Buying Your First Property: Step by Step
“Don’t wait to buy real estate. Buy real estate and wait.” - Will Rogers
*I purchased my first home at 19 and owned over 100 doors by 24. Anyone with enough determination can do this.*
I will forever believe that owning Real Estate is the cornerstone of creating wealth; not just because of the money you can make, but because of the second and third order effects, such as the tax benefits, influence, and leverage. When I ask people, especially those who are from the younger generations why they don't own any property, the answer always comes down to the same two things. They don't think they can afford it, or they don't know how. Today I'm going to go through the basic step by step process to purchasing your first piece of property and show you how not only can just about everyone afford it, but that it's also fairly easy.
The home buying process can be broken down into five major steps:
1. Loan Qualification
2. Property Identification
4. Due Diligence
Each of these major steps will have a few specific things within each one that you'll need to complete, but complete each one, and you'll own your first home.
1. Loan Qualification – Before you hit the market hunting for property, you should sit down with a few mortgage lenders. If you know you plan on purchasing a multi-unit, have some approximate rents of each unit with you, so they can add that income to yours, and help you qualify. For example, if you want to buy a triplex to live in one unit and rent the other two, if the other two units are renting for $600/month, they can add $900/month to your income and use it to help you qualify for the loan. That’s an extra $10,800/year!
Once you’ve been prequalified, sellers will take your offers much more seriously, and you’ll know what you can afford. Here is what you’ll need:
· Two years of work history. Most standard lenders will need to see that you’ve been employed for at least two years. Not necessarily with the same employer, just that you’ve been working, and have had some income.
· Two months of current paystubs. This is what they will use to determine your current income. They don’t care what you made for the last couple of years, just what you are making now.
· Credit Score. Most lenders want you to have a credit score of 620+, however for the younger audience, you may not have a credit score at all. If you need to generate a credit score, apply for a credit card, carry a $10 balance on it for 6 months, and voila, you’ll have a solid credit score. You can also ask someone to make you an authorized signer on their credit score and generate a score for yourself within 30 days.
· A KNOWLEDGEABLE LENDER. This is the most important one. Get recommendations from people who are in real estate full time. The experience and knowledge of your lender can whole heartedly be the difference between getting approval for your loan or not. They’ll see the problems before they happen and know exactly how to fix them. Do not just pick a lender off of Zillow.
2. Property Identification – Now that you’ve been pre-qualified and know exactly what you can afford, you can hit the market and start looking at homes that could fit into your long term plan.
It’s important to make sure that when you’re shopping for property, you are making a logical, and objective decision, and not an emotional one. Here’s what you’ll need to be successful:
· AN EXPERIENCED REALTOR. As a buyer, you don’t generally pay your realtor. The seller of the house does, and they’ve already figured that into the price they’ve listed their property for. Many realtors aren’t worth their salt, blame that on how easy it is to get a license. However, a knowledgeable and experience realtor is going to have knowledge, connections, and advice that can save you tens of thousands of dollars. Find people who actively invest and own real estate and get recommendations from them. Don’t just hire someone your cousin recommended. Remember! You wouldn’t trust a cook who wouldn’t eat his own food right? The same goes for Realtors. I would never trust a Realtor that didn’t own their own properties.
· Single Family VS. Multi Family. Do you know what property type you’re on the market for? Do you want monthly income, or do you need your own private space? What can you afford? What is best for you financially long term? Be objective with yourself.
· Walk Through. Everything that is most likely to make you fall in love with a property is on the inside. That’s why, when we do our walk throughs, we always start on the outside. Most of the important big-ticket items will be here. How is the roof? The siding? Foundation? You get the picture. Once you’re done on the outside, head inside. If there are tenants on the property sometimes you can be friendly and they will give you tons of information about the property.
· Neighborhood. Location, location, location. Everyone has heard this phrase when describing the value of real estate, and it’s true. Is the property in a good area? Near schools? Churches? If you want to get an honest feel for the neighborhood, you need to walk it at several different times. Walk it in the morning at around 10:00 AM, the evening at 6:00 PM, and the night, at 1:00 AM. These are the time windows where each neighborhood will change dramatically.
· Asking Price. Can you afford it? Is it worth what they’re asking? Are their indicators that there might be room to negotiate? Tag in your Realtor.
3. Negotiations – Now that you’ve picked out a property that will work for you, it’s time to submit an offer. There are tons of contracts, and other legal processes that you need to be able to navigate in order to successfully purchase real estate. This is where your Realtor should be earning his money. If you have any complex questions, make sure to ask an attorney.
· Understand the different phases of negotiation. Whenever you’re purchasing a property, there are different rounds of negotiation. The first round is when you are first submitting your offer on the property, asking for some basic price drops because of clearly apparent issues, or value issues. The second round of negotiation begins after your property inspection. After you find specific issues with the house, you alert the sellers, and ask for additional concessions based on the issues. The final round of negotiation is often situational, based on other issues that occur throughout the transaction.
· Determine the price. How much is the property worth to you? How much can you afford? To determine the purchase price of the property, you also need to calculate how much you’ll need to spend on the property in order to make it habitable. Have your Realtor explain to the Seller how you got to the number you’re offering them, and the sellers will be much more likely to accept it.
· Closing date. How long do you need to close? I always like to give myself room. Even if the lender says they only need 30 days, that doesn’t account for anything that might go wrong. 45 days to close is generally a good number. If the sellers give you pushback, you just explain that you only like to make commitments that you know you can keep.
· Concessions. Do you want the seller to fix something? You can either ask them to fix it before closing in your offer, or you can ask them to set aside cash in escrow to be delivered to you at closing, so that you can fix it yourself.
4. Due Diligence – Now that your first round of negotiation is done, hopefully you have the property under contract, AND got a decent price reduction. Now that you’ve determined a price, you need to do some real homework to make sure you’re not buying a dead horse. Here is what you need to do to cover your back.
· Home Inspection. The very first thing you should do is hire a pit-bull of a home inspector. They’ll charge you $400-$500 and will go through the home with a fine-tooth comb. Afterwards, you can expect a lengthy report with lots of pictures. I have never ever hired a home inspector that did not pay for themselves in the form of a price drop I got from the sellers after the inspection.
· Contact the city. This is very important. You must verify the zoning. Make sure the building was permitted, and make sure that the type of building is allowed to exist where it is at. If you are buying a multi-unit property, make sure that you get a rebuild letter from the city, essentially making sure that the building you purchase isn’t being used illegally.
· Scope the sewers. I know it sounds silly, but just do it.
· Review the leases. Are their tenants in place? Make sure to read the leases. You want to make sure that the rents are as represented to you, and if you want to raise the rents, you need to verify when the leases are ending, so you know when you are allowed to make changes to them.
· Re-negotiate. Now that you have all of this additional information, submit what you need to the sellers, and get another price reduction or concession if needed.
5. Closing – Now that you know what you’re buying, and have gone through a few rounds of negotiation, its time to head to the closing table. Be prepared to sign a ton of documents and do a lot of reading.
· Review your loan term sheet. Make sure there are no additional changes to your term, interest rate, down payment, etc. If there are, review them with your lender, and make sure you are okay with the changes.
· Review the closing sheet. Make sure that the calculations that determine how much money is coming and going from each party are correct and what you were expecting.
· Title insurance. Make sure to purchase title insurance. Chances are, you’ll never need it, but it will make sure to protect you against unrecorded liens or easements that the seller may have put on the property.
· Sign. Read every document, and then sign it. Make sure to ask for both digital and hard copies. Keep them safe, forever.
· Pictures. Make sure to take a picture of yourself in front of your new property. It was a lot of hard work, and you earned it, make sure you can remember it!
These are the basic processes you’ll need to go through to buy your first home! You are never too young, or too old to purchase your first property. I have helped people as young as 17, and as old as 67 successfully purchase their first property.
Where there is a will, there is a way.
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