Why I Don’t Do Due Diligence Before I Make An Offer On A Home
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Read Transcript for “Why I Don’t Do Due Diligence Before I Make An Offer On A Home”
Not having to do due diligence work on deals is one of the biggest advantages of zero down real estate. Here’s how to make it happen.
“Dear Joe. I hear that you don’t do due diligence before you make an offer on an investment property. That sounds dangerous to me. Can you tell me why?” – Rick Coleman, Fort Worth, Texas
Joe: I think there’s a heading that he’s referring to in one of my marketing pieces that says, ‘How To Make No Risk Offers With Five Minutes Of Work Rather Than Five Hours Of Due Diligence’. Throughout my entire business in every different thing that I do, I’m always looking for ways to do things quicker with less risk, and because we’re reducing that risk, I call that whole process ‘The Safety Net Method’. It’s the way you do it, the way you talk to people, the way you fill out the contracts, and what you’re looking for.
Joe: The way most investment teachers show you to go out and make an offer is first they have you try to find a property. Let’s say you go find an abandoned property – you’re driving down the street, the grass is growing high, and you say, ‘That might be a deal. So let me check it out.’ So you pull it up in the county records, find out what the status is and who owns the property. You contact that person, and you say, ‘I might be interested in buying your property.’
Joe: They say, ‘If you want to go look at it, here’s how you get inside.’ You go look at the property and do a full blown inspection on it, trying to figure out what’s wrong with it. Maybe you get some contractors to come out there and get an idea of what it’s going to cost to fix the roof and replace the carpet and whatever else needs to be done to that property. You check the title to make sure that it has clear title and look at the mortgage and make sure that they’re making their payments on time.
Joe: Then after doing all of that work (which maybe takes you three to five hours’ worth of your time), you pull up the comps to see what the value is because you want to know what kind of offer you need to make (and by comps I’m talking about comparable sales of other properties in the area) You then make an offer you think you can make money on and is going to make sense to put your money into and use your credit to buy that property.
Joe: Then, you make an offer and the seller says to you, ‘No, I want _x_ amount of dollars instead.’ They don’t want to discount it nearly as much as what you think you’re going to need to make it happen. So all of that work and effort that you put into it goes out the window; you’ve lost all of that time.
Joe: My philosophy is, don’t spend the time. Instead, give yourself contingencies to get out of the deal if it doesn’t make sense or if these ugly things start to rear their head, e.g. later on you find out there’s a hole in the kitchen floor and you’re going to fall through it.
Joe: I make offers on properties without ever seeing, going by them or checking on a title or looking at the loan situation, and without ever doing comps. We can make offers doing it that way without spending all of that time because we put contingencies in our offers that allow us to back out of the deal if the deal doesn’t work.
Joe: Now, we ask questions. We want to know from the seller about these situations. They usually tell us, too, but if it turns out that what they’re telling us is not accurate, then we can back out of the transaction without losses and much less loss of time.
Joe: One of the things we find when we’re doing it remotely is – let’s say I’ve never been in a property and the guy says, ‘It’s in pretty good condition. I do want to sell it. There’s really not any big problems with it.’ And we say, ‘That’s great.’
Joe: We send him out a sign and a lockbox. He puts the sign in the yard for us and he puts the lockbox on the front door. We start doing our advertising campaign to get buyers into the property. And our buyers start going in and our buyers are telling us, ‘This place smells like there’s 300 dogs that live here. This is horrible. It smells awful.’ Or, ‘That roof must be 40 years old. It’s about to fall off the house.’ So we learn from our buyers the condition of the property if the seller lies to us.
Joe: By the way, they don’t lie to us that often because we ask them and a lot of times they tell us, ‘Well, I’ve got one plug in the third bedroom that’s got reverse polarity on it.’ They’ll go into real detail about it. (I don’t really want to hear that. I just want to know if it’s got any major issues to deal with).
Joe: We find out from the buyers what the problems are and we ask the seller then, ‘We found out there’s a hole in the roof. Are you going to fix that?’ ‘Oh yeah, I’ll take care of that.’ ‘Okay as soon as you get that taken care of, we’ll have a better chance of getting it sold. Or, we can lower the price. We can do it either way. You don’t have to do the work. We can just lower the price. Which one makes the most sense for you?’
Joe: And if they say, ‘No, I’m not going to do it and I’m not going to lower my price. You’re either going to sell that property or you’re not,’ then we don’t have to sell that property because we have a contingency that lets us out of that deal, so if the buyers aren’t interested in buying it, we don’t need to sell it.
Joe: Also, if they’ve given us a price that’s too high and everybody that comes in says, ‘No, I’ve found another property instead. This is a little bit too high for what I want. I’m looking at other things instead.’ – if we keep hearing that over and over again and nobody’s buying that property, and a month goes by using the marketing I teach and that property’s not sold, then there’s a reason, and there’s only one reason that it hasn’t sold – and that’s the price.
Joe: If you’re working with rent to buy properties, the price problem has to do with the monthly payment rather than the actual purchase price of the property because people are much more sensitive to the monthly payment than they are to the full purchase price of the property, unless they’re paying cash for the property or they’re getting a new loan.
Joe: This is the way to do it without ever looking at the property and without ever having to go out there. I see this happen with my students all the time – we do it all the time.
Joe: I don’t like to go look at properties any more. When I first started this business, it was a lot more fun to go out and look at houses but I’ve seen every possible configuration of house out there, and frankly, I’m not that interested in spending an hour driving for twenty minutes, looking at it for twenty minutes, coming back for twenty minutes, and then buying the property.
Joe: It also makes it possible for us to do it remotely so I can sell properties in multiple states. We can put ads in the paper, which we don’t usually do because it costs money. We’d much rather use online sources that are free and we also still use those ugly signs – they’re still one of the biggest bangs for the buck IF you do it right and do it the way I teach.
Joe: Yes, it is possible to do this without any due diligence; to make these offers and be safe doing it. When you put these contracts together, make sure that you have a contract that’s not going to damage you. And make sure you learn to talk to your sellers and your buyers in a way that sets their expectations properly so that they won’t be surprised or angry at you because you told them one thing and something else happened. Setting expectations is very important in this process and it’ll keep you from a lot of pain if you do it right. So learn the process to do it right. Thanks.