How to make a successful offer on your first investment property

So, you are ready to take a leap with your first investment property. You’ve found a lender, contractor, or even property. You are ready to sign on this dotted contract line… Or are you? I bet hundreds of “what-if” scenarios are running through your head right now. Am I overpaying? Is the seller hiding something? Will my lender fund the transaction as they promised to? Would I lose my deposit if they don’t? These are all legitimate questions. These are the risks inherent in real estate investing. These risks are especially high for new investors, those who have yet to gain experience in buying, renovating, and selling a property. You cannot avoid these risks but can do your best to mitigate them. Here are some tips on how first-time investors can make an offer that mitigates these risks and offers them the highest chance of success.

Work with a reputable real estate agent

Once you gain more real estate investing experience, you might not need to use a real estate agent. However, if it’s your first foray into real estate investing, do yourself a favor and hire one. Why? Let me quote the former Secretary of Defence Donald Rumsfeld: “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” As a new real estate investor, you are at the peak of unknown unknowns. You need all the help you can get; a reputable real estate agent can provide it.
Now, real estate agents work on commissions. They only make money once the property changes hands. So they are not motivated to find excuses why you should not buy it. However, those with experience and reputation to protect will share their reservations with you. If they do, by all means, listen to them. I am telling you that because we had numerous transactions when a real estate agent felt something was not quite right and… was ignored until the loan got underwriting. Let them do their job and protect you from the risk you might not be aware of as a brand-new investor.

Be aware of the red flags.

Some properties have more red flags than others. As a first-time real estate investor, you might not have sufficient experience to recognize them. The red flags are not necessarily negatives. They are the areas you must investigate further to ensure they will not affect your renovation budget or the property’s after-repair value and marketability.

For more details, you can read our article on the red flags in real estate investing, but they typically include properties sold by other investors, properties that might have zoning violations and even properties that are not on public water and sewer. In addition, if the property is offered at an unusually super-discounted price, your antennas must go up.  

Learn how to evaluate the ARV.

That said, you don’t have to take your real estate agent’s opinion for the last word. In fact, some areas are so crucial to the success of your transaction that I would argue that it would be irresponsible for you to rely solely on their opinion. The prime example is estimating the after-repair value of your property. If you are not able to form your own independent opinion about the ARV of your property, perhaps you are not ready to invest responsibly.

The holy grail of ARV estimating is finding comps via the Multiple Listing System (MLS). Unless you are a real estate agent yourself, you will not have access to it. Fortunately, other resources such as Zillow, Redfin, and Trulia are readily available to the public. We’ve also written some helpful articles on estimating your ARV without the agent sharing the best practices you should follow.

Work with a reputable hard money lender.

Working with a reputable hard money lender can offer the benefit of a smooth closing and an additional—and very experienced—set of eyes to help evaluate your transaction. Unlike real estate agents who get paid once they sell you the property, private lenders evaluate the success of their transaction once the loan has been repaid. An honest hard money lender is on your side. They want you to succeed because they make money when their borrower pays as agreed.

When making an offer on your first investment property, use your lender’s real estate expertise proactively and early in the process. Before ratifying your contract, talk to them about the transaction. I don’t know about other private lenders, but we typically don’t mind running preliminary numbers on the transaction before you sign the contract. We would need three numbers to do so: your purchase price, your realistic rehab budget, and your after-repair value. The main goal is to ensure you make a reasonable profit that justifies your future effort and risk.

When possible, have a wiggle-out clause in your contract.

Even if you are pre-approved with a reputable hard money lender, it’s not a guarantee of funding. The approvals are subject to meeting that lender’s underwriting conditions. Even the most well-meaning and customer-service-oriented lender might discover some aspects of the transaction that exceed their risks. For this reason, many first-time investors are nervous about offering a large earnest money deposit. At the same time, they often feel pressured to remove any contingencies to compete with all-cash offers and other investors.

Fortunately, many of those newly discovered risks would automatically release you from your contract. For example, if any issues with the title cannot be resolved on time, you can walk away from the property without losing your deposit. Other risks discovered during the underwriting process might require an experienced agent to negotiate the release from the contract. For example, we had a borrower whose property turned out to be in the flood zone. It made insurance multiple times more expensive. It was not disclosed in the contract, and her agent was able to negotiate the release without our borrower losing her deposit.

Another borrower had a property with a very old well. Wells have a limited time span and typically last between 15 to 30 years. That particular well was special: not only was it ancient, but it was never approved by the county. Approving a new well would have required an environmental survey and, because the property was in the beach area, a special kind of technology to fit into the environmental standards. A seller might not have known the condition of the well but should have known that the existing well had never been approved in the past. Thankfully, the agent was able to negotiate the release of the earnest money deposit when our borrower decided to walk away.

That said, properties suitable for fix-and-flips are typically sold “as-is.” That means the seller makes no representations about its condition. In fact, they know that the property is in bad enough shape to disqualify it from conventional financing. They want to sell it with the least hassle, which for them means removing any contingencies, including financing and inspection contingencies.

You probably will not be able to remove a financing contingency, but try to negotiate at least three to five days for a home inspection contingency. You can use this time not only to walk the property with your contractor but also to address any issues with the private lender you are working with.

Be ready to walk away.

As disappointing as it might be, walking away from a transaction that is more trouble than it’s worth is actually a success. It’s a success of your diligence as an investor or the success of due diligence of those working with you. Your first foray into real estate investing might set you up for years of wealth-building. Alternatively, it can deplete your savings and exhaust you mentally. You want to avoid being cavalier and need to manage your risk diligently. The offer you’ve made on your first investment property might have not be successful, but at least it was not a disaster either. And with your earnest money hopefully intact, you’ve learned from your experience and gained some wisdom.

New Funding Resources has a track record of helping first-time real estate investors succeed. We don’t sugarcoat or overpromise. We are willing to work with you to ensure that your first real estate transaction is a resounding success.