) Check your credit score.
Another layup. You had better believe that anyone getting ready to lend you money to buy a property worth hundreds of thousands of dollars is going to check your credit score, and not knowing this critical piece of information is a huge disadvantage to getting started.
Once again, there are a ton of options out there for doing this. And once again, I’m going to give you a simple and obvious solution — just go ahead and use Credit Karma. I use it, it’s free, and it’s simple. Takes 10 minutes.
5) Demonstrate a history of standard life payments
This is one that’s a little more subtle than the first four, but not being able to demonstrate a history of payments that the vast majority of Americans are making each and every month can actually delay you significantly.
When you ask a bank for a loan, especially if you are a first time buyer applying for FHA financing, the lender will want to see the following:
- Your credit score
- Your income
- A track record of consistent and significant payments
Here are some examples of payments that you’ll want to have made (consistently) for at least a year if you are looking to get financing for your first property:
- Credit card payments
- Rent or mortgage payments
- At least one instance of a utility bill like electric/water/internet
It’s really easy to check and make sure that you are paying these consistently, but it’s also easy for a lot of folks to informally pay roommates/parents/loved ones for these types of services. Make sure that your name is on any credit card, lease/mortgage, and utilities that you pay. It’s important to demonstrate that track record to your lender.
6) Gather important legal and tax documents.
Here’s a list of documents you’ll almost certainly need in the process of applying for financing. Make them easily accessible if you are considering financing a property:
- A few recent paystubs
- Two years of tax returns
- Contact information for your current landlord or information about your current mortgage
- Recent utility bill
- Recent statements for all bank accounts, credit card, investment accounts, and retirement accounts
- Government ID
7) Contact a local agent.
There are a million different ways to get started investing in real estate, but if you ask me, I’d suggest just getting yourself an agent. If your experience is at all similar to mine, you are going to overanalyze every step of the process, and having an experienced professional to go to with questions is a HUGE benefit.
Here are three reasons why I’d recommend that anyone looking to buy a property for the first time go through an agent:
Unlike me, my agent had been through the purchase of a property in my market before. She was there to answer every question I had, remind me of deadlines, and pointed out problems to watch out for.
My agent got her commission when I closed on my duplex. That commission was a powerful incentive to ensure that I hit every deadline and to quickly respond to any and all questions I had about inspections, legal documents, financing, etc. It’s possible that attempting to get my own license and study the market solo would have delayed my entry into real estate 6 months or more. Assuming that working with an agent got me into my property that much sooner, her commission was easily worth it.
There are quite a few people that you will need to work with on any property. You can either vet each and every one individually, or you can vet your agent and trust their judgement. My agent connected me with an inspector and a lender, both of whom I ended up working with.
Here are three very easy ways to connect with an agent:
- Post to the BiggerPockets Forums and ask if anyone can recommend a reputable agent in your town.
- Similarly, you can meet BiggerPockets Members in your area and ask for a referral.
- Outside of BiggerPockets, you can find agents anywhere and everywhere — I’d look on Zillow, Trulia, or start with a good, old fashioned Google search. Just make sure that you work with an agent that understands your unique situation.
8) Contact a local bank and get a pre-qualification letter.
In order to seriously offer on any property, you’ll likely need a pre-qualification letter from a lender. This document is an informal letter stating that the local bank believes that you are likely to qualify for a mortgage. Making an offer with one of these makes it more likely for the seller to take you seriously.
Much of the time, these pre-qualification letters can be obtained with a simple phone call. In my case, my lender asked me how much income I earn, what large debts I had, what assets I had, how much I could afford to put towards the downpayment, and what my credit score was.
Because you’ve already taken care of the easy steps prior to this, you should have absolutely no problem giving your potential lender this information and obtaining a pre-qualification lender.
There are many ways to find a lender. Three really easy ones that I recommend are:
- Ask your agent for a trusted lender
- Ask for referrals on BiggerPockets
- Google “home loans [your city]” and shop around
Keep in mind that some BiggerPockets users will suggest that you get a “pre-approval” letter instead of a pre-qualification letter. The difference between the two is simple: A pre-qualificaiton letter is informal and is the bank’s way of saying that you are likely to get approved for a loan, while a pre-approval is a formal means of demonstrating that you are already approved.
While getting a pre-approval letter may not be a bad idea, I personally was able to purchase my property just fine with a simple pre-qualification letter, and I went through the approval process afterwards. I chose not to get a pre-approval letter because I wasn’t sure if my offer on the property was going to be accepted, and I didn’t want to have to go through the intensive formal approval process until I knew that I was under contract.
9) Set aside cash for your earnest money and downpayment.
If you are serious about buying a property, you will have access to cash. Most first time purchasers will likely need to bring cash to the table just to make an offer on the property. This cash is called “earnest money,” which is basically like a security deposit when you offer on a property.
Most first time purchasers will put down earnest money, and get a mortgage formally approved by the bank AFTER the offer is made (like I did).
In my case, I offered to buy my duplex for $240,000, and the seller required that I deposit $5,000 earnest money into a holding account managed by a third party to demonstrate my seriousness. If I had decided to back out of the deal for a bad reason, I risked losing $5,000.
You can be sure that I was extremely interested in the property, and believed strongly that I was able to purchase it with $5,000 cash on the line.
After I got the property under contract, I applied for, and was approved for, my mortgage, and my earnest money was used as part of my downpayment.
Setting aside this cash is very easy, assuming that you have saved up for this purpose. Just move it into a separate savings account. Generally, earnest money will be around 2.5% of the purchase price of the property, so plan accordingly by looking at recent sales prices for properties in your area of interest.
10) Set up automatic alerts for MLS Properties in your area.
I would not call myself serious about purchasing real estate if I was unaware of the properties that are publicly available for sale in my area of interest.
The super-simple way to do this is to do this, and the method I use, is to simply ask your agent to send you every property that hits the MLS in your area, and that meet the criteria for properties you’re interested in. Most agents will do this for free – just send him/her an email outlining the types of properties and locations that you are interested in.
These steps are the absolute bare minimum if you are seriously considering buying property. If you aren’t ready to take the easy actions above, then you aren’t even in position to offer on property.
Do yourself a favor, and take these simple actions to put yourself in position to purchase property – if you are seriously interested in real estate.
No one will sell to you if you don’t.
For those with some experience under your belt, what would you add to my list? For all the newbies out there, what questions do you have about this process?
Let’s talk in the comments section below!