Going out and actually looking at properties is arguably the most exciting part of the process when searching for homes. While it may be daunting for clients waiting to get to this step, it is important that our clients are fully prepared and knowledgeable about the process. We like to set good expectations so that our clients feel empowered to make quick and knowledgeable decisions.
This module covers:
- Our process for finding properties
- Step #1: set up property searches on REColorado
- Step #2: Investor reviews properties and sends over deal analyses
- Step #3: Review the deal analyses
- Step #4: "First date" property walk
- Step #5: Refine and keep looking
- Structuring offers
- Colorado's state standardized contract
- What makes a good offer?
- Submitting an offer
We’ve gone over the steps needed to achieve this in our previous modules, but for sake of review, here’s a checklist of what you will want to have reviewed or set in place before you start looking at properties. This foundation will help set you up for success and help execute your goals.
- Pick your agent.
- Sign the Buyer Agency Agreement. It’s a legal document that establishes a fiduciary agreement with the buyer and allows the seller to pay that agent. Basically, it hires your agent as your agent.
- Select your lender.
- Have your pre-approval letter. It’s pointless to write an offer without a pre-approval letter in the Denver market as it won’t be taken seriously by the seller.
- Pick the lender you’re working with because switching lenders during the middle of the transaction can cause issues.
- Know your strategy.
- You don’t need every detail figured out, but have the basics figured out.
- Be smart with your personal finances.
- Don’t buy a car or anything else you would need to finance; it creates more paperwork and could mean you no longer qualify for the same loan amount. This may mean that you can no longer close on the property you wanted.
- Be on credit “lock down” until the transaction is closed. Don’t apply for any new credit cards.
- Start property searches and analyses with your agent.
- Determine criteria and make changes as necessary.
Our Process for Finding Properties
If you haven’t noticed so far, we’re very process-driven. In our experience, processes lead to clients being dialed in and ready to go. Plus, it allows us to act very quickly to get properties under contract on your behalf.
Step #1: Set up Property Searches on REColorado
REColorado is our local MLS. Remember, the vast majority of house hacks are found on the MLS. Zillow and Redfin pull their listings and data from REColorado. REColorado is the source and is where listing agents upload their listings. Zillow and Redfin are great at pulling single-family listings but do a poor job of pulling multi-family data.
REColorado allows us to setup custom searches based on your criteria. These are the searches we typically set our clients with:
- Specific house hacking property searches. These searches—which use a combination of field searching, keyword filtering and square footage requirements—are part of our “secret sauce.” They usually find some amazing properties and can avoid hours of scrolling through the MLS!
- Multi-family (2-4 unit) searches. In addition to having accurate data, REColorado will have (if the listing agent uploads it) info on rents, expenses and lease information.
- Custom searches based on the client’s needs. We’ll create custom searches based on parts of town, commute time, certain features and price point.
Step #2: Investor Reviews Properties and Sends Over Deal Analyses
Once the property searches are setup, we always have the investor review properties on the MLS and then analyze some deals using Joe’s rental property analysis spreadsheet. As we’ve refined our process, we’ve noticed a big difference when the client has the ability to underwrite properties compared to us sending over properties. There’s a big difference between reviewing a spreadsheet that we prepared versus you having to input the numbers yourself. We want our clients to be educated.
We ask our clients to send over three deal analyses. It doesn’t matter how good or bad the deal is. Understanding the process of underwriting the property is the goal.
Step #3: Review the Deal Analyses
Once the spreadsheets are emailed over, we’ll hop on a zoom call or write an email back. It’s important to discuss what the client has right, wrong and how we would underwrite the property. Once a client has analyzed a handful of properties, he or she “gets it.” It’s not rocket science, but it takes a few times to get the hang out of it.
Step #4: “First Date” Property Walk
Now it’s time to walk some properties! This is nicknamed the “first date” property walk because it’s meant to help you understand properties from an investor’s perspective. Before we walk the properties, we’ll underwrite them in the spreadsheet. You are able to compare your spreadsheet to reality and see how different areas and houses compare with how you will balance your investments and personal requirements. Plus, you’ll definitely see the power of Photoshop at work when comparing the online photos to real life!
The goal of the “first date” property walk isn’t to put an offer in, but it’s not uncommon for an investor to submit an offer.
Step #5: Refine and Keep Looking
Sometimes we put offers in, sometimes we don’t. Assuming we don’t put an offer in, the next step is refining our property searches based on your feedback. It could be a change in location, property type, bedroom count, size or other variables.
We keep analyzing, walking properties and refining until you’re ready to start writing offers. Typically, our clients are ready to put offers in within the first few property tours since they are educated and understand the numbers.
After you go through the process above, you will find a property that fits your criteria and is the one you want to use for your house hack. It’s now time to start submitting offers. This is when it gets real. You are signing a contract and putting earnest money into the game.
Colorado’s State Standardized Contract
In Colorado, we’re fortunate to have a state standardized contract and other related documents. These are created, approved and updated annually by the Department of Regulatory Agencies (DORA). It allows for quicker and smoother transactions since everyone is using the same forms.
DORA realizes that purchasing real estate is one of, if not the biggest transactions a person has ever made. They don’t want prospective buyers to be stuck in a contract with a house that’s not the right fit or too expensive. The contract is very buyer friendly. The details are explained in the next module, but just understand that it gives the buyer multiple options for terminating the contract.
The contracts are prepared using an online software called CTM eContracts. Fortunately, it allows for electronic signatures for all parties involved.
What Makes A Good Offer?
It’s more than just price! It’s common for people to think that the offer with the highest price is the one that always wins. That’s not true. There is a lot more to structuring an offer than just having the highest price. We routinely win properties where we are not the highest priced offer.
When drafting and submitting offers, we follow a 16-point checklist:
- Establish a relationship with the agent. Picking up the phone and calling the listing agent is a simple, yet powerful step that many agents skip. The relationship helps understand what the sellers want and helps our offer standout when it’s submitted. Rather than just becoming another offer sitting in their email box, the agent associates it with us and what we communicated on the phone call.
- Path of least resistance. After talking with the agent and understanding what they want, we structure our offer to make the path of least resistance for the seller and agent to accept. One example is simply following their submission instructions of sending it to their correct email address! You would be amazed at how many agents cannot follow instructions. What does that communicate to the other side? If they cannot submit it to the correct email address and follow simple instructions, it communicates that they could be a pain in the butt to work with. There are a lot of little things, but they add up!
- Write a detailed cover letter. When submitting an offer, we always write a concise cover letter that highlights the strength of our offer and how it matches what the seller wants. When agents get over a dozen offers, you want to make it easy for them. This step eliminates the need to dig through our contract for all the details.
- Submit a pre-approval letter. Earlier we discussed pre-approval vs. pre-qualification letters. Pre-approvals show that we are ready to go and have a higher chance of closing.
- Source of funds.
- If buying with cash, include source of funds showing the full amount necessary for purchase.
- If buying with a loan, include source of funds showing the full down payment already in the bank account.
- Call from the lender. The lender proactively explains that the buyer is qualified, easy to work with, responsive, etc. Plus, the lender can share their experience of working with us. For example, when we submit offers, Joe is copied on the email and immediately follows up with a phone call.
- Submit the best financing terms. Some agents and offers will include options for different lending programs. This communicates uncertainty to the seller. Generally, we have this determined before the offer and submit with one loan option to show that we are ready to go and using a loan program that is straightforward. Many of the down payment assistance programs come with red tape that can throw uncertainty into the transaction.
- Clean and easy-to-read contract. Structure the offer in a way that is easy to read and understand. If you’ve received emails or letters where one is confusing and the other is clearly laid out, which one do you pay attention to? The one that is easy to read! Listing agents and sellers are like other people—they are busy! Let’s not make it harder for them to understand our contract. Many agents add custom clauses when the contract already has it in there. Don’t add unnecessary or repetitive language!
- Early buyer termination dates. As mentioned earlier, the Colorado contract is very buyer-friendly. It’s best to put the most common dates and deadlines that buyers terminate on early rather than later. We always recommend our clients hire a home inspector. The inspection is what causes many deals to fall apart. Rather than having our inspection objection and resolution deadlines three weeks after going under contract, we often have it seven days out. It gives us and our client plenty of time to do our due diligence (don’t worry, if we need more, we can push the dates out) and lets the seller know that we’re moving fast. It’s in everyone’s best interest to know sooner rather than later if we’re moving forward or terminating.
- Limited inspection. You would be surprised at some of the small and unimportant items that buyers will ask sellers. The inspection objection is not where you nitpick over small items such as door stops or paint colors! We let the seller know that we’re not going to nitpick over small items, which is often a huge relief to them.
- Unusual price offer. Many people round to whole numbers, such as $340,000. We’ll often write offers at a unique price like $341,100 for example. It helps our offer stand out and lets the seller know we put thought into calculating it. Plus, sometimes we’ve won some offers just because we were the highest by a couple hundred dollars!
- Escalation clause. Sometimes we will add an escalation clause to the contract, which tells the seller we’ll raise the purchase price up to a certain amount to beat out other offers. We require the listing agent to send us a copy of a bona fide offer to make sure it’s legit.
- Rush the appraisal. If closing quickly is important to the seller and will help us win the deal, we can write the offer so we can close in 10 days. We’re able to do that because we work with great lenders, such as Joe, who can act fast and rush an appraiser out to the property. It’ll cost you a few extra hundred dollars, but if that is what helps us win the deal, then a few hundred dollars is inconsequential.
- Flexible closing date. If you’re buying the house from an owner-occupant, they are often selling their property and buying a new one. They are running into the same issues that other buyers are and may miss out on a few properties. If we can offer a flexible closing date, that can be a huge relief to them. For my primary residence that I purchased, the sellers were waiting for their new-build home to be completed. Builders are notorious for pushing back closing dates. I gave my sellers the option to push our closing date back if they needed. They avoided a lot of stress and the potential headache of moving twice and staying in a hotel for a week or two. Additionally, if an investor is selling the property and are in a 1031 exchange, a flexible closing date is highly desirable for them too.
- Seller leaseback. Sometimes sellers need to close by a certain date but want or need to remain in the property. They essentially become tenants. Again, this is like the example above where it can make their life a lot easier and less stressful. These are usually for short-term situations, or less than 60 days.
- Backup offers. More than 20% of all properties in Denver fall out of contract. Some go back to the MLS, some do not. If our offer loses out, we always ask the agent about submitting a formal backup offer or let them know to call us if anything doesn't work out. Guess what? We win quite a few places like this!
Are any of these points the “magic bullet” that always helps us win? No. The combination of them, along with our reputation, helps win quite a few and a higher percentage than the average Denver agent. Becoming a real estate agent has a relatively low barrier to entry: a person has to take some classes and spend a few hundred dollars to take an exam, which is not too hard to pass. The classes and the exams, like a lot of schools, don't teach practical real-world tips like our checklist. Our offers often stand out compared to other ones, which helps us win them!
Submitting an Offer
Now it’s time for us to submit the offer on your behalf! As you can tell, the prepping and structuring of the offer takes time, whereas submitting it is fairly straightforward. We’ll go through common questions from clients:
“Does it cost money to submit an offer? No, it doesn’t cost anything to submit an offer.
“How soon will we know?” The Denver market moves fast, so we usually know within 24 to 48 hours.
“What are the outcomes after we submit the offer?” There are three:
- Reject - Offers have an acceptance deadline, so the listing agent can verbally say, “We are not accepting this offer,” or, if you haven’t heard anything from the listing agent before the acceptance deadline, the offer expires and is officially rejected.
- Counter - A negotiation where seller says, “Yes, we like the offer, but we need to address a few small changes.”
- Accept – The offer is good, seller signs and property is officially “Under Contract!”
Jeff, who has been through this process several times, reiterates how having a good team in place is really key to understanding the process of looking at properties and, ultimately, finding the right property for you. The more you understand the process and have a team that has your back and is willing to go to bat for you, the greater your chances are for getting the property you want under contract in a competitive market such as Denver’s.
Building your team is arguably one of the most important steps in any investing strategy. We work with investors, lenders, inspectors and other teams of real estate professionals on a daily basis. We would love the opportunity to help you with any needs you have. If you have questions, need clarification, or would like to set up a consultation with our team, please contact us at Chris@DenverInvestmentRealEstate.com or visit our website www.denverinvestmentrealestate.com/.