A few months ago, I got an email from a reader who wasn't sure what to do AFTER he had his initial phone call with a motivated seller.
The story was – he'd had a nice conversation with one of the property owners who responded to his direct mail campaign, and by the time he hung up the phone, they had verbally agreed on a sale price of somewhere around 15% of the property's market value.
This was great news for my reader – but even so, he found himself feeling “stuck”, simply because he had never been through these motions before and wasn't quite sure what to do next.
To expand on this a bit further, this was his situation:
“I just got done with my first mailing campaign – just under 300 postcards (your template, thanks!) and got 4 phone calls. I used your questionnaire, I got the information and now I'm a bit stuck on how to go through the due diligence.”
I actually thought his question was well-warranted because my own process has changed a bit over the years (which means there's obviously more than one way to get the job done).
When I get to this point in my talks with a seller (where we've informally agreed on a sale price that works for both of us), it's a great sign that I'm moving in the right direction, but unfortunately – I still don't have a legally binding contract, which essentially means that nothing is set in stone.
It's also worth noting that in this initial stage, I still don't know enough to make any final decisions about the property (because I haven't gotten up to my elbows in the due diligence process yet). As a general rule, I try not to spend an excessive amount of time on property research until I have a signed purchase agreement in my hands. Once I've gotten this far, I know I'm dealing with a property owner who is serious about selling at a price I can accept (and considering the prices I'm willing to accept, this quite the feat in and of itself). This alone is what allows me to justify investing even more of my valuable time into the property research process.
Once You've Got Your Motivated Seller…
When I've finally found my “diamond in the rough”, it's time to channel my excitement into something productive. In doing this, I go through the following steps:
1. Verify the Value of the Property
As I've outlined in this article, it's extremely important to get an educated opinion about the value of the property you're working with.
Not the realtor's opinion. Not the seller's opinion. An educated, unbiased, data-driven opinion.
In some instances, nailing this number down can also be rather difficult (especially when dealing with vacant land, as I do). Nevertheless, it's a job that's got be done, and the rest of the process hinges greatly on this number, so my first order of business is to get this nailed down pronto.
2. Uncover the Good, Bad and Ugly
Any property on earth is going to come with a mixture of positives and negatives.
When I'm investing in a more common type of real estate like a single family home or duplex, I always start by ordering a home inspection report. These will usually cost anywhere from $300 – $500 (depending on the type of property and the complexity of their report). What I get in return is a fairly detailed report outlining all of the potential landmines that were observable to the home inspector. For an example of this due diligence process, check out this blog post.
When I'm investing in vacant land, I'm usually quite pleased to find that these properties are MUCH simpler than houses. On the same coin, there can also be some hidden issues that most people don't think about until it's too late. For starters, take a look at this blog post, where I've outlined all the most common issues that I've encountered in the land business (some of them are much more common than others, but they should all be investigated if the answers aren't readily apparent). I also talk more about having a discerning eye in my contribution to this article.
3. Get the Paperwork In Order
Once I've gotten comfortable with the value of the property, and what I'll be getting once I buy it – my next step is to make an official, written offer to purchase the property.
I make this offer in the form of a purchase contract, which I talk about in great detail in this blog post. Contrary to the assumptions of most new investors, putting together an official purchase agreement doesn't have to be complicated. In fact, it's one of the easier things I do in this business, especially now that I've got the right systems in place.
Once I've had the appropriate discussions with the seller and we're both on the same page, I simply present my written offer to them in a simple-but-well-thought-out manner (i.e. – with a cover letter and contract). Depending on how they prefer to communicate, I can either send this to them in the mail, or via email, with both pages attached as a pdf document.
Assuming the seller doesn't have second thoughts or overthink the transaction altogether, I usually receive the signed purchase contract back from the seller in 7 – 10 days (and if I don't, I simply follow up with them until I get a response).
4. Move Towards Closing
This final step depends on whether I'm planning to close the transaction in-house or with a professional closing agent.
When I'm working with a relatively small deal (with a fair market value of $10k or less), I'll close the deal and handle all of the paperwork myself, as I describe in this blog post. I'll be honest – closing a deal in-house requires a lot more time, effort, mental energy and attention to detail. I don't close many deals in-house anymore, because I'm intentionally targeting larger deals that justify hiring this job out. However, when I was just starting out and I didn't have much money to spare, I relied heavily on this in-house method, which saved me a ton of money in the beginning.
When I'm working with a title company or closing attorney (which I typically recommend if it's your first deal, or a big deal), I simply call up my title company or closing attorney of choice, fax/email them a copy of the signed purchase contract and ask them what their expected turnaround time is (i.e. – “Approximately when will we be able to wrap up this closing?”).
Closing with a title company or closing attorney is MUCH easier – in almost every circumstance. It also takes more time, involves more paperwork and is a bit more expensive. Nevertheless, I usually think it's worth the extra cost , simply because it frees up my time to work ON my business rather than IN my business.
The vast majority of real estate transactions are handled through a professional closing agent, and quite frankly, they should be (because most people don't know nearly enough to handle this level of detail on their own). Keep this in mind, because for many, many people, it's just smarter to work with a professional on all closings, across the board.
Communication is Key
Regardless of which method I choose to close the deal, I am always staying in communication with the seller. I don't necessarily call and email them every day, but at the bare minimum, I'm letting them know a few key things:
- That I received their signed contract.
- That I've contacted the closing agent (or I'm in the process of putting together the paperwork).
- That they can expect to hear from me and/or the closing agent by a specific date, so we can complete the final paperwork, close the deal and get their cash in their hands.
These key pieces of information give sellers great comfort in knowing that they're dealing with someone who is professional, who cares, who knows what they're doing and who can be trusted.
In a business like real estate, there are a lot of sleaze bags out there. People get taken advantage of a lot. One of the best ways to build instant trust with people is to over-communicate. Let them know what's going on and what the seller's expectations should be.
It also helps to be honest and realistic about the timelines (i.e. – don't over-promise on something you can control) and if you can't meet their expectations for whatever reason, just admit it. You won't be doing yourself any favors by setting yourself up for things that aren't going to happen.