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Lock It Up: A Vital Real Estate Investing Concept

Summary: The approach to buying investment real estate differs significantly from a residential home purchase. This post discusses the all-important concept of acting quickly to “lock up” a property when you encounter a potentially good deal. We use real-life examples to illustrate this vital concept. Let us know what you think!

 

Last week some friends of ours got a killer deal on a 10-unit apartment complex. They got $50,000 off of the agreed upon purchase price, or a nearly 10% reduction. This made what was a “good” deal into a “great” deal.

How did they do it? And especially in this competitive market, when great deals are so hard to find?

The key is that they “locked up” the property.

 

What is “locking up” a property?

When people first get into investment real estate, they often approach the buying process as if they’re buying a personal residence.

One key difference is the buyer’s intent when putting in the offer. With residential properties, buyers put in an offer because they’ve made the decision to go through with the purchase if the offer is accepted. They’ve seen the property, toured the neighborhood, evaluated the schools and made the decision in their mind that it is a place they could call home. They’ve thought long and hard about the offer. This is because the final price is likely to be the same or close to the price that was settled on initially.

Investment real estate is different.

With investment real estate deals, whether or not you will actually go through with the purchase after your offer isn’t a foregone conclusion. The intent is “let’s wait and see.”

The reason is that you don’t have the opportunity to fully evaluate investment properties until they are under contract. You typically can’t get in to see the property because the sellers don’t want to disturb the tenants. Sellers won’t provide information about leases, utilities and other expenses until a contract is in place.

So what you offer initially is less important. What’s more important is that you get the property under contract as quickly as possible (aka lock it up).

This means you often will offer list price without any bargaining up front. Even when a property is not quite meeting your cash-on-cash criteria, if it’s close enough or you can see sources of hidden value from your initial screen, you need to act on a deal right away and get it under contract – that day or within hours of being presented with a deal.

It’s also common that you put in an offer before you even see the property. We’ve purchased more than half of our properties this way. When presented with a great deal, we’ll make the decision to put in an offer on the spot. No hemming and hawing. With great deals, in the time you spend analyzing the deal or driving by the property, another investor will have locked up the property.

 

So what are the reasons to lock up a property?

 

#1 Avoid Competition

You never want to get into a bidding war over an investment property. At a certain point, the numbers just don’t make sense. And frequently there are investors out there who buy properties that don’t cash flow or even lose money. They are either inexperienced or are playing the appreciation game. So they are out there buying all deals, even the “bad” ones.

Therefore, if a property is listed on the MLS and a good deal, it’ll go quickly, often in the course of a day. Even if the property is off-market, there’s a good chance the real estate agent bringing it to you is also presenting it to other investors at the same time, so it too will be long gone in a day or maybe, if you’re lucky, two.

You must act quickly! You must receive the email or call about a deal and immediately analyze it. Then, get back to your agent right away with an offer that day. It will most likely be a full-price offer, and as soon as possible.

Let me give you a real-life example.

Our killer 4-plex purchase

I used to check out the MLS around Seattle daily. One morning I saw a new listing for a 4-plex, just down the street from a duplex we were in the middle of rehabbing. It was listed at $389,000 and bringing in $2,575 a month. On the surface the deal didn’t look great. It didn’t come close to meeting the 1% rule and the property had high utility expenses (greater than $500 a month paid by the owner). However, with a little digging, we found out that the owner lived in one of the units, so the rents should be much higher. We also knew that we could eliminate the utility expense by billing back the utilities to the renters, since we had a couple of other properties in the same town where we billed back utilities and had no difficulty renting these units.

We would have put in a full price offer without seeing the property. However, it just so happened that we (and our agent) were visiting our rehab property just up the street. So our agent immediately called the listing agent to see if we could get into the property. The listing agent was not available, but the owner was at the property getting ready for the open house. She agreed to show us her unit. So we literally walked over to the property, met the owner and toured her unit. She was not able to let us into the other three units, but it didn’t matter. We knew we had a steal.

Her unit was beautiful. Given the finishes (granite counters in the kitchen and both bathrooms) and a bonus room, it clearly could be renting at a higher price than the similar two bedroom, two bath unit next store. So we knew we were already above the 1% rule even if we couldn’t increase rents in the other three units.

We put in a full-price offer that hour, and the owner immediately accepted. There was going to be an open house the next day.

We later found out that numerous investors called her agent that same day to try to get in to tour the property. But we had already locked up the property, so the listing agent had to turn them all away. We also heard that several investors told the agent that the property was under-priced and should have been listed $30,000 to $40,000 higher.

Why did she accept our deal without waiting for other offers?

The owner’s unit

I suspect one reason is because our agent was able to convince the owner that we would follow through. We have a several year history with our agent now. She knows we have the financing. When we’re serious about a deal, we can make it happen. She conveys that to owners when we make our offers, so the owners feel comfortable that we’re going to be able to secure financing and will not flake on them without due cause.

We later found out that another reason she accepted our offer. She was desperate to get out of the property. She had bad renters–one who she knew she would have to evict. Her not wanting to have to deal with an eviction while living there worked out for us.

We closed on the property without asking for a reduction in price. This was due to the obvious demand for the property. We put about $100,000 into repairs on the property (a large chunk of this we got back in taxes using Real Estate Professional Status), we evicted the bad tenant, we billed back all utilities to the tenants, and now make $5,190 per month in rent. And we don’t have utility expenses or much maintenance since we put so much money into updating the place. I suspect if we sold the place, we could easily get over $700,000 in our current market.

I hope this example shows you a couple of things. One, you must jump on a good property and get it under contract immediately to prevent others from getting it out from under you. Lock it up! Two, if you can identify sources of hidden value, you can make a good deal into a great one. You can make the rents increase disproportionately if you put some money into the property. Forced rent appreciation is the term for this.

#2 The Negotiating Comes Later

After you have an investment real estate property under contract, the negotiating process starts. This is because the due diligence period can uncover details that can help you justifiably ask for price reductions.

The inspection can pinpoint things that need replacement and repair. The lease review can reveal surprises. Reviewing the utility statements and costs can be eye-opening. The appraisal can throw a serious wrench in things, and really help you negotiate the price down.

And remember, if your inspection reveals a problem, the owner now has to share this information with the next potential buyer, who will then negotiate the price down based on that information.

So now the owner has a serious incentive to sell the property to you. You’ve taken it off the market, wasted their time, and you’ve identified problems with the property that they now have to reveal to other sellers. And now if the deal falls through, the property will have that dreaded “relisted” status, which makes other buyers wary that there is something really wrong with it.

As one of our real estate agents likes to say, “There will always be a haircut.” Now, obviously, that’s not completely true (as my example above even shows), but generally, it’s the idea when you buy an investment property.

So let’s go through another, more recent, example.

We recently locked up a 6-plex in Oklahoma city for $315,000, which was the list price. The inspection revealed several issues including problems with the foundation and roof. We were then able to negotiate to have the roof repaired prior to closing at the seller’s expense and a reduction in price to $302,000 to pay for the foundation repair.

We’ve been able to shave money off of the contract prices or receive credits for various items. Examples are roofs that need replacement, electrical that needs to be replaced, and inside wall-damage. We’ve also been able to add contingencies such as having a particular problem renter evicted before closing.

Our friend’s 10-unit steal

Which brings me back to our friend’s 10-plex. About a month into the deal, the property appraisal came in at $55,000 below the asking/agreed upon price. So what did our friends do? They asked for a reduction in price to match the valuation. They knew they had the upper hand and were prepared to walk away from the deal. In the end, they got it within $5,000 of the appraised price. Yep, that’s right, they got $50,000 off of the initial contract price.

It took about a month of back and forth, but they knew the owner was motivated to sell. They had already tied up the property for several months. It was amazing negotiating on their part. It’s an awesome example of how you should never get emotionally-involved with a real estate investment deal. You should always be willing to walk away if it doesn’t make sense. That gives you the upper hand.

Finally, this example shows that while awesome deals might be difficult to find in a hot market, you can make a good deal into an awesome one through due diligence coupled with justifiable price reductions. You’ll never be in this position if you don’t act quickly and lock up the good deals.

 

Do you have a good “lock it up” story you want to share with us? Any other reasons you want to lock up a property that we missed? Please leave us your comments and questions below! We love seeing your feedback.

Interested in learning more about how to build a portfolio of cashflowing real estate? Be part of the conversation! Follow our general Semi-Retired MD Facebook page and then join our physicians or professionals group! Don’t forget to sign up for the Waitlist for the next course as well! We hope to see you there!

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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