Investing in real estate might seem simple: Collect your investing funds, find a property, buy it, collect rent income.
But anyone who’s done it knows there are many, many more steps involved along the way. After seeing a client be surprised by just how many steps there were after his contract was accepted for a 4-family I decided to write this to illuminate the process for anyone who’s considering buying their own 4-family.
One of the first things to know is that once your contract is accepted there’s a timeline that starts ticking down. There are a lot of moving parts here, but I group them into three stages: Inspections, Negotiations, and Appraisal. The typical time between a contract being accepted and the day of closing is 45 days, which gives you roughly 15 days for each stage. 30 day closings aren’t unheard of, but for any deal involving a lender having a shorter timeline can make everyone’s life difficult.
Inspections: Days 1-15
This is when your real due diligence starts. The inspection period includes everything, both the physical inspection and the financial inspection. Until this point your numbers were hypothetical; now you’ll get to see the actual financials the building pulls in and what repairs and improvements are necessary.
Legal and Financial
If you’re using lending to purchase the property there’s a lot of disclosure that’s required at this point by lender. Even if you’re using cash I’d suggest the same discovery. I use a rental property rider from the St. Louis Association of Realtors and ask for all leases and rental agreements, the rental property verification (Form #2096a), occupancy permits (which are required by the city), along with the rent roll/actual rent payment history for each unit for the last 12 months. Another term you might hear at this point is estoppel certificates, which function similarly to the rider as both have the same purpose, to understand the financial and legal status of the building and the occupying tenants.
In St. Louis 4-family property inspections normally run about $800. The inspection package I usually get includes: $550 for the inspection, $220 for a sewer lateral line camera, and $80 for a termite inspection. Those costs are based on my usual inspector and can vary, but that price gives you a good target. I wouldn’t skimp here, especially on the sewer lateral line inspection because it’s common to find issues there with properties in the city. As the buyer it’s your duty to pay for your inspection, so plan for this cost.
Most contracts stipulate that property inspections must happen within 10 days of an accepted contract, and any repairs you desire will need to be returned along with the full inspection report in that period. The timeline for the inspection itself is closer to 7 days within the contract being accepted so you have time to go over it and put together what you’ll ask to be repaired before those 10 days are up.
Don’t be afraid to ask for something to be fixed. If the property is listed as “move-in ready” and clearly isn’t, you’re completely reasonable to ask for repairs to make it so. Sellers shouldn’t misrepresent the property. For example, on one walk-through I went on with a client there were stacks of boxes along a basement wall that, when I decided to move them, were hiding a crack in the foundation wall. We asked for that to be fixed and got it since the placement of the boxes made it seem like there was a clear intention to hide the crack.
Negotiations: Days 1-15
It’s the buyer’s job to figure out what they want repaired, so be sure you make your voice heard here. In my article about negotiations I mentioned that this is another point in a deal to try to get what you want. Don’t expect everything to get fixed (I’ve only seen that happen once), so make sure your list has the things you really want and other issues that’d be nice to have fixed but are less important as bargaining points since you aren’t likely to get them all done. This is when you’ll make your agent earn their commission.
Appraisal: Days 16-20
The lender will come in and appraise the property to be sure that they’re lending the right amount of money, verifying what’s called the loan-to-value ratio. The lender appraisal is another thing you’ll have to pay for, which is why I set it out after the negotiation stage so that, if you can’t come to an agreement and the deal falls through, you’re not out the cost for the appraisal. The typical cost for this is around $500 and it’s paid at closing as a debit to the buyer in the settlement statement. That’s the way you want to pay for it — otherwise you’re out of pocket for the appraisal and don’t have the property to show for it.
The title company will also search for any tax liens on the property, and if you’re not in the city I’d recommend you ask them for a survey as well to be sure the lots are properly drawn and what you expect. In St. Louis city, however, the homes are generally close to 100 years old and the property lines are usually very distinct thanks to fences that seem to be everywhere, so disputes or oddities with property lines are incredibly rare.
Financial Contingency and HUD1 Statements: Day 38 and 40
This is the last point that we can back out due to finances and get our earnest money back. This will depend on your exact contract, but this is how I write mine. If we don’t exercise this option everything is approved and ready to close.
The HUD1 statement comes 5 business days prior to closing and will have all the credits and debits from the buyer and seller and will also include the total amount of money that the buyer (and sometimes seller) must bring to closing. If something is wrong or misstated by your lender on their good faith estimate, it could postpone closing another 5 days.
Closing: Day 45
With closing comes the final walk-through with your agent — this is when you double check to make sure that everything that was agreed would be fixed has been fixed and that the property is in the same condition as it was when you did your inspections.
At most of closings in St. Louis you’ll have your agent, your lender and the closing agent will be from the title company. You will own the property after it has funding, not necessarily on close, but the two usually coincide, or the day of funding is the day after closing. Since you started this process to become a landlord, be happy that you’ll receive your rents as a prorated credit during close. Along with that the security deposits are also included in their entirety on the settlement as a credit to the buyer — be sure to set those aside in an escrow account as soon as you can.
Once you walk out of closing, that’s it, you’re now (or soon will be) the owner after that 45 day process. Go celebrate!