My Greatest Fear #8 – I’m Afraid of What I Don’t Know
Even after being in real estate investing for 38 years, I still am learning every day. Many new investors use the fear of the unknown as an excuse not to get started. They keep studying and studying with the belief that the more they know the more likely they are to get the “perfect” deal.
I say perfect deal because their analysis of each prospective deal can take hours or days. A better approach is to make an offer and get the property under contract and start marketing it immediately – once the seller has signed your contract.
Your protection against missing something or making a major mistake can always be rectified by cancelling your contract during the inspection period. This is your safety net against making an initial mistake. Once under contract you can take your time analyzing the property and all it nuances to make sure you have a good deal.
If you are wholesaling and you find issues or problems with the property, it doesn’t mean that you can’t sell it to another investor who will accept these deficiencies. It depends on the magnitude of the problems – to some investors, any problem is resolvable even if court action is needed and these can be the best deals.
To a novice these issues are deal killers before they start so they pass on them. The simplest solution is to get a contract for the property, do your due diligence during the inspection period while you are marketing it and let the closing agent tell you about the serious issues, if any, that exist with the title to the property. These title problems can cloud the title for an end-buyer, however, he could very well be willing to accept them.
These liens or code violations can be for safety issues such as abandoned and unsafe structures to simple un-mowed grass liens. All of these can be “fixed” with time and money – this is not your issue unless you intend to buy and hold the property. Your potential buyer should have the time and money to fix these issues so he can move on to rehab or rent the property.
But let’s say you are facing a dilemma of making an offer for a property and you are unsure of whether or not to do it because you are afraid of what you don’t know that could happen. The simple solution is to have a two-fold protection in your contract that will give you an “out” right up to the closing.
The first protection is the inspection period. I suggest you get at least 10 days and preferably 15 – 21 days. If you are dealing with a homeowner directly and not a listing agent, this “longer” inspection period should not be a problem and we have occasionally gotten 90 days if the seller wants to stay in the property for an extended period after you get a signed contract.
WARNING – an inspection period is calendar days NOT business days. For example, if you inspection period starts in June 1 and is for 10 days, your inspection period is over (expired) on June 11. However, if a national bank holiday falls in the inspection period, this day is not counted. For example, if your inspection period is from July 1st to July 11th, it would actually be extended until July 12th because of Independence Day on July 4th. You inspection period technically expires at 12:00 midnight on the last day of the inspection period BUT I suggest that you cancel at mid-day for two reasons: first, because the seller may renegotiate the price instead of allowing you to cancel. Secondly, if he won’t lower the price, you’ll at least know he got your cancellation notice. I like to call the seller, email him and send a fax if he has a fax line.
The killer contract clause that will protect your deposit after the inspection period has lapsed is one that requires the Seller to provide you with clear and marketable title at the closing. This means all title issues, judgments and liens are cured prior to closing. However, it doesn’t require that the seller fix potential code issues that have not been discovered by the city’s code enforcement department.
The best way to cover yourself for illegal additions or work done without permits is find this out during the inspection period and find a buyer who will take this potential problem as part of his purchase. This buyer will be signing a Hold Harmless Agreement at closing to eliminate any potential future issue where he says you knew it but didn’t tell him. If you can’t find this “agreeable” buyer during your inspection period, cancel as I already mentioned.