Do you know what the number one cause of chickening out and not purchasing real estate is? Analysis by paralysis, a “disease” caused by over-analysis and inaction. I’m no doctor, but from what I’ve seen, the primary cause of this disease is the overwhelming amount of tasks that need to be completed in order to close a deal.
It’s like the old cliché goes, “How do you eat an elephant? One bite at a time.” That elephant is a metaphor for your first deal. The way you overcome it is by figuring out what you have to do and then breaking it down into actionable steps that you can prioritize.
I understand that you may not know all of the steps that go into purchasing your first property.
That is the purpose of this article—to outline the steps the first-time investor needs to do to secure his or her first deal. To keep it simple the main focus is going to be on purchasing a buy and hold property with your own money for the down payment.
There are, of course, other ways you can get into real estate much more quickly, such as wholesaling, fix and flipping, and partnerships. These methods are beyond the scope of this article. Without further ado, let’s get this party started.
Step 1: Save
Before you do anything, the first thing you need to do is save! You do not want to be too hasty by depleting all of your savings to purchase a property. What happens if something goes wrong? You have no margin for error. The rehab on the property could cost more than you expect. You could have an unexpected large medical expense. Something might break. There are a million things that could go wrong, and that’s why the first step is to put yourself in a strong position financially before purchasing a property.
So what is a strong financial position? This really depends on your risk tolerance. Personally, I have two layers of reserves. I set aside $250-$500 per month (depending on the size of the property) as my first layer and also like to have a $10,000 second reserve per property.
I understand that you may have a higher or lower risk tolerance than me. However, my recommendations would be to at least have $10,000 over the estimated down payment and repairs in your reserve account before moving on to the next step.
Step 2: Build Your Team
A common misconception is that you need a full team before you start making offers on deals. You need to be equipped with a lawyer, accountant, contractors, as well as an agent and a lender.
This is a complete fallacy and is one of the biggest excuses for inaction. The only two team members you need before you start making offers on your first deal is an agent and a lender.
Don’t get me wrong: A good lawyer, accountant, and contractors are invaluable, but they can be sourced as needed. They are likely not necessary for your first deal.
To build a team, my preference is to go through recommendations or referrals. Go to your local meet up and ask folks there who they have used for an agent and a lender.
Once you have five to seven potential candidates, interview them. Ask questions that allow you to get a feel for their experience working with investors, their knowledge of the market, and their understanding of what you want. Whittle it down to one agent and one lender then proceed to the next step.
Step 3: Get Pre-Approved
You’ve got your agent and your lender, now it’s time to get pre-approved. This process involves sending the lender your account balances (checking, savings, brokerage, retirement, etc.), your last two pay stubs, previous year’s tax returns, etc.
Once the lender reviews these documents, he/she will determine how much you are able to afford through a pre-approval letter. You present this letter to the listing (or seller’s) agent alongside any offer so they know that you are interested and are able to obtain financing for their property.
Step 4: Search for Properties
After you are pre-approved and know what you can afford, it’s time to start looking for properties. Ask your agent to sign you up for the MLS listings that match your criteria. Things that I look for are price, number of beds/baths, square footage, and location in relation to work and a bike path.
You will get a daily email with any new listings for properties that go up for sale that match your criteria.
Make sure that you are able to cash flow with your current down payment and estimated interest rate, insurance, taxes, PMI (if necessary), and reserves.
Once you have a deal that checks all of the boxes, it’s time for you to have your agent draft up an offer. Once completed he or she will send the offer to the listing agent along with your earnest money.
(Note: Earnest money is the money that you send in along with your offer to show the seller that you are seriously interested in the property. It gets applied to your down payment at closing.)
Many times there will be some back and forth negotiation between the initial offer you send and what the seller ultimately wants. If you can come to an agreement and you both sign, you will be under contract.
Step 5: Under Contract
Once you are under contract, this is where the fun begins. The first thing you do is tell your lender so they can start their underwriting. Not to bash lenders, but oftentimes they are the ones that hold things up (reason why you need to find a good one). By giving them everything they need in a timely and organized manner, it greatly increases the probability of them being able to close in time.
After you alert your lender, you need to get the inspection ordered. Make sure this is completed at least one week before the inspection contingency deadline. After the inspector has drafted his report, you can have your agent draft an inspection objection report pointing out any things you would like fixed. If the seller disagrees and it is before the inspection deadline, you are able to back out and get your earnest money back in full.
The other important part of the closing is the appraisal. Your lender will order this for you. They need to get a third party to value the property to make sure their loan is covered. If the appraisal comes back lower than the purchase price, the lender will often not lend on the property. Don’t fret, though—most offers have a financing contingency such that you will be able to back out if the lender does not want to lend on the property.
If the inspection objections are resolved and the appraisal comes back at or above the purchase price, you should be in the clear for a smooth closing.
Step 6: Closing
The day of closing is usually the easiest part of the transaction. You meet at the title company’s office and sign what seems like are hundreds of papers. Make sure you do some hand exercises the week prior. You’ll be very sore otherwise.
Step 7: Repeat
Congratulations! Hopefully you followed this overview and are able to complete your first deal. Now, it’s time to make any renovations and get tenants in the property.
Now it’s time to rinse and repeat. Start saving up for the next down payment on the next property!
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