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SHOW NOTES FOR EPISODE 408: WHEN TO WALK AWAY FROM A DEAL
Walking away from a seemingly good deal is something many real estate investors find very difficult. When you’ve found the investment property of your dreams and are getting ready to close, letting go can be tough. However, when something goes wrong, walking away might be your best decision. In this episode, Bill shares five red flags that every investor should know before signing escrow papers for any deal.
Weekly Tips
- Stealth Tenant Marketing – Finding the Best Tenants for Your Rentals
- Alliances with Local Companies – Get HR people to put up flyer on employee bulletin board – offer one month free
- Tenant Screening
- Facebook Marketplace
- Make contact with great prospective tenants
- Get insight into their lives by visiting their profiles
- Google search – put quotes around name “Joe Doe”
- Walk the to their cars
- Drive by the house they are currently living in
- Facebook Marketplace
Introduction
Walking away from a seemingly good deal is something many real estate investors find very difficult. When you’ve found the investment property of your dreams and are getting ready to close, letting go can be tough. However, when something goes wrong during the buying process, walking away might be the best decision you will ever make. Moving forward with the real estate deal will only cause you lots of stress and frustration. You may even lose a ton of money!
So, how do you know when to walk away from a real estate deal? Here are 5 situations when you should tell a seller goodbye and look for investment property elsewhere:
The Home Inspection Uncovers Major Issues
Before making an offer on investment property, you need to hire a professional home inspector to check the state of the home. This inspection report will give you information about the property’s plumbing, foundation, electrical wiring, and structure. Conducting a home inspection is crucial because it will show you what areas of the investment property need repairs or renovation.
Some home inspections only reveal minor issues that you can fix without spending too much money. This could be problems like stained wooden floors, peeled paint, broken sockets, or outdated fixtures.
When should you walk away from a real estate deal? When the inspection uncovers major problems like faulty wiring, defective heating, unstable foundation, severe mold issues, or high radon levels.
The Title Search Uncovers Unexpected Issues
A title search is a process of perusing past tax records, deeds, and other financial transactions connected to a particular piece of real estate. The main purpose of a title search is to ascertain that the individual selling the property is the actual owner and that the property doesn’t have any encumbrances or liens that would complicate the transfer of the title. You can conduct a title search yourself by checking online records or visiting the county office where the investment property for sale is located. However, it is recommended that you hire a title search company to do the work for you.
Consider walking away from the real estate deal when a title search reveals the following issues:
- Uninformed or unfamiliar heirs – If the original owner of the real estate property has passed on, then you are probably buying from one of the heirs. If any of the other heirs have not been notified of the sale, then you are likely to face legal problems in the future.
- Liens on the property – Types of lien include tax liens, mechanic’s liens, attorney’s liens, and judgment liens. If the seller is not ready to pay off the liens before closing, walk away.
- Disputed boundaries – Even when boundary disputes involve small pieces of land, resolving them can be very time-consuming and frustrating.
- Unlawful deeds – This is a common problem that emerges during a title search. For example, the deed might have belonged to an undocumented migrant or someone that lied about their marital status. Such deed problems can create issues for you ahead.
A Real Estate Investment Analysis Reveals Low Profitability
Every investor should learn how to find real estate deals and how to analyze real estate deals. One of the best tools for real estate deal analysis is Mashvisor. You can easily find or add any investment property to this platform and analyze it. Learn how to do that here.
Next, you’ll need to analyze the neighborhood where the investment property for sale is located. Mashvisor’s heat map will show you the areas with the highest and lowest listing prices, good cash on cash return, and good Airbnb occupancy rate. Once you’ve compared locations and ensured that the neighborhood has a high rate of return, you can then use Mashvisor’s real estate investment calculator to check for details such as:
- Optimal rental strategy
- Traditional and Airbnb real estate comps
- Traditional and Airbnb rental income
- Traditional and Airbnb rental cash on cash return
- Traditional and Airbnb cap rate
- Traditional and Airbnb occupancy rate
- Monthly expenses
- Cash flow
As an investor, you should only go for positive cash flow properties with a good return on investment. If the investment property deal finder reveals that a house will generate negative cash flow, walk away quickly.
The Deed Restriction Is Too Burdensome
Also known as a restrictive covenant, a deed restriction is a statement that places certain limitations on how a property can be used. Deed restrictions apply to all future buyers of the property. Changing them usually takes a lot of time and effort, as well as huge legal expenses.
Before you make an offer on a home, be sure to ask for a copy of the deed of restrictions. Go through it slowly and understand what you are dealing with. A deed restriction might forbid things such as:
- Increasing the number of bedrooms
- Changing the color of your rental property
- Keeping certain breeds of pets
- Adding structures such as pools, workshops or garages
- Removing trees
- Building fences
If you find a deed restriction too burdensome, walk away from the real estate deal and don’t look back.
Homeowners Insurance Is Too High
When you buy an investment property, you will be required to pay homeowners insurance to cover the house, as well as the people living in it. Before closing on a rental property, shop around and find out what you are likely to be charged for homeowners insurance. The online agent or app will calculate a quote based on the following factors:
- Where the investment property is located
- When it was built
- The square footage
- The type of construction
- Foundation type
- Type of air-conditioning or heating systems
If the investment property is located in a high-risk area or has features that would be considered liabilities, the insurance is likely to be overpriced. This could be your cue that this is a bad real estate deal that you should walk away from.
In Summary
The investment property buying process itself is stressful and time-consuming. You don’t want to continue dealing with other problems after closing the real estate deal. Always look out for red flags and walk away when you sense you are not getting value for your money.
DISCLAIMER: Many of the above strategies take knowledge and have a higher degree of risk. You need to do your research and/or work with someone who is experienced to reduce your risk.
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