What To Evaluate Before Making An Offer
By Paul Esajian on July 19, 2019
Once you submit an offer you should have a pretty good idea of what you are walking into. You never want to get into a situation where you are almost disappointed by getting a signed contract. Where many novice investors get into trouble is by submitting offers without doing their necessary homework. Their last ten offers may have gotten rejected and they become lazy with their diligence. What they find out the hard way is that it just takes one slip up with your diligence to get in trouble. You are forced to play catch up for the entire process and make the best of a bad situation, often with reduced profits. The alternative is doing the right diligence before you get too far. Here are five critical due diligence items to evaluate prior to making an offer.
- Market: All properties are not the same. A large property in a rural area should not be valued the same as a smaller property in a booming market. On the surface the bigger property may appear more valuable but in reality, it isn’t. If the market is on the upswing you can afford to stretch your offer just a little bit to buy before the turn. If the market is declining the asking price should not influence your decision to walk away. When evaluating your market, you need to look at sales price data, employment, tax changes, strength of schools and business development. This research should be done long before you get a lead on a property. You should have this in your back pocket so all you need to do is act instead of wasting valuable time in this step. If the market is poor don’t be blinded by the numbers. Eventually a poor market will show its true colors.
- Cost Of Repairs: Estimating the cost of repairs on a rehab project is something you will learn over time. The investors you see on your favorite TV show have been doing it for years and can come up with figures fairly quickly. Even if you have a few rehabs under your belt, you should also find a second opinion. In a perfect world you would just call your contractor to meet you at every property you look at. The reality is that they are probably busy working on current projects and usually won’t drop everything to give an estimate on a property they may not even close. Your cost of repairs is influenced by the work you plan on doing. It is important to toe the line between improving to your taste and keeping the market in mind. Over improving and throwing money at the property does not mean you will get it back. If the work doesn’t appeal to buyers, you will be left with a property that has a hard time selling. Updates are nice, but quality of work is much more important.
- After Repair Value (ARV): It is important to work backwards on a rehab project. Knowing what you can get the property for is just one piece of the puzzle. The next is actually getting it sold. You need to have a realistic idea of what you can list the property for when the work is completed. It is advisable to talk to your real estate agent and look at recent comparable sales and current listings. While improvements are nice, bedroom and bath count are more important. If you can find a way to legally add an extra bedroom or bath, your value will soar immensely. It is also important to always take a realistic view of your ARV. It is human nature to only hear the highest comp your realtor provides. You may get that number, but it could also be a case of the seller finding the right buyer at the right time. Always assume the low end of the market and be happy with anything over it.
- Timeline: How long is it going to take your property to sell from the day of acquisition? Some properties are cut and dry, while others are not nearly so simple. If there are tenants in place or the property is acquired through a tax auction there will be some time before you can start working. This must be taken into account. The market thirty days from now may not be the same say four months out. You also need to account for carrying costs, interest repayment and opportunity cost. You also need to know that your team can get started as soon as you get the keys. If your contractor, electrician or framer are booked a few weeks out you either need to find other people or wait. Neither is a good option, but both must be factored with your diligence.
- Potential Hurdles: Very few rehab deals go smoothly from start to finish. Even on the seemingly easy ones there is some snag along the way. As you prepare to make an offer you should take a minute to consider what you may be facing. Will you have an issue with the town? Will the existing tenants be a problem? What are the odds of finding something with the foundation? An unexpected issue doesn’t mean you have to walk away from the property, but you need to embrace it financially and mentally.
If you take the time to cover this five areas, you should have a good idea you know what you are walking into. This allows you to make offers with confidence and get more deals closed.