Today we are continuing our conversation about how to buy your first single family home rental property. We are covering Steps 6, 7, and 8. This consists of getting with your lender to go over the Loan Closing Checklist, getting the property valued through your lender, and getting your inspections completed.
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 haven't watched Part 3 yet for Step 5 click here.
If you already have, watch the video below for steps 6, 7, and 8:
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. So you've got the property under contract. What happens next? Well, there's a few main points that I want to talk about. Number one, gonna wanna get with your lender right away.
They're gonna have several things you're gonna wanna be doing. We'll call this a loan closing checklist.
Which we will go through a little bit later.
Number two, we're gonna need to get values done. That's gonna be done by your lender. But the property is gonna have to be valued. And then number three, you're gonna want to get your inspections done.
Okay? So let's talk about all of these. We'll come back to this. The values, depending upon what type of a deal that you're getting and what you're doing with that.
So if you're getting a property that you're not planning on doing any work on, then it'll be done as an as is value, which typically is somewhat close to what you're paying for that, but occasionally you can get a really good deal and the value can be worth more, but a lot of lenders are gonna use the purchase price as the as is value.
But some lenders will allow that if the value comes in higher that you can use some of that equity.
So you've got that. The other one you've got is a ARV, which stands for after repaired value.
The after repaired value is what is the property worth once the repairs are done to that. Now in order to establish this after repaired value, a contractor bid and a scope of work needs to be done. So it's gonna say, Hey, okay, we've gotta do a scope of work to get this after repaired value, and that has to this contractor bid scope work has to be done before we can value the property because it depends on what you're doing to the property. We'll make a determination for this value. This value is done, one of a few ways. So one way that this is done is by what's called evaluation.
Evaluations is where we send two independent, real estate agents that live work and play in the area to the property that make it termination on the after repaired value based upon the contractors bid in the scope of work or as is if there isn't one. Another way that it can be done is it can be due a walk through with a desktop.
Basically, what happens is a representative will go through and look at the property, and then an appraisal will be done through a desktop, and then a final value will be reached for one of these. Another way that it can be done is through a full appraisal Now it's really gonna depend on what loan product you're actually going for that will make a determination as to which one of these is going to be done, but any way you look at it, there needs to be some sort of valuation that needs to be done to the property. That's going to be ordered with your lender. They're the ones who're going to need to to do that.
You're not going to want to call an order appraisal on your own because no lender is going to accept that. It has to be ordered by the lender, and it has to be through their process, so or through their per vendors, everybody's got different things that they're looking for on that, but you're gonna wanna make sure that you get that through the values. Now the next thing is the inspection. Okay?
So what are we doing with this inspection is we wanna make sure you haven't spent a lot of time in the property. So you wanna make sure the property condition is somewhat what you thought it was, which means when you make that offer, the seller gives you rights to get into that property. You have to make arrangements with them. Then you can get into the property to do what's called a full inspection.
So to do that inspection, you can do one of a few things.
You can hire a home inspector.
A home inspector is basically going to go through the entire property and they're going to give you a report. That report is going to tell you about problems that have been found throughout the property.
Some of those might be minor problems, like there's a missing plug cover, and some of those may be major problems like the GFCI breaker doesn't work or where there's a hole in the foundation that you didn't know about. Now you have to realize that a home inspection is only as good as what they can see.
A home inspection is a visual inspection. They're not gonna be looking past the walls, those types of things. Now they may have like a moisture meter that they can use to see if they find moisture anywhere.
The great thing about this is you have a home inspection, you're gonna have a really good idea of what's wrong with a home.
However, you're not gonna know, some things, like I say, looking behind the walls. Now if you are gonna get a home inspection, some add ons or additional things you can do is you can have someone send a camera down through the sewer system to make sure that the sewage line that's coming to the house is actually in good shape and doesn't have any issues. That's something you can't see visually, but if you add that on, you can do that. Another thing that you can do is a meth or inspection where basically you take a swab or you can do it yourself or you can hire a home inspector do that where you take a swab you go throughout the property and they see if there's any traces of methamphetamine.
So that's something you're probably going to want to know prior to purchasing that property. The other thing that you can do is get somebody in the attic, get somebody on top of the roof. Now, I recommend if you're just getting started, a home inspection is a great way to go. It does take some more time and it does cost some more money.
But you're gonna learn through that experience. So my recommendation is if you hire a home inspector, make sure that you're there for the last part or the last hour and have them walk you through the property. And make sure that you understand what's here, what's there, what is happening to the property. It's a great way to learn.
Now as you get more experience, my recommendation is you start getting some general contractors.
So what I stop doing is I stopped doing home inspections. I started with home inspections, but I stopped doing that, and I started just getting a my general contractor. And I would have my general contractor get on the roof and take a look at it. Is there any soft spots?
Anything we need to worry about those types of things on the roof? I would have him look at the foundation and see if he could see any foundational issues or anything that was going on there. I would have him look at the HVAC system, which is heating and air conditioning system. What year is it?
You can see that from the sticker. This is something you can actually do on your own. What year is that HVAC system? I would also have him take a look at the electrical panel.
How old is the panel? What type of breakers are there? So that I have a good idea of life expectancy of that.
I would have him take a good look at the plumbing. I'm looking at all the systems, right? What type of plumbing is there? Is it pex plumbing?
Is it old galvanized plumbing? Is it copper? What are we dealing with there? And what problems might we see with that.
So if I'm looking at the roof, the foundation, the HVAC, the electric, and the plumbing, and then we do an exterior walk around just to see if there's any problems. That's gonna take care of most of our major problems. What we're looking for something is that's gonna be a game changer. It's really gonna hurt us.
Now in addition to this, I would do swabs for any type of a a meth inspection and I may do something with mold with a moisture meter that I would use on my own so that I could get a feel for if we have any concerns with that. Typically, you'll know if there's mold, and it's pretty visible, or you'll see some soft spots. So that's what I would do. So this is kind of my modified after I'd had some experience with doing some home inspections, and I had done some fix and flips, or I've done some rehab projects and really had a better feel for that.
So that's the next real step that you're gonna wanna do is get going with this. Now you are gonna spend some money on this, whether you spend some money with a general contractor to go look at that. And the idea here is you've gotta realize that this is kind of like insurance.
You're basically paying for the home inspection or the general contractor to go and do these things for you. And if they find a big problem, they're saving you from getting into a big problem. Now, if that's the case, you would want to go and renegotiate with the seller, you might find that the roof has a massive problem that nobody knew about send the pictures to the seller and say we need to reduce the price by eight thousand dollars so I can take care of this problem on the roof, the seller may say no. And if the seller says no, you have the option to buy the property of the price or you can reject it and not move forward with the property but you still would have spent money on the home inspection or whatever the case is.
That's okay because you spent five hundred dollars to save yourself from an eight thousand dollar problem. So it's not the best news, but it's a lot better than having an unexpected eight thousand dollar bill that you weren't planning on. So think of it as insurance you hope that you don't have to use it. But you're glad you have it when you do.
So that's what you're looking at for the inspections. Now, Next thing, as we're getting our inspections done, there's a deadline for the inspections to be done, and you've gotta be done with those inspections prior to that deadline, and if you have a problem, you're gonna renegotiate the price or remove yourself from the contract so that your earnest money does not become in jeopardy. So that's what we're gonna want to do with that.
Now let's talk a little bit about values.
What happens if the values don't come in for what you're hoping for or what you need them to be? Well, in most contracts, you have an appraisal deadline or a value deadline, which basically says by this date, we will value the property, and we'll make sure the property value is in line with where it needs to be. Now if it's not there, then you're going to need to remove yourself from the contract or renegotiate, and say, hey, we need to renegotiate and they may not allow you to renegotiate, they may say, nope, we need that price, and you may have spent some money on an appraisal. Again, you're saving yourself from a big headache.
You would hate to buy a property and find out it's worth fifty thousand dollars less than what you thought that it would be after those repairs were done to it or even an as is and find that out after you're responsible and liable for the loan. You don't want that to happen. So that's you're going to have the appraisal that's going to help you in justifying those prices and you're in lots of cases going to need to have a general contractors bid, so that you can justify the scope of work.
In determining what that after repaired value is. The other kind of contingency that you have is a loan denial.
And the idea with this is anytime up into that loan denial deadline, which is gonna be a date.
If you remove yourself from the contract, you would get your earnest money back. But you're responsible as the buyer to pay for any inspections or appraisals or anything you're getting done to the property.
One of the things for an inspection type period before you become the buyer of the property.
Another one that's, happens quite frequently is termites.
You wanna get a termite inspection.
It's typically a hundred dollars, but if you have termites, it could cost you ten thousand dollars or more to get fixed. And so you wanna know that. Now the nice thing is with these reports is we can then take them to the seller and say seller, you have termites and you have a problem Now the seller is required to disclose that information to anybody else that comes to buy the property. They can't not say it in most states, so they have to disclose it if they're aware of it.
And if I have a termite report that says there's termites, and I've sent it to them and said, Here you go. You've got termites. You might as well work with me because now you're gonna be required to disclose that to anybody else that comes to buy gives us the opportunity to have that conversation, have that discussion, and have that renegotiation based upon this new information. However, the seller may say, no, I'm not going to, and then you would either have to move forward at the price or remove yourself from the contract.
And in doing so, you would then take, your earnest money would be returned to you in most contracts as the way that it's written.
Okay. So that's the big stuff that needs to happen once you go into contract. You need to get in touch with your lender so the lender can start the valuing of that property right away. You also are gonna need to get a scope of work together, and that scope of work is gonna need to have then have a contractor's bid attach that so that that value can get established.
You're also going to need to start working on your inspections, both the termite inspection and any other inspections or home inspections you wanna have done in the property to make sure that you're not running into a bigger problem than what you're aware of. So that's the process that you're going to want to be looking at.
So the next thing I wanna talk about. I wanna talk about two things here.
Okay. One thing I wanna talk about is how do you know what the scope of work should be. Okay. And then number two, what we're gonna go through is the closing checklist.
What is required so that you can work with the lender to get the loan to make that actually happen. We'll talk about that. First, let's talk about scope of work. The question is How do you know what you should be doing to the property?
What type of work you should be doing to the property? Well, the way that you do that is through comparables. If you remember we went back and we looked at comparables in establishing our value, and about one of the things that we're going to do now is actually look at those and see what they look like. So, okay.
To make things simple, I'm just gonna choose a random property here.
I don't know anything about this property or what's going on with it, but what I'm gonna do is I'm gonna come here to comparable properties. I can look at stuff that's on the public record or that's on the MLS and I can look over the past year or I can shorten that to say, I wanna look over the past six months.
I don't know if that's exactly six months, but we'll just say July. Okay.
I can change the square footage, the distance away, and I can look and see what these properties actually sold for. Okay. So if I'm looking at this, I can sort these by the sales amount. So I can see that the okay. This is a rent. I'm sorry. We want just sold and property type.
This is two single families.
And okay. That's a rent. That's a rent. So I can see two two seventy five is kind of the low end and three forty is the high end.
Okay. So what I'm gonna do is I'm gonna start with this two seventy five and I'm gonna look at it and I'm gonna say, Hey, what's the condition of this property? So let's just look at some pictures here. Okay.
So what we're asking ourselves is what is the scope of work that needs needs to be done to our property so that it's the same or better quality than Another property.
Let's look. It looks like that one doesn't have very many pictures. Let's look at this one.
We're gonna get whatever pictures are available, and we archive those. Okay. Here we go. This one has more pictures.
This is what was put on there. So I'm gonna look at this. Okay. Let's look.
Paint looks good. The moldings look decent.
The carpet looks So so, you know, this is more of a builder's grade, but they do have a two tone paint on it.
You know, nothing like crazy, but it's not like horrible either, right? So this is kind of what we're looking at here. So if I want My property is sell in this range. What did this one sell for? Three twenty.
What did it actually sell for? Let's go back.
If I want my properties to sell for two seventy five, that's the type of condition that the property needs to be in. Okay. Now if I want my property to sell for more money, it's gotta be in a better condition in order to justify that higher amount.
So a lot of people get confused as the scope of work that they should be doing on that, what they should be doing to get the property sold and the answer is it needs to be the same as what your competition was. Okay. What is your competition? What is recently sold and that's the next thing that we can look at here is we can look at stuff that is on the MLS exclusively and instead of sold, we can look at active, we can look at pending, we can look at contingent okay.
So what do we have here? Well, look, we've got one property for three hundred and ten. We've got another property for four hundred and ninety six within a half mile this property. What are the differences between these?
Okay. Cause that's a big difference. So I'm gonna look at actives, and I'm gonna look at souls, and I'm gonna use the lower of the actives or souls is what's going I'm going to use to determine my value on the property, which we have all kinds of information on how to value properties, but I'm also gonna use that information to determine what I need to do to the property to come up with a scope of work, which is One of the things that we like to do is we walk our members through and helping them determine the scope of work, and so you know what needs to be done in working with your contractor then to get that so you can get the end price.
The bottom line is you don't wanna under improve the property, not do enough to get the values. You also don't wanna over improve the property where what you're doing is not gonna get you dollars back. You wanna make sure for every dollar you put into it, you're gonna get more than a dollar back from that work that you're gonna put into the property because there's costs and those things involved, and you wanna have a profit margin. So that's how a scope of work is actually gonna be established is a walk through of the property, looking at your comparables, your souls, and your actives, that are in the same area that you're planning on selling your property for and making sure your property is in the same condition as those.
And the only caveat I like to give is I like to do one thing to make it just a little bit better. I don't wanna overdo the values or overdo the rehab or the scope of work. I wanna make it just a little bit better. So, for example, let's say that everything has vinyl floors in the kitchen and the bathrooms.
I may spend an extra few thousand dollars and do tile floors, or let's say that it has, ceramic countertops or or, just regular countertops. Well, I may say, let's put granite in. Now, I'm not gonna do both of those things. If everything in the area has granite, then I need put granite countertops in or solid surface countertops, I've gotta do that.
But if everything in the area doesn't have that, I like to choose one thing. I typically like that be in bathrooms or the kitchen and make it just a little bit nicely nicer by spending a few thousand dollars because I wanna stick out, especially in a market where it's more of a buyer's market than a seller's market. I wanna make sure I'm the best price and the best quality. So I wanna be the same as those other ones and have something that's just a little bit nicer that I spent a few thousand dollars more on.
That it kind of has that sizzle where somebody says, you know what? These houses are practically the same, but that one has the granite countertops, and it's the same price as the one that doesn't. Let's go ahead and move forward with that property or let's buy that property. That's what I'm looking for when it comes to that.
I want to put a little bit of sizzle on it.
Alright.
Next, let's talk about closing checklist.
Okay. What you're seeing here is our closing checklist and we'll make sure that you don't have any specific information, but we start with the property the LLC, our financial investors' information, the agents' information, if there is an agent title company's information.
These are all things that the loan processor is going to be working on. And these are the things that need to be done in order for the deal to close. Now some of these are just administrative, check the box stuff, so I don't I'm gonna jump into those.
But I, what I am going to do is talk about some of the bigger things here, that I think you should be aware of.
Let's see here. So I'm gonna tell you about that. Okay. We've already talked about contrabid, so I'm not gonna talk about that.
With your contractor, if you're are doing an after repaired rather than as is, you're gonna need contractor license.
You're going to need to make sure that you've got an agreement with the contractor that's signed. We provide those, to make it easier, contractors' licenses, a termite inspection, making sure there aren't termites or if there are termites, you're going to have to get a bid to remediate those and include that as part of the costs.
You're gonna need a copy of the purchase contract, and that purchase contract shouldn't be expired, and that's something that you're going to have to get your lender.
The other thing you're gonna have to get to the lender is verify if there is additional cash to close that you've got a way to come up with that. So a bank account, or, maybe you've got it on a lending credit, or maybe it's coming from your four zero one k, but there's gonna be something to show where those are actually coming from. You'll need to provide a copy of your driver's license. Okay.
You'll also need to sign what's called a letter of intent. Now typically that will be sent out to you that will go through the terms of the loan. You'll wanna sign that letter of intent. That will will will break out everything for you.
Okay.
Let's see. And final estimates.
Yeah. I'm not gonna go through that.
Title report. So, title report, what a title report does is it makes sure that when you buy the property, nobody can come and say I actually own that property. And if they do, then the title company is going to pay them off so that you can maintain that property. So what they do is they look back as far as possible and they look at every transaction that's ever happened and they ensure the title that you're getting titled to that property. Now there's a lender's policy. There's an owner's policy.
Our pros our loan processors will order those so it's nothing that you need to necessarily know about. Very rarely will there be a problem with title insurance, but there's gotta make sure you're getting clear title or you're not gonna be able to buy the property nor would you wanna buy the property, nor would you be able to get a loan on the property if it's not clear title? Once in a blue moon, we see a problem with that, which really is the seller's problem at that point, but title insurance. So that's just something that has to be ordered and there's a lot of conditions that need to be on that. That's something that the loan processor is going to be working with the title company on to make sure it meets those.
Attorneys approval of that. The other thing that we want to look for is what's called a twenty four month chain of title that's typically part of the title report, but that twenty four month chain of title shows if in if there's been any other owners in the property in the last twenty four months, and if there has, we want to know who owned it and what they paid for it because why is the property value changed significantly in the last twenty four months. And if so, we need to understand that.
Okay.
Closing letter is also something that just comes from the title company. You don't need to be aware of that or worry about that. Heirs and Mission Insurance, property tax statement, verifying wire instructions. Now what's gonna happen is the title company is gonna put together a settlement statement That settlement statement is going to break down all the costs and everything else, and it's going to be something that you're going to sign when you actually go to close on the loan.
That has to be prepared in advance and be reviewed by the lenders. That's something that our processor is gonna work on. Next is hazard insurance, has their insurance will need to get ordered. We've got some recommendations we can make for you, or you can find your own.
But the big thing here is it's gotta be a vacant dwelling policy. It can't be a renters policy until you actually have a renter in there. So there's a few conditions that are come upon the hazard insurance, typically the processor will just work with the hazard insurance company and get that all taken care of, but it takes time. We can move really fast as a lender, but we're waiting for other people to get us the documentation, and then lots of times they'll get us documentation, but it won't be what we asked for.
And so something will have to get changed and it may take them some time to get that changed and get back to us and have them forbid if they mess up a second time, then we have to ask for it again. So this is a process of hurry up and wait is really what we run into. The other thing we're gonna look for is flood, is this located in a flood zone and if so we need to get flood insurance. Now, we're gonna look at it most of the time.
We just get a flood certificate. You don't even know about it or have to worry about it, and we move on. But if it does come back, then we have to start talking about flood insurance. But that's just done by the processor.
That's just looked up. Then there's some acknowledgements There's some non owner occupied and authorizations that need to be signed by you. Those are gonna be digitally sent over to you. There's some other agreements, and then we're gonna pull a credit report, and we're gonna do a background check to make sure not a criminal, and to make sure that you don't have, any collections, judgments, and those types of things.
Then there's gonna be some set for the LLC, so there's gonna be getting an EIN number registering it, doing that type of stuff for the LLC that's gonna be holding title to the property, as well as getting the articles of organization and certificate of organization. Now, again, all of these things are gonna be handled, by our processor.
You are gonna need to maybe sign something or do something, but they're not things you actually have to go out there and find there things that we're gonna be doing in the background. We've got some other agreements that needs and then we're preparing loan dogs. These are the loan docs that actually have to be prepared.
So it's nothing that, you need to worry about. But that needs to be prepared in order for you to go to the closing table and actually sign.
And then we wanna we'll go over the cash to close and what that looks like. We got final underwriters approval, get the wire ordered, send the closing package, and ask for you guys to leave a five star review.
So that's kind of the closing checklist.
The reason why I bring not kind of, that is the closing checklist.
I know there's a lot of things on there, but again, most of those things we're able to do but we're happy to work with another third party vendor that's responsible for that and we're at the mercy of them providing it to us. We can close really fast. We're waiting on those things, and some of those things could vary rarely, but it could cause a problem with the closing that could have some issues. And so we wanna be aware of those well in advance, but that's the closing checklist.
So to this point, what has happened is we've talked about, what happens once you get the property owner contract. We're gonna be going through getting the inspections done, getting the values done, getting the loan, getting the closing checklist, all those things need to be getting done. And the next thing that's gonna be happening is you're gonna be going to the closing table and you're gonna be signing the closing docs. And then there's a whole slew of other documents if you've ever bought your own house before, it's basically you've got a stack of documents to sign, which basically say, hey, If you don't perform, we're gonna take this asset from you.
That's really what it boils down to.
So That's what's gonna happen at the closing table. You're gonna go to an attorney's office or to a title company with an escrow agent. They're gonna be the ones signing, you'll be signing that. They'll be notarizing it, getting a copy of your driver's license.
And then once that occurs, then the wire will get transferred to the title company or closing attorney, and then what will happen is it will officially go on record. And what that means is It gets recorded. Money gets dispersed out. The recording actually occurs, and now the ownership of the property is now in this new entity that you're, in charge of, and then we get into the next steps of what we're doing here, which we'll be covering in our next video.
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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