My last post described finding your WHY in owning a rental property and discussed cash flow v. appreciation. Now that you know why you want a property, this go-around, let’s talk finding then negotiating your property.
There are tons of opinions out there basically saying that the housing market is declining meaning that housing prices are again on the rise making it hard to buy. Those same people say that finding good deals in this market is hard given the competition of people wanting to buy NOW to avoid potential uncertainty down the road. The prudent course is to save your money for when the market goes south so that when people are running from real estate because interest rates have risen, you can jump in with the money you’ve been hoarding.
I’ve been hearing this for the last three years or so! There is always someone saying that the housing market crash is right around the corner and if I listened to that and stayed on the sidelines for the last three years, I’d have 2 rentals instead of 4 (almost 5). I say, if you have money now, buy now!
If there truly is a market correction around the corner then that’s even more tenants available to fill your units. Everyone needs a place to live, especially in bad times when buying a house is harder. Those people who can’t buy a house will be needing to rent yours!
With that said, the best advice that I’ve heard recently to “crash proof” your rental income is to buy properties now that can withstand a 10%-15% decrease in rental income in the future. That advice I can get behind because it’s prudent without being too Chicken Little. So when you’re running your numbers on whether to buy a property now, figure in a 10%-15% decrease in the rent that you can get for the unit and if the numbers still make sense, it’s a decent buy.
With those caveats in mind, let’s find some properties…I’ve found all my properties, except for the first one, which was a rent-to-own, through the MLS. Using the MLS is not fancy or especially creative but it’s easy and it works. Especially for beginners, it’s the way to go. That’s how I found my latest property, just by scouring Zillow.
I did have a realtor sending me listings, but as she pointed out, most clients looking to buy a house find properties faster than she does because they are constantly looking. My husband was the one on Zillow this time and pointed out this cute 3 bedroom, 2 bath house in a really good school district.
Because I know that I’m investing for appreciation (because I know my WHY), all of my searches were in good school districts and I was especially interested in the schools where my kids go since that area is right around the corner from me. When this house came up right across from their high school, I scheduled to see it right away.
A side note about when to buy a property: I love buying rental properties in winter. Inventory is low, that’s true, but the prices are as low as they’re going to get all year. Sellers are afraid of having the house sit on the market for a long time and are more willing to lower the price than in the summer when there’s a plethora of buyers. Also, remember that your rental is not the house that you’re going to live in, so it doesn’t have to be perfect, it just has to be good enough so having less choice is not a deal breaker. I’ve bought my last three properties in October, December, and again in December. I feel like I’ve gotten especially good deals during those times.
Okay, back to my house…so I called my realtor and we looked at two houses back-to-back. I saw one that was very similar to the one that I bought but it was way too small and had roof and ceiling issues that you could see right away. The ceiling was sagging and being held up (poorly) by support beams. That would not have been a turn off per se, but the fact that the house was so tiny and the price didn’t reflect that certainly was. So that house was a NO right off the bat.
Then I saw my house and knew pretty much right away that after running my calculations, if the sellers accepted my offer, I would buy it. It looked like it was well maintained and just needed a few cosmetic changes. It also had an addition whereas the others in the area didn’t making this house more desirable. I walked in and around the house, like I always do, and recorded as much of the house as possible with notes on what needed to be done to get the house up to rental snuff.
I then went through the video at home and came up with a budget to make any and all repairs necessary. I wasn’t too sure if it needed a new roof, but I added this possible repair into my calculations just in case. I like to overestimate what needs to be repaired and the expense of the repairs and be pleasantly surprised when the home inspector says that so and so actually doesn’t need to be replaced. From that repair estimate, I came up with a top number that I’d be willing to buy the property for based on comps that my realtor pulled up for me. This step is the most important one in determining at what price point you should offer to buy the house at.
You need to know what has sold within the last couple months to know what your property is potentially worth. A good realtor can pull these comps for you and also talk to you about the features of that house that make the sold price either lower or higher than what your offer should be for your property. Make sure you are comparing the SOLD price of the comp to where you want to land on the price of your house.
My realtor did some due diligence on her part and found that the house was being sold as part of an estate sale. The elderly woman living in the property had passed and her kids were selling the house. Having this type of information is invaluable because it tells you that the sellers may be willing to take a lower price so that they don’t have to deal with the house any longer than necessary. It really is a win-win for both sides because who wants to deal with a house that they haven’t actually lived in and they don’t know the repair history of?
As a related side note, the second rental that I bought was one where the couple was divorcing. They couldn’t stand each other and that was evident at the closing so they wanted to dump that house ASAP. I got a great deal on that one too! 🙂
After sitting down with my realtor, I asked her to put in a low- ball offer and although she didn’t like doing it, she reluctantly did. The offer was too low and the seller came back at full price instead of trying to negotiate. Boo! I put in the low ball offer first to let the sellers know that I wasn’t going to pay top dollar for the property. I didn’t actually think that the offer would be accepted, but hey, you never know.
I then put in a higher offer that was $15K less than my top (slightly inflated) number and, at the suggestion of my realtor, also added a clause that the sellers would not be responsible for any repairs that the inspector finds (an AS-IS clause). It made sense to include the clause because it was an estate sale and I knew the sellers didn’t want to deal with any repairs that the inspector found. I felt comfortable with the idea because in my visual inspection, the house looked like it was well maintained and that there wouldn’t be any major issues. AND, if there were major issues, I could still ask the seller to repair or back out of the contract.
When the seller has knowledge of a major defect found in the inspection, the seller now has knowledge of the defect and must repair those defects for the next buyer. So, why not ask for them to repair it for you? The AS IS clause is really intended for minor fixes like some outlets not working, not say, the entire house’s electrical system not working. Including an AS IS clause with your offer is seriously a master move because it makes your offer so much better than anyone else’s and if you’re willing to make those minor fixes yourself, in the end you come out ahead because of the low purchase price.
Both my husband and realtor said that there was no way that the offer would be accepted, but it WAS and it was the AS-IS clause that cinched the deal! The sellers understandably didn’t want the added burden of having to make repairs on the house which is what made my offer so enticing.
I’m now going through the mortgage phase of buying the house which will be discussed in my next post. Tune in because I have some great tips on getting a low rate mortgage!