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Learn How to Close More Deals in Real Estate with Less Money
Want to do more deals and spend less money?
There are some gems that are highly unspoken of, that we will review today.
We always hear about how to find deals, building rapport, knowing your rehab costs, knowing your ARV, and the best follow through practices up to closing.
But, no one ever talks about the transactional costs and how to spend less money closing your deals.
This is a key concept in real estate investing for beginners.
This is a very important aspect of doing business.
What you pay at the closing table determines if you close more or less deals.
Today, we will talk about appraisals and how they dictate your closing costs.
Let’s get started.
Important Factors
As you get through the lead building strategies and make it to getting deals under contract, you’ll know understand that you’re at the point where its all about the money.
Your closing costs could determine whether you can keep shopping for deals, or if you need to focus on renovating and closing the deal you have first.
I’m not sure why this topic is not shared amongst aspiring investors much, but it is a very integral part of the process.
We all know that the cash out of your pocket is opposite of the objective. We are all about OPM (other peoples’ money), right! Yes!
So, let’s prepare you for saving as much money as possible at the closing table.
When we use hard or private money, we are usually subject to the comparables we use and the (sold) cost per square foot of those comparable properties.
Well, how important are those comps?
Well it may sound simple, but your attention has to be in the details.
Selecting the best comparables are a vital part of estimating what you will borrow and spend.
If your financing covers 70% of your ARV(after-repair-value) including rehab costs, you will need to make sure your ARV and rehab costs make sense.
We will use financing that covers 70% of ARV including repairs in the example later.
Not only do you need to make sure your scope of work for your rehab will bring the ARV you are projecting, but you will also need to be sure you are utilizing comps that are accurate to what the appraiser may use.
Therefore, your valuation should resemble what an appraisers’ would, so you are as accurate as possible in what you will submit to your lender.
Not all appraisers are created equal and sometimes you may get some bizarre comps in your appraisal report, but you need to be very considerate to their mindset.
Do your best to consider what the appraiser will consider when choosing comps.
The Appraisal
When you get appraisal reports, you should study them to increase your understanding of what was used and why.
Expect that, the more you and the appraiser are out of alignment with your comps, the more it will affect how much of your financing will be covered.
Also, be prepared to challenge appraisal reports as needed. You may receive consideration for an alteration request in your appraisal report.
However, it is seldom that an appraiser will alter their report. Not sure why, however.
Especially if your concerns are valid. Just be sure you are courteous and professional in any interactions. It will help your results.
Let’s use an example of how the appraisal can affect your purchase and the cash you’ll need to bring to closing.
EXAMPLE –
You submit your project to your lender where you are looking to purchase 240 Main Street which is a 3bed/2ba and 1,500 SF for $100,000.
Based on your comps, the property has an ARV of $225,000 and the repair costs will be $57,500. Your valuation shows 240 Main Street having a $150 cost per square foot after repairs. Your ARV is based upon the following comps and their respective (sold) cost per square foot.
- COMP 1: 126 Madison Street is 0.2 miles away, was renovated, is 3bed/2ba, 1400 SF and sold for $217,000 (or $155 per square foot).
- COMP 2: 316 Eldridge Road is 1 mile away, was renovated, is 3bed/2ba, 1600 SF and sold for $240,000 (or $150 per square foot).
- COMP 3: 218 Main Street is a few houses down on the same block, was renovated, is 3bed/2ba, 1550 SF and sold for $224,750 (or $145 per square foot).
Based upon your submission of the project to your lender, it is approved at a purchase of $100,000 pending the appraisal.
When the appraisal is received, the report includes comps (1) and (3).
However, the appraiser did not use comp (2).
Instead the appraiser used 206 Jefferson Boulevard which is 0.4 miles away, was renovated, is 3bed/2ba, 1300 SF and sold for $175,500 (or $135 per square foot).
The appraisal report shows that your project, 240 Main Street, will be valued at $145 per square foot versus the $150 per square foot after repairs. This now brings your average cost per square foot down to $145 versus $150.
This change will shift the amount of money you will be lent and the amount you need to bring to closing.
Prior, where you only needed to cover the closing costs, you will now need to bring an extra $7,500 to closing to cover the difference.
With this change, the ARV of the subject property is now $217,500. Your repair costs are $57,500. So, your lender will only agree to lend $94,750 versus $100,000.
- Unfortunately, you happened to missed the property on Jefferson Boulevard and you made your offer based upon the three comps you summitted to your lender.
Here, displays an underlying reason you really want to understand not only how your financing will formulate your lending amount, but also the need to consider what the appraiser will utilize in evaluating your project.
Perhaps you should consider offering incrementally less than what your computations reflect, just in case. For example offering $95,000 versus $100,000 just for safe measure.
- As a recourse, you could make the seller aware of the appraisal to see if they’d consider altering the purchase price. Maybe they will adjust the price and reduce the $7,500 you are now responsible for bringing to closing. Always consider creative alternate strategies to close the deal.
Conclusion
Although, the example used was very direct and “plain” for simplicity purposes in conveying the message, there usually is much more detail regarding the subject property and the comparables used.
Common details to consider are; school district, build (frame vs brick), yard space, parking accessibility, porch vs no porch, garage or no garage, property type (detached/semi-detached/row), AC system vs no AC system, basement vs no basement, etc…
Use our investment calculator tools to aid your goals.
It is evident that appraisals are a crucial portion of your acquisitions, so be sure to prepare accordingly.
Thanks for joining us today faithful readers-future leaders! We appreciate it.
Love ya and keep striving for growth!
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