Real Estate Investing Step by Step

Understanding the concept of Acquiring Real Property for Financial Gain

In order to understand how to acquire a specific parcel of property in order to generate a net difference an investor must go through a series of steps.

Identify the area
research the vital statistics of the area
1. Density/Population

i. Residential

ii. Commercial

iii. Industrial

Demographics

i. Age

ii. Income

iii. Employment

Real Estate investment is a VERY INVOLVED AND TECHNICAL PROCESS!!! To be successful in any real property investment an individual investor must assemble a core team that will assist in all the various aspects of technical expertise, product and local market awareness and, most importantly, the transaction and experiential knowledge that is critical to the overall success of any Real Property Investor.

Single Family REO Rehab and Rental Properties.

Buy a home at a wholesale price.

Wholesale REO and Short Sale Purchases to Rehab

“Buying on Spec” or “Speculative Buying” is to buy a single family home, multi family home, or commercial structure at wholesale price in anticipation of a need for rental of such a structure or home at the projected time of completed rehabilitation. Such needs can take a variety of forms:

Growing rental market wherein the home(s) may go under lease for a variety of purposes (vacation rental, annual rental, short term seasonal rentals, etc.).
Lease Option purchasers or first time home buyers either of whom may demonstrate the need for a home but face certain minor challenges with traditional home purchase programs.
Relocation Buyers moving from all over the nation and the world to the areas in which you build.
Second Home/Vacation Home Buyers

Our Program offers you the opportunity to purchase single and multi family homes and small commercial projects at a fraction of original purchase prices. With the assistance of a qualified and licensed Real Estate Professional and an experienced and Licensed Mortgage and Finance Professional you will be provided with the best in Real Estate and Finance Transaction Coordination.

The four keys to understanding the relationship between your goals and your capabilities:

Wants

Needs

Desires

Ability

This list is vital to any property investor’s plan. One must evaluate each and every one of these characteristics in order to asses the true viability of any deal for that particular investor. Each is dependent on the last and so on.

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For Example:

Joey B. has provided his Real Estate and Mortgage Professionals with a complete profile on himself and has been presented with several opportunities that seem consistent with his requests. Now the process of elimination begins based on the four keys mentioned above:

Wants: Joey B. Wants to control the risks and exposure and keep his monthly expenses and potential carrying costs to a minimum
Needs: Joey B. Needs to get a deal started within a the next 45 days because he is utilizing a 1031 exchange and is limited to a certain time frame and dollar amt for this transaction.
Desires: Joey B. would love for the seller to take back a note at better than market rates.
Ability: Joey B. will have spent a fair amount of time with the Mortgage Professional on his team to verify that he is qualified for several financing products that would suit the various projects that were presented him. Additionally, Joey B. is subject to several very specific restrictions for this transaction based on the 1031 rules of like property, purchase price, etc.

With this in mind the Real Estate and Mortgage Professionals working with Joey B. will address each of these issues as they apply to the various opportunities that were presented.

Want: the project that offers the best initial asking price will obviously present the lowest carrying cost however that is also subject to Repairs needed, available cash or the financing available, and the appraised value vs. the LTV (or Loan to Value ratio offered from the lender).
Needs: the “wants” mentioned above will have to be measured against how fast the deal can be structured and closed based on the timing needed.
Desires: once again if the seller is open to adjust the purchaser price because of necessary repairs needed this may add up to an expeditious closing since there may not be a need for a traditional lending institutions due process which can be time consuming.
Ability: Finally, the project that is selected is matched up with one or more of the various financing products that Joey B. was qualified for (not Pre-Qualified!!!) and as well matched up with the rules of the 1031 exchange process and rule in order for Joey B. to ensure the integrity of the tax shelter and therefore all of the above

If these keys are all addressed and the points of issue important to each individual are thought out in advance the likelihood of the individual’s success is increased simply because of increased thoroughness.*

*Each individual Buyer or Seller in any transaction involving Real Property is ultimately responsible for their own decisions and it is advised that each Buyer of Seller endeavor any and all due diligence to ensure that any transaction is suitable for the individual’s intentions.

How to get started

First

Understanding exactly what is to be achieved (the Goal) is the very first thing to happen prior to acting on any real property purchase. Before reading a single contract a successful investor will first formulate the basis for a plan that will serve as the rough blueprint of how the investor expects to achieve the goal(s). There are a variety of things to evaluate and consider. This is where an experienced Real Estate Professional will begin to prove invaluable. Among the most important considerations will be the various analyses that a true real estate Professional can provide with regard to an investor’s goals and resources (ABILITY). Based on what the individual investor outlines as desired goals and available resources, an experienced and practiced Real Estate Professionals can begin to provide insight as to the various markets areas, the variety of projects available within these market areas, and the benefits and risks involved in all of the possible combinations that are consistent with the investor’s abilities.

Identify your goals (Emphasis on Realistic/Conservative for Goals)

Profit Goals

(These MUST be Realistic and derived from market research)

Quantity of Properties

(This is Resource Driven. Meaning that an individual investor has certain resources available with respect to liquid capital, Lending Qualifications, Credit Standing, etc )

Overall Long and Short Term Intentions

(Philosophy of Real Estate Investment becomes the question here. Does the investor understand the basics associated with such transactions? Buy and Hold vs. Intended Quick Sale vs. Annual Rental / Seasonal Rental / Lease Option etc)

Verify that your goals are consistent with your resources

Timing and Time Commitment

Capital Commitment and Resources

Goals vs Resources Credit Standing

Employment Status and History

Residential Status and History

Second

Identify the Area (geography)

Nation => State => County => Region => Neighborhood

Your Real Estate Professional will assist you with the choices available and help to narrow down the choices based on the investor’s interests. Once the area is selected then the additional education on the local market characteristics begins. A qualified and experienced Real Estate Professional will be able to provide various reports on sales activity, pricing, list vs. purchase prices, inventory on market, ratio of sales vs. new listings available, etc. Leading indicators of markets would be short sales vs. REO vs. Normal retail sales. It is important to know what type of sale is leading the market, what type of sale is determining value. This information can be provided to allow the investor to better understand the dynamics and trends in the local market and therefore offer the investor the opportunity to make a more informed decision. Our program offers our investors a full BPO (broker Price Opinion) on our properties.

Third

Presentation of the available opportunity(ies)

At this point the Real Estate Professional will focus on the specific area(s) of interest to the investor and develop out as many opportunities as possible based on the investor’s direction. Once these opportunities are identified the process of elimination begins utilizing the Four Keys (Wants, Needs, Desires, and Ability).

NOTE THAT THE INVESTOR HAS YET TO REVIEW A SINGLE CONTRACT OR INITAITE ANY OFFERS WHATSOEVER!!!! (The majority of the work in the process of acquiring real property for a specific purpose is done PRIOR to writing any contracts!!!)

Fourth

Structure the contract offer(s)

Once the Project(s) have been selected it is time to target specific aspects of the project. This will rely heavily on the Technical knowledge of the Real Estate Professional that the investor works with. The process of acquiring real property is riddled with complexity. There are literally dozens of forms of Contracts and Addenda. Some contracts are very specific to particular transactions while others are designed for a wide array of transactions. Each contract has a variety of terms and stipulations that must be adhered to by either or both the Seller(s) and/or the Buyer(s). It is of the UTMOST IMPORTANCE that these various terms and stipulations are met or the potential for the deal to suffer fatal consequences becomes very high. There are a variety of very negative consequences that can develop as a result of not using the correct contract or failing to meet contractual obligations for either or both parties to the transaction. Very often the negative consequences resulting from these lapses in performance on the part of either or both the seller and or the buyer can be measured in actual dollars lost or in lost potential. The most common contract used in today’s real estate market is the AS-IS contract for sale or purchase. In a nutshell this contract basically states that the buyer accepts the property in “as is” condition and desires no additional monies for repairs.

The contract offer(s) need be structured

It is very important that everyone understand that the process of transacting on real property is not a unilateral endeavor. Meaning that there are multiple parties to a transaction and that will mean that there are multiple agendas and goals trying to be achieved.

“Buying and Selling real estate is very much like being in a relationship. One has to understand that there are other people with needs involved and if a deal is to be struck then everyone must be considerate of each others goals”

In real estate this concept is called “A Meeting of The Minds.” This means that both sides of a transaction must come to an agreement that is satisfactory and acceptable for everyone on the buyer’s line AND everyone on the Seller’s line.

With this in mind it is important to recognize that a contract offer is simply an offer is only an offer. It is obviously tailored to further the agenda of the Buyer(s) and achieve the terms that desirable to the Buying side of the transaction.

There are essentially three (3) possible reactions to a contract offer.

1. The offer is Accepted as is.

This is obviously the best case scenario for the Buyer. The terms that were structured on the contract offer were designed to suit the buyer’s needs and should therefore be optimal for the buyer. So, if the seller(s) is/are agreeable to the terms of the original offer than it is safe to assume that the buyer(s) should be pleased with the acceptance.

2. The offer is Refused or Declined.

This is obviously the worst case scenario for the Buyer. The terms that were structured on the contract offer were entirely rejected and the offer is not being considered any further. There are many reasons why this may occur. However, the most common seem to be that the seller(s) have already accepted another offer, or the offer was so far from satisfactory to the seller(s) that there was no interest in negotiating (too far apart), or, in many states the seller is not obligated to accept any offers and may, for whatever reason, simply say no.

3. The offer is Countered.

This is the beginning of realizing the affects of multiple agendas and goals. At this point the Seller(s) have evaluated the terms and conditions of the Buyer(s) offer and began the process of manipulating them to better suit their own goals in selling the property. This process is not limited to any one revision or any specific amount of revisions. There are no limits as to what terms or conditions my be altered and the process of “Offer – Counteroffer” carries with it an infinite amount of possible outcomes as it pertains to the terms and conditions of the contract. Also, it is important to remember that this process can result in achieving the “Meeting of the Minds” and therefore a commitment or, just as likely, a failure to come to the “Meeting of the Minds” and ultimately no deal.

It cannot be emphasized enough that the Technical knowledge and experiential knowledge of a licensed and qualified Real Estate Professional is very important in dealing with the organization and structure of a contract offer that is compatible with the Buyer’s goals. Additionally, any Counter offer negotiations that follow a contract offer are carefully designed and considered in efforts to maintain that compatibility.

VERY IMPORTANT

Do not get frustrated or discouraged if the initial offers are rejected or countered and ultimately never materialize into and accepted deal. It is important to be patient when dealing in Real Property Transactions. Frustration can lead to impaired decision making and that can be very costly in this sort of transaction. The terms and conditions that become final and are committed to by both parties are enforceable by law and it is the ultimate responsibility of each party to any transaction to ensure that the final version of any contract is acceptable prior to signing and making the commitment.

Fifth

Searching for the right deal

Thousands of homes are available each with a wide variety of necessary repairs, floor plans, elevations, floor plan modifications, amenities, upgrades, appliances, etc. There are also many limitations on the use of specific properties. For just a sample of some of the issues that are of concern you may find that due to local ordinances the property Is riddled with liens because the property has not been properly maintained over the last 12 months. Even though the past homeowner should ultimately be responsible for these fees, they will need to be paid and the liens cleared before ownership can be transferred. With this in mind the Real Estate Professional can work with both the title company and the bank to help ensure these liens are paid PRIOR to purchase.

Based on the nature of the project this step is no less critical than any of the previous. This is yet another instance where the information on the local market and the evaluation of the supporting data on the part of the investor is critical. Then come the questions about the purchase and the original goals that were set in advance.

Is this property single or multi family?

Is it an entry level, mid level, or high end home?

Is it intended to be rented annually or seasonally?

Is this to be a short, mid, or long term hold?

Based on many of the above questions:

What will be the target size of the home?

What repairs or upgrades will be added?

What Color selections?

What landscaping packages?

Etc…etc…etc…

This list is very extensive and fairly specific to the individual purchase. Once again, I cannot stress enough the advantages offered by working with a Licensed and qualified Real Estate Professional to help navigate through the REO and Short sale purchase process. The decisions made at this juncture of the deal will have a significant impact on the outcome of the project.

Once the property is located and initial inspections are performed the investor will submit an offer to purchase the home based on the purchase type (REO vs Short Sale). The following will be needed in order to put an offer in on an REO or Short Sale property:

Fully executed as-Is Contract for sale or purchase

Proof of escrow (usually a copy of a certified check, minimal is 1,000)

Pre-qual Letter (if finance deal) dated within 30 days of the date of offer

Proof of funds (if cash offer) Dated with 30 days of date of offer

If offer is from a LLC or Corp you must include signing authority

Also Proof of Funds or Pre-qual must be in the name of the Company

Once again, the investor is entering into a contractual obligation. This is for a REO or Short Sale property. The lender is committing to selling a specific home at a specific price and the Buyer(s) is committing to the purchase of that home at that price.

Sixth

Closing on the purchases, Lending, And the Close

Once the contracts for the purchases of the REO or Short Sale property is successfully negotiated, the terms and conditions are agreed to by all parties (Meeting of the Minds), and all the contracts are signed and committed to by all buyers and sellers then this project becomes the responsibility of a Mortgage Professional (if financed). If it is a cash deal the responsibility falls totally on the buyer and the title company.

In a financed deal, an experienced and knowledgeable Mortgage Professional will have been involved in the genesis of the project and will have worked diligently to ensure, to the best of their ability, the availability of suitable finance products for the investor. When this is done properly and effectively the project will be placed with the appropriate lender immediately utilizing the finance product in that lender’s portfolio that is most beneficial to the investor’s goals.

Generally, these projects will utilize a loan category often referred to as a “Conventional Loan.” This is a loan product that is designed for an individual borrower to use for the acquisition of a home without the intent of occupying it. There are many, many variations of this loan product and many lending institutions that provide this loan category. The variations from Bank to Bank and as well the variations within each bank’s product line are too numerous to count. This is why it is recommended that an investor utilize a dedicated Mortgage Professional to assist in the selection of this loan product.

Once project is places with the lender the Mortgage Professional will work closely with the investor to ensure that the loan application and loan package is accurate and complete. This is a critical issue as many loans are denied due to inaccuracy or incomplete packages. Even the most savvy and experience Mortgage Professionals will be challenged on a consistent basis by lender guidelines and underwriting processes. This is why working with a Mortgage Professional that is seasoned and knowledgeable is so important.

Seventh

Timing

(Project Analysis and Selection, Contract Offer, Time to Close, Rehab Period, Completion and Final Punch and Walkthrough)

Overall it is not uncommon to find that the time from inception to completion of most projects ranges between 30-120 days. This can be plus or minus 30 Days depending on a number of different factors. In general the timing for each stage will be as follows:

Project Analysis and Selection (1 week avg.)

This initial step will involve working with your Real Estate Professional and Mortgage Professional (if financed) to familiarize the team with each other, the Four Keys, and the Goals. Once everyone is on the same page the process of identifying the area and the project begins.

Bear in mind that there will be market data to review and become familiar with. Additionally, the various projects will involve the review of Homes, Floor Plans, Pricing, etc.

Offer-Acceptance-Communication (2 weeks avg.)

After the orientation and project selection process is complete the next step is to begin the process of Contract Offer(s). As mentioned above this is the point at which the investor begins to interact with the Reo or Short Sale Sellers. This can be as simple as sending the offer and receiving an outright acceptance in a matter of minutes (very, very rare). Or the process can be drawn out for months due to possible Counter Offer negotiations or time consuming short sale negotiations. It is not uncommon to go through multiple rejections in pursuit of the right deal. Remember, discouragement, frustration and impatience WILL hinder the investor’s ability find the right deal.

Closing (30-120 days avg.)

This stage is primarily dependent on the type of purchase, Cash or financing as well as the of transaction (REO vs. Short Sale). In the event it is a finance transaction an excellent Mortgage Professional can asses the project and the various factors involved and move the process along in a manner that is as expeditious as possible. With a True Qualifying process and a thorough Loan Product identification the process can take as little as 30-45 days. When it comes to dealing with Lending institutions and Banks it is always wise to allow an additional 15-30 days for the various miscellaneous issues and tasks. In the instance that it is a Cash purchase, this usually moves things along faster. Ultimately Cash is king and making cash offers leaves little room to back out, Banks like that. If it is a short sale listing no matter cash or credit purchase type you are at the mercy of the negotiator and you will find that these types of transactions take the longest.

Rehabilitation (2-4 weeks)

This will vary somewhat dramatically depending on the contractor, the extent of the Project, and the Local Conditions (market, labor pool, climate, etc.). The contractors should be selected based on their reputations, quality of construction, ability to perform, and pricing.

A quality contractor can complete a small rehab, under ideal conditions, within 2-4 weeks. There are too many variables to address in the process of rehabbing a home that can affect the timing. However, it should be known that it is usually in the contractor’s best interest to complete a rehab as quickly as possible. Most contractors must utilize a fair amount of cost “projecting” in order to price the rehabilitation of a home. This is intended to take into account the cost increases of various products and resources over the coming weeks during the construction. Therefore the faster the rehab is completed the better. If the rehab takes much longer than expected the cost projections will likely be insufficient and the contractor runs the risk of losing money on the project. This risk is minimal if the contractor is experienced, and knowledgeable.

If we take the outside timeframe for each of the above stages we come to an average of 3-6 months.

Project Analysis and Selection (1 week avg.) 1 wk

Offer-Acceptance-Communication (2 weeks avg.) 2 wks

Closing (30-120 days avg.) 1-3 months

Rehabilitation (2-4 weeks) 1 month

Total Time on average 2-5 months

Based on what the nature of the project and the goals identified the process of either marketing for sale, annual rental, vacation rental, or lease options (to point out a few) may be started well prior to the completion of the subject rehabilitation. Based on the market conditions and availability of end user buyers, annual tenants, vacationers, or lease to own buyers the investor will work with the Real Estate Professional to optimize the potential for securing a contract or lease.

The strategy for identifying the end user is formulated well in advance of the commencing the project. Based on the original market analysis provided by the Real

Estate Professional the plan or the “exit strategy” will be outlined with as much room for flexibility as the project allows. This Flexibility is vital due to the ultimate unpredictability of the Market. Any Real Estate Investor that plans to rely solely on a single exit strategy with a project that is not pre-sold or without a secure contract from the beginning is planning to fail.

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