All that looking and negotiating and all else entailed in a real estate transaction means nothing if the deal doesn’t close. If we liken the process to baseball, one team may have a lead, but if the closing pitcher comes in for the final inning and throws nothing in the strike zone, well, that lead could well evaporate.
It’s not easy to win a baseball game, nor is it easy to close a deal on a property. From the casual consumer’s point of view, sure it looks fairly painless. The buyer writes the check and picks up the keys and that, as they say, is that. But the real work happens behind the scenes. For example, if we look at a 12-unit investment residential property we can see just what the realtor and the buyer need to get done once the sale has been agreed upon.
Nothing happens until the Agreement of Purchase and Sale, APS for short, is accepted by both parties. Sometimes certain conditions are listed that must be taken care of before the sale goes through. If the conditions or agreement on them is not met, then the APS can be voided without any penalties. Usually both buyer and seller have named conditions. Typical time-span for fulfilling all conditions is 30 days. But some items need to be done more quickly.
Once all of this documentation is turned over to the buyer, that buyer needs time to go over the information. Items that need checked are the invoices and rent rolls to see if they match the math the deal was based upon. Same with utility bills, to make sure the expenses were not under-reported.
The entire 30 days gives the buyer time to review the documents, but also time for the realtor and/or seller to take care of other details. As far as conditions, the fewer you have on an APS, the better. Sometimes an extended list can be a deal breaker. But inspections, insurance and financing are almost always part of the package.
Inspections are one of the first items to be done. The buyer needs to know if his investment is sound before signing any insurance or mortgage papers. Inexperienced investors, in particular, can lose money if they leave out this important step. The buyer does visit the multi-unit property before putting in a bid, but sometimes they only see the shared parts of that property. Perhaps they might get in to inspect an individual apartment.
After the APS is agreed to, the buyer must inspect every inch of that property. Only then is a professional called in to give the building/buildings an even closer look. If the buyer does the initial hands-on inspection, that will save money. Some flaws, like a ceiling that is collapsing or a floor that needs replaced are easy for even the rawest investors to spot. Items like these might also be deal breakers, so the buyer can back out without penalty. If the buyer does the initial hands-on inspection, that saves time and money.
It usually takes insurance companies a couple of days to come up with a coverage quote. If you’re already working with an insurance broker, this should be an easy task. Just call him or her up with the details and let the firm do the work. If you don’t currently have a broker that you trust, that means you should do some comparative phone shopping for rates and coverage. The existing property insurance may or may not be better.
You may need that full 30 days to get the financing sorted out. Given the tougher lending laws in Canada, spurred by the crises in the United States some years back, it may take a little work to find the best deal. Then again if you have someone you’ve worked with before, that you trust, the financing should be easier.
Multi-unit building financing needs first a Building Condition Assessment, which may take up to seven days to schedule and another week to get the report. This professional assessment, covering the entire property, usually costs around $2,000. Critical systems like plumbing and the electrical wiring will get tough scrutiny.
Also needed is an appraisal, also something that also takes about a week to schedule and that second week for the report. The appraisal will re-assure the lender that the building is worth the money they are putting out for it. Cost for this report is roughly $2,500.
The Phase 1 Environmental is another report that looks into the history of the building. If you’re lucky you’ll get an appointment in a week, but it may be longer. This lets you know if there are any possible environmental concerns such as if the property was operated as gas station. If so, an additional inspection, called a Phase II, would be required to test the surrounding soils for contaminants. The basic inspection runs around $2,000.
Baseball team managers keep the pitchers motivated to throw strikes. Real estate buyers must manage the sale just as if it were a baseball team. The buyer must keep on top of what the real estate agent and seller are doing as well as following up on all the various inspections. In this case a hands-on approach is best.
Investing in real estate isn’t easy. You have to be organized and have at least basic time management skills. Some deals fall apart if not enough time is allowed for all the steps to be taken care of. If you are thinking of getting into the game, decide if you have these skills as well as a great deal of patience. A thick skin doesn’t hurt either.