“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
I think Rick is referring to a heading 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.
By 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.
The way most investment teachers show you to go out and make an offer is they first 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 and find out the status and owner of the property.
You contact that person, and say, ‘I might be interested in buying your property.’ They say, ‘If you want to go look at it, here’s how you get inside.’ So you go look at the property, do a full blown inspection on it and try to figure out what’s wrong with it.
You may get some contractors to come out there and get an idea of what it’s going to cost to fix the roof, replace the carpet and whatever else needs to be done to that property. You check the title to make sure that it’s got a clear title and you look at the mortgage and make sure that they’re making their payments on time.
After spending about 3 to 5 hours’ worth of your time doing all that work, you pull up the comps (which is the comparable sales of other properties in the area) to see what the value is because you want to know what kind of offer you need to make.
So you make an offer that 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. Then the seller says to you, ‘Oh 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 the work and effort that you’ve put into it goes out the window; you’ve lost all of that time.
My philosophy is simple: 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.
I make offers on properties without ever seeing them, going by them, checking on a title, looking at the loan situation, or even 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.
Now, we ask questions. We want to know from the seller about these situations. And they usually tell us 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.
One of the things that we find when we’re doing it remotely is the condition of the property. 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 not really any big problems with it.’ And we say, ‘That’s great.’ We send him out a sign and a lockbox.
He puts the sign in the yard for us and 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 are telling us, ‘You know, 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. 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).
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.
We can also tell them ‘You have to do the work. We can just lower the price. Which one makes the most sense for you?’ 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’ve got 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. 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 that I teach and that property’s not sold, then there’s only one reason that it hasn’t sold – and that’s the price. 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.
This is 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.
This is the way to do it without ever looking at the property and having to go there. I see this happen with my students all the time, we do it all the time. 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. 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. And they’re still one of the biggest bangs for the buck IF you do it right and do it the way I teach.
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.