Today we are continuing our conversation about how to buy your first single family home rental property. We are covering Step 5, which is how to get your property under contract. This lesson will run you through the 6 step process to get the property under contract. From the Purchase Price, the inspection deadline, the loan denial, earnest money, the appraisal deadline, and the closing.
If you haven't watched Part 1 yet with the first three steps click here. If you haven't watched Part 2 yet for Step 4 click here. If you already have, watch the video below for step 5:
If you want to learn more about real estate investing with me, click the button below for a quick webinar where I explain more about how all this works:
Alright, guys. The next thing we're gonna talk about here is getting the property under contract.
Okay. Under contract. An under contract property is where the buyer and the seller have both agreed to terms. Okay? Those terms include the purchase price.
Those terms include the inspections deadline.
That's a date Those terms include a loan denial deadline.
Those terms include earnest money, inspections, evaluations, loan denial, and appraisal deadline.
So let's just talk about a few things. One, if you are going after MLS sniper and going after properties that are listed, you're going to need to use the board of realtors approved form. Basically, the brunt of realtors is, saying, hey, this is the form we all agreed to to cut down on litigation and problems, all that type of stuff. Now, You don't have to use that form. You can use any form, and we've got purchase contracts. But if you're going directly to a seller, I recommend using some of the purchase contracts we have. They're pretty simple.
If you're going through an agent, I recommend using the forms that are, used in your area because that's what agents are used to using. So you don't even have to have that form. Because the agent's gonna have that form, and you can either hire a buyer's agent that's been helping you and have them put the contract together for you, or you can call the seller's agent and say, I'll pay you one percent more, give me a two percent discount on the commissions, and I'm gonna have you, and these are the terms that I wanna write up in the contract. Okay?
So first is the per price. Well, in this example, we know we gotta buy it for a hundred and fifty five thousand dollars. Maybe we can get it for less. Maybe we offer them one fifty.
And then that gets into offers and counter offers, which we'll talk about here in just a minute. Now let's say we have agreed to a hundred and fifty thousand. The inspection's deadline The idea here is you've walked the property once. Maybe you haven't even walked the property.
Maybe you made an offer without seeing the property, which you can do. I've made a lot of those. It basically says, Hey, I've seen the property once or I haven't seen the property. I need some time to get my contractor in there and my inspector in there and all those things.
So I need this much time. And usually, you'd say two weeks, maybe three weeks. It just depends.
And that's gonna give me enough time. And the seller is gonna make access to the property. They're gonna let you in with a reasonable request with reasonable time and those types of things within those few weeks. Now between now and those few weeks, I have to decide if I wanna move forward without inspections or not.
The other one we're gonna talk about is loan denial. Maybe you say three weeks is your loan denial, and two weeks is your inspections, and your appraisal is three weeks as well. So Let's just use some numbers here. Let's just, use a calendar.
Just oh, maybe here we go.
Okay. So we'll just use some easy dates here. So let's say that we're making the offer today on the sixth. I'm gonna say by the twentieth I'm gonna have my inspections done.
I'm gonna say by the twenty seventh I'm gonna have my appraisal done. And by the twenty ninth, I'm gonna have my loan denial deadline, and then we're gonna close on the first. That's the other one. It's the closing date. We're gonna close on the first of next month. Okay?
So those are all things that are part of the offer. There's also some other nuances with some legalese and those things, less concerning on that.
You're also gonna put together an earnest money. How much earnest money? And that's negotiable. That could be a dollar or it could be ten thousand dollars.
Usually when I'm dealing with a property that's listed, I'm five hundred to a thousand dollars is what I'm doing for earnest money. If I'm dealing with a that is not listed. I'm usually doing fifty to a hundred dollars. Okay.
So what these mean is I have up until this deadline to remove myself from the contract.
If I go past this deadline on the twenty first, if I wanna say I don't wanna buy this house anymore, because of my inspections, then the seller can get my earnest money. Okay?
If my loan denial if my loan denial gets denied on the twenty eighth and I say I'm not moving forward, then the earnest money comes back to me. If it goes to the thirtieth and it's usually ends at five pm on these dates, the contract will say that then I lose my earnest money. Right? If my appraisal, if I'm doing it up because of my appraisal, which means if for some reason you don't have these things taken care of, you have to do what's called an extension.
That extension means you are going to extend the time. You go to the seller and say, hey, seller, I know the loan denial was on the twenty ninth. I need to extend that to the fifth. We've ran into some problems. If you can't, I need to cancel the contract, return my earnest money sign it, send it to them. They would then sign it, and your new deadline would then be the fifth, which means you probably would change some of these other deadlines.
Now every contract's a little bit different date based on state.
It used to be in some states that if you went past the deadline and chose not to buy it, that the seller had the option of one of three things. They could take your earnest money. They could sue for liquidated damages, their losses, and those things, or they could to for enforcement of the contract, which means, hey, you have to move forward with this. If you're able, you have to move forward on this, and the seller had the right to do that.
Some states still do that. In a lot of states though, for, the reason of not blocking up the courts and having all these battles, they've simply just said, you know what? The seller gets to keep the earnest money. That's where we call it.
Solar gets the earnest money. That's the extent of the damages that can be there. This is a question you need to ask your agent.
If you're working with an agent. If you're not working with an agent, you're using one of the forms. Typically, we say that earnest money is total liquidated damages on your purchase. And so that's all you would be out if you went past these deadlines. Now if you think about this, you're risking five hundred to a thousand dollars to tie up a piece of property could make you hundreds of thousand dollars over the next twenty years or more.
So that's probably worth doing, and there are gonna be some situations where you've put some money up and for some reason something doesn't go right here and you might lose some of that earnest money. Now I wanna do everything we can to help avoid doing that, and that's knowing your deadlines and living up to those deadlines. But it's gonna happen occasionally. So you just have to be prepared for that.
That's just part of investing and you've gotta be be aware of that could happen. Right? But if you get in there and find there's a big problem, you wanna fight it out before the deadline so you can get the earnest money back. On occasion, maybe that won't happen because of something.
You wanna extend that contract so you shouldn't be losing that earnest money.
So that's how we write up the contract. There's dates for deadlines. There's prices. There's the amount of the earnest money.
Now this is how it works out. The buyer makes an offer to the seller. Okay? So let's talk about this.
Okay. So it all starts with the buyer. The buyer makes an offer. So let's say I made an offer to them for a hundred and forty thousand dollars.
And let's say I wanna close on February twentieth.
And let's say I wanted to do a hundred dollars of earnest money and, you know, some of those things. Okay? Then I give that. I sign it.
I give you the earnest money, and then the seller has one of three options. They can accept Well, they can say, yep. I'll do it and they sign and everything I offered I got. Or they can reject where they say, hey, sorry.
Not interested.
Even if you make a full price offer, they can still reject. They say, no, we've decided not to sell whatever the case is, they can do an outright rejection. Or what is most common is they do what's called a counter. Now this is called a counter offer.
Now how the counter offer works is everything in the original offer is the same except for specifically what is stated in the counter offer. So everything in the original offer remains the same unless otherwise stated in this counter offer, meaning If the seller comes back and does a counter offer and says we can't take one forty, but we'll take one fifty. And we can't do February twentieth for that closing deadline, but we will do February first. So then they say counter offer, and they give the counter offer back to me.
Then I have a time period that typically twenty four or forty eight hours, where I can then re I can do the same thing as the buyer. I can just accept it and say, yep. We'll do it. I can reject it and say, nope.
And then we're not under contract. Nothing's happened or I can do a counter offer. And I can go back and say, well, I'm good with but I wanna change the term. I want the price to be one forty five, and then the seller has the same option.
Now keep in mind, at an end point in time, If we're in a counter offer and I have not accepted, the seller can get offers from other people. They can accept offers from other people. They can do all those things. In addition to that, there's a time period for acceptance.
And if it doesn't get accepted, during that period of time, then the contract is void. So here's the example. Let's say make an offer for a hundred and forty thousand. I tell them that they have twenty four hours to get back to me.
They've got till tomorrow night or whatever the case is. They don't get back to me. They get another offer. They decide to take that offer and sign it.
The seller can do that. Okay? Let's say also that they gave me a counter offer of a hundred and fifty thousand. And, then they got a better offer and they called and said, we're rejecting this offer.
This offer's gone. We're gonna take another one before I've actually signed it and put the date and time on there. Well, that goes away as well. So there's some timing in this as well.
But the ideas and the points I wanna make sure you understand is the buyers and the driver's seat and makes all makes the initial offer. The seller then can accept to reject or counter offer. Everything stays the same except for what specifically stated in that counter offer, and then the buyer has the same right to do the same thing until somebody comes to an acceptance and then it's the original offer And you're gonna have addendum one, addendum two, addendum three. Those are the counter offers, and those will be listed.
And basically everything the offer stays the same unless otherwise stated in these accepted agreed upon addendums.
So that's the whole point of getting this under contract.
You put the contract together, you work with the agent or if you're working with seller direct, you fill that out. It's a fill in the blank, put in the dates, put in the prices, Once that's signed, now you're officially under contract. What I wanna do next is talk about the long term profit you're gonna see on this property. Okay? So one of the things is we ended up we're cash flowing three hundred dollars a month on this property. That is after our rent seventeen hundred dollars.
We've got our taxes or insurance and all that type of stuff, and we've got a three hundred dollar cash flow. So we're into this one hundred and fifty five thousand dollars So here's what I want to make sure that you understand. If we take I'm gonna look at a ten year perspective. And I wanna look at a twenty year perspective.
Okay. So ten years, I wanna use the worst time of that ten years. So if we come and say, what is this house gonna be worth ten years from now? If you just bought this property for one hundred and fifty five thousand What's it gonna be worth ten years now?
Well, let's just come and look at twenty two thousand seven To two thousand seventeen, you're gonna say, well, why those dates?
Because two thousand seven was the height of the market.
Okay. And then we're gonna come over here to twenty seventeen, and it's went from the average went in twenty seventeen was three hundred and thirteen thousand, where it was two hundred and fifty seven thousand. Okay. That was the median price.
That is during two thousand and eight. That's when banks were failing and catastrophes were happening and You know, you couldn't get a loan and there was real estate owned and all this craziness was happening and values were dropping and everyone went crazy. Literally they said it was the worst financial real estate correction of all time during these years, okay, during two thousand eight. So I'm taking the best time with the worst time, and I'm giving it a ten year span.
And what we're saying is property values went up on average So the the median for the nation was two hundred fifty seven and it went up to three hundred thirteen over that period. So a fifty six thousand dollars increase If I take that fifty six thousand divided by the two fifty seven, we saw a twenty one point seven eight. I'm just gonna call it a twenty two percent increase in value over that ten year period, including the worst possible time in real estate. It had a twenty two percent increase in value.
Okay. Now let's look on a twenty year perspective. I'm gonna do the same thing.
Let's see here. So the twenty twenty seven isn't here yet. So we can't we can't do a full So we'll go a little bit before. Let's just kind of get our data. Whether what are we up to here? Let's go twenty twenty three.
And we'll go twenty years. So we're gonna go two thousand and three.
So in twenty twenty three, the median was four hundred and seventeen thousand. Okay. In two thousand and three, the median was a hundred ninety one thousand. So If we take the one ninety one four one seven, we're seeing an increase of two hundred and twenty six thousand in a twenty year period. Okay. And then we'll divide that. So two twenty six divided by one ninety one, and we're seeing a hundred and eighteen percent increase in a twenty year period.
Okay. So what does that mean for us? Well, it means that that property that we paid one hundred and fifty five thousand dollars for ten years from now. In the worst time, if we look ten years from now, that property is gonna be worth twenty two percent more. One fifty five times point two two is gonna give us thirty four thousand. We'll add that to the one fifty five.
That property is gonna be worth a hundred and eighty nine thousand dollars to near from now. Okay. Now twenty years from now, historically using the historical data, twenty years from now, that property is gonna be worth one hundred and eighteen percent.
So we'll times that by.
One one eight percent, and that is a hundred and eighty two plus the one fifty five.
So that's gonna be worth three hundred and thirty seven nine. I'm just gonna say three thirty eight. So in twenty years, Based upon the historicals, that property that you bought for a hundred and fifty five thousand in ten years is gonna be with one eighty nine. And in twenty years, it's gonna be worth three hundred and eight thousand dollars. Okay.
So, let's just use either either way you do this, you know, you're looking at an increase on this.
So one fifty five.
So you made a hundred and eighty two thousand dollars over that twenty year period by just maintaining and holding this property.
But that's not the only way. This is appreciation. Property values go up over time. You see the graphs. That's what's happened since nineteen sixty.
It goes up. It goes down, but overall, it's a trajectory going up. Now, The next thing we wanna talk about, and I'm gonna change pencils here. Let's talk about rinse.
What happens with rinse over time? Okay. Well, let's look what did rents go up over a ten year period. And you know what?
Let's use the same time period. Let's use this two thousand and seven ish time period. I've gotta guess her a little bit, but let's just say the average rent then was seven fifty And then we're gonna come ten years later to to twenty seventeen and rents were nine hundred ninety one. On average.
So if we go nine if we take nine ninety one minus seven five zero, it was two hundred and forty dollars. It was the increase. So two hundred and forty divided by seven fifty, that's a thirty two percent increase on rents.
Over that ten year period, which means our seventeen hundred dollar rent has gone up thirty three percent, thirty two percent.
So it's it's got up five hundred and forty four dollars. We add that to the seventeen hundred And we've got two thousand two hundred and forty four, which means that our cash flow has gone up eight hundred and forty one dollars. Now have taxes gone up a little bit, have insurance gone up a little bit? Sure.
Those things have gone up, but they haven't gone up five hundred and forty one dollars a month. So maybe we say you've got eight hundred dollars cash flow. K. You've got eight hundred dollars cash flow right now.
Now let's look at the twenty years. Okay. So let's just take this ends in twenty twenty one. So we'll come back to two thousand and one.
So on a twenty year perspective, we're like six thirty five was the average rent. And in twenty twenty, twenty one, it was one thousand one hundred and ninety one. So we'll take One one nine one is the median rent. Subscribe six thirty five.
Whoops. One one nine one is the median rent. Subscribe six three five. Means it went up five hundred and fifty six divided by the six thirty five, which means it went eighty seven percent up.
So that means that our seventeen hundred times point eight seven, it's gonna go up one thousand four hundred and seventy nine dollars We add that to the seventeen hundred. So now the new rent twenty years later is three thousand one hundred and seventy nine dollars.
Which means if I subtract the seventeen hundred, which was what I was getting, and I add the three hundred dollars cash flow it means that my new rent, my cash flow on this, is one thousand seven hundred and seventy nine dollars a month.
Okay. And this is not even paying off the property, guys. If I times that by twelve, twenty years later, you're making twenty one thousand dollars a month off rents from this property.
K? Twenty one thousand dollars a year in rents. If the rents go up by eighty seven percent, like it's what they've historically done. And you have a hundred and eighty two thousand dollars in equity in this property.
But that's not all folks. Watch this. Okay. So now you got the loan calculator here.
You took out a loan for a hundred and fifty five thousand.
And I think we put this at six and a half percent.
Oops, woops, long term is thirty years. Let's go six point five.
Let's calculate that. And then we're gonna come down and look at Oh, I wanna look at the M schedule. View amortization schedule. K. Here we go. So Oh, I did this wrong. Let's fix this.
One fifty five.
I'll calculate that. Okay. So the other cool thing that's been happening is your tenant has been making your mortgage payment, and part of that mortgage payment is paying down your principal. So that loan you took out for one hundred and fifty five thousand.
Okay. This is your ten.
Your loan is now you owe a hundred and thirty one thousand.
K. So one fifty five minus one thirty one. So your tenant has paid down twenty four thousand dollars or two thousand four hundred dollars a year, on average is what they've paid down. Now at the end of twenty years, it gets even more exciting.
The end of twenty years, the end year end twenty.
They have paid down. You now owe eighty six thousand. So one fifty five minus eighty six So they've now paid down sixty nine thousand dollars. They have paid down in your debt and you now owe eighty six thousand dollars. Okay? So let's let's look at this guys. Let's look at all of this.
First thing, how much are we making? Well, twenty years We'll just use this as an example. I owe eighty six thousand dollars on this property.
So I owe eighty six thousand dollars is what I owe on the loan. Okay.
The other thing that I have is this property now is worth three hundred and thirty eight thousand dollars, which means I have two hundred and sixty nine thousand dollars of equity.
That's my equity.
Yeah. I've got it as property. Okay. Cause they've paid that down. So that's how much equity I have on the property.
Then I've got my rent So we're talking twenty years later. My new rent is three thousand one seventy nine. My mortgage payment on this without taxes And those things, my original mortgage payment on this was nine seventy nine Okay. Now hopefully in the twenty years, you've refinanced and mortgage rates have gone down from six and a half to three percent, but I'm not even gonna factor that in because you got a thirty year fixed at six and a half.
If rates go down, you're making even more money. So then we come in here and we say, okay, we've got taxes and insurance. Well, let's say taxes went up. Let's say taxes doubled.
Like, I don't think that's gonna be the case, but let's say taxes doubled, so it's about two hundred and fifty dollars in taxes.
Repairs. We're gonna take our repairs up. So hundred and seventy seven dollars ten percent for repairs and capital. And insurance let's say insurance went up, like, sixty five.
Two sixty five dollars. So now we've got nine seventy nine as our payment, which includes principal pay down, two hundred fifty dollars a month for taxes, hundred and seventy seven for repairs, capital improvements, sixty five. So now I'm at fourteen seventy one. But my new rent is three thousand one hundred and seventy nine three thousand one seven nine.
My new rent so seventeen o eight is now my average rent that I cash flow times twelve. So I'm getting twenty thousand dollars a month. So and I've been or excuse me, twenty thousand dollars a year. This is the secret to real estate.
This is how you make money. It's all about buying something. Hanging on to it. And we factored in money that you're gonna have to have to fix ups, and those things are going into an account.
And as you have the problems, you're paying for that. That is why real estate is so powerful and that's why I tell people you don't need to do a thousand deals. You probably need to do four or five deals If you did, five deals, if you bought five properties, one a year, one every other year for the next ten years, and you bought five properties, you would have a hundred thousand dollars a year in income just from the cash flow without paying off these properties. That is huge, guys.
That is huge. So don't worry about doing hundreds of deals.
We're about doing a few deals and hanging on to them and hanging on to them so long term. So a lot of people ask me what the secret to success was for me. And I said, I bought a property a year, every year for ten years, and I held it for twenty nine. It looked like a genius. It really didn't have a lot to do with me. It had to do with understanding the market and that things are gonna go up over time and that's what happens in this real estate and why rental real estate is so amazing.
If you want to learn more about real estate investing with me, click the button below for a quick webinar where I explain more about how all this works:
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