Calculate the Risks

You found it, now get it……

The property has been found and you agreed on a number. This part of the deal is so important. Make sure the real estate agent you're working with has the knowledge to help you in the market. One thing I’ve noticed through my many deals, yet is rarely talked about, is the importance of an exit strategy if the deal falls through. There will always be due diligence, inspections, and many other things required before the sale. However, I always make a point of discussing the points at which I can walk away from the deal, so I can understand the financial obligations to me. Anything can happen along the way, but knowing if something happens and the consequence is a learning moment rather than a financial hit, is so important. There have been deals I’ve seen in the past where the seller had the buyer wave the ability to leave the deal if the property didn’t appraise for the expected value, and it was written into the contract that the buyer would make up the difference. So in this case if you are going for financing and the property doesn’t appraise favorably, you are on the hook for more out of pocket. It’s important to get the deal, but also to protect yourself along the way.

All that being said, this also puts you in a position where you can’t waste time. As the buyer, make sure you handle everything quickly and efficiently. If you are going to expect a buyer to give you the option to walk away, then you had best not waste their time. I follow up with my lenders, agents, and anyone else involved on almost a bi-daily schedule. I’ll send them texts or emails just to ask if there is anything they need from me, or if they have made any progress since we last touched base. You have no idea how many times I have reached out, only to be informed that something has already been completed and we can move on to the next step of the process. Don’t expect that you are the center of everyone’s attention, but make sure you force them to think about you constantly so you can keep things moving. For the sake of the loans let me help you out. Make sure you have your last two years of taxes, your two most recent pay stubs, account statements for your checking and any savings account you may draw funds from, and also statements of any monthly or recurring payments you may be making. I have these things on retainer and the second I decide to finance with an institution I fill out all the info through their portal and send over all those documents. This just ensures they get what they need up front and we don’t waste any time going back and forth asking for documents.

Timing is everything with a deal. If you're going to take the time to put in all the research and get an offer accepted then why would you kick the can down the road and waste time completing the project and securing the asset. It probably goes without saying but not only is having a competent real estate agent important, but you should also have researched all restrictions and regulations before bidding in that market. This leads in to why I enjoy being just outside the action. Most of the hot spot adjacent areas have more favorable regulations and are easier to connect with the officials involved. You can get questions answered and even if something does go wrong you can probably get face time or chat with whoever is making the rules. It’s invaluable to not be one among many in the major markets where they will deny a request for the dumbest reason and give no explanation and send you back to the beginning without any consideration for all the effort you have put in. Having the ability to grow in the market and maybe even establish a presence with the local contractors, vendors, officials, and service providers gives you more understanding of the community and helps grow your knowledge base of the market.

Now that the deal is hammered out and you’re going through the motions of getting the deal closed, it’s time to evaluate your cash and funding. Take a look at what you have on hand and what you can get access through funding. Whether that be personal lines of credit, credit cards, private lenders, cash on hand, or some other means. Take it all in and start putting your budget together. Evaluate the projects that need to get done, the budgets for each project, and the timelines for completion. Don’t tell yourself the deal needs to close before you put in the effort to figure all this out. It is much better to assume it’s going through and be prepared for everything as soon as it’s yours. I subscribe to the mentality that the more time you have to think about something, the more things you’ll think about. Once these projects, timelines, and costs are calculated create a spreadsheet that prioritizes them in importance versus cost. If your new property needs a new roof then that needs to get addressed first. If you start working inside upgrading and improving with the leaky roof overhead and a storm rolls through and leaks all throughout your newly renovated interior it’s not the best plan of attack. Make sure the shell of whatever you are buying is bullet proof first. Take care of the outside problems first, so when you begin to address the inside problems they are protected. Also make sure to complete a cost analysis on the options you plan to institute. Not everything awesome is worth doing. Adding a $20,000 coffee bar to your reception area in your new office space is awesome, but is it going to cash flow properly. Counter point, for the residential market, hot tubs are always a crowd favorite and in many markets are completely reasonable to include. While in other markets it’s not worth the upkeep for the returns you will see from the investment.

Now that you’ve taken the time to identify the features to include and order to execute them, it’s time to research contractors and service providers. There is some real benefit in starting to research the people you want to work with and getting real numbers from them, so you know what to expect. I’m sure you’ve been told don’t count your eggs till they hatch, but in this situation it just means if the egg does hatch you are completely prepared to take care of whatever hatches. It’s important to realize this kind of investment takes tons of work and preparation, but if done with a goal in mind, and proper forecasting, you can enter the market and keep your head above water.