Acquisition Checklist
As a professional house flipper, one of the big requirements of my business is to scale to the point where — despite only making $15-30K per house — my company is able to sustain a significant annual income. To do this, I focus a lot of energy on creating systems and processes, and documenting those systems and processes so that anyone in the company can execute on them.
One of processes I have in place is the set of tasks required to get from putting a property under contract through due diligence and then through the final purchase of the property. Because the due diligence period for a typical purchase is only 5-10 days, there’s a lot to be accomplished in a small amount of time. If anything in the due diligence process is missed, it’s very easy to overlook key information that may ultimately hurt your project, and your profits. So, having a good process in place is not just about efficiency, it’s also about long-term success.
If you’re planning to do an investment purchase, I would recommend reviewing the Acquisition Checklist below; your list may vary a bit, but for the most part, these are the things you should probably be focused on accomplishing in the days/weeks between contract and closing…
PROPERTY ACQUISITION CHECKLIST
Upon Contract Acceptance
Ensure Access to Property:
- Make Copy of Property Key(s)
- Purchase New Lockbox
- Place Key(s) in Lockbox and Install at Property
If Certified Funds are Required for EM:
- Get Certified Funds for EM from Bank
- Submit Certified Funds to Agent
If Financing the Purchase:
- Send Contract to Loan Officer
- Provide Loan Officer Property Info
- Connect Loan Officer with RE Agent
- Have Loan Officer Schedule Appraisal
- Make sure Loan Officer Knows Anticipated Closing Date
Due Diligence
Inspections:
- Turn On Utilities for Inspection (water, gas, electric)
- Schedule Termite Inspection
- Schedule Property Inspection
- Attend Inspection and Take Notes for “Scope of Work”
- Get Final Inspection Report and Review for “Scope of Work”
- Get Termite Letter/Pest Inspection Report
Contractor Prep:
- Create Scope of Work
- Create Materials List
- Determine Which Contractors Are Needed:
- GC
- HVAC
- Roofer
- Electrician
- Plumber
- Pest/Termite Control
- Painter
- Landscaper
- Carpenter
- Schedule GC Walk-Through(s)
- Get Contractor Quotes
Purchase Decision:
- Perform Final Financial Analysis Using Estimates/Quotes
- Perform Both Flip and Rental Analysis
- Make Go/No-Go Decision on Purchase
Upon Contingency Finalization
Final Purchase Prep:
- Get Closing Date from Lender/Agent
- Arrange Landlord Insurance Policy
- If Financing, Connect Insurance Agent with Loan Officer
- Follow-Up on Appraisal with Lender
- Get Pictures/Video
- Choose a General Contractor
- Choose Sub-Contractors (if no GC)
- Determine Exit Strategy
- Create Rehab Schedule (if no GC)
- Create Final Budget
Prior to Closing
Final Loan and Closing Prep:
- Obtain and Review HUD-1
- Obtain and Review GFE (if financing)
- Ensure Loan is Ready for Closing (if financing)
- Get Certified Funds for Closing
- Determine How to Hold Title
- Get Partnership Agreement Documents Signed (if partnering)
Upon Closing
Day of Closing:
- Get Keys
- Change Property Tax Records to Home Address
- Get GC and Sub Contracts/Docs Signed
- Arrange GC and Sub Start Dates
Are you writing up your offers on the REO’s with inspection contingencies? I was told the bank usually does not take offers, even if they are cash with inspections contingencies. If not, can you still “Make Go/No-Go Decision on Purchase” once the contract is accepted? For example could you make a no go decision if you bring in an inspector and they find that the house has major issues and needs everything replaced i.e. roof, HVAC, plumbing, electrical.
Hi Samantha –
First, you might want to check out this article: http://www.123flip.com/education/4-rules-for-using-contingencies
The short answer to your question is that, YES, banks will certainly consider offers with inspection contingencies. While they would likely accept an offer with no contingencies over yours, if there were no other competing offers without contingencies, they’d happily accept an inspection contingency. You want to keep it as short as possible (no more than 7 days, and 3 or 5 days is better), but banks are quite used to people requesting inspection periods in their offers.
The other thing you’ll often find these days is that, even if you don’t request an inspection period, the banks will very often give you one anyway. If you read the addendum that you sign, it often says that you have a 10-day inspection period, even if your original contract has no inspection period (or a shorter one). And this is generally the case with Fannie Mae properties (which is important for reasons I’ll mention in a second).
As for backing out of deals if you don’t have an inspection period, it’s generally not possible. But, here is my experience. If you find a major issue, many banks will consider lowering the price of the property even after it is under contract, in order to get you to close on it. I’ve had banks knock as much as $7K (10%) off the price of a property because I found a major issue that I missed on my initial inspection. Of course, they aren’t required to, and if they refuse to lower the price, you are still required to go through with the purchase, or lose your earnest money.
Now, like I said, Fannie Mae generally gives a 10-day inspection period, even if it’s not in the original contract. But, if you try to negotiate the price down after this inspection period, they will almost always say no. And they have a contract addendum that basically says, “Once you have this house under contract, and the inspection period is completed, you can’t back out for ANY reason or at any time.” Even if Fannie Mae takes 6 months to get clear title on the property, legally you are bound to sit around and wait for them to figure out the problem and get it resolved.
Some Fannie Mae asset managers are nice and will let you out of the deal if there are issues with the title, but the way the contract reads, they can hold onto your earnest money and make you wait for months if they want to. Would it hold up in court? Who knows…but their contract is very much in favor of themselves, and not the buyer. So, when buying a Fannie Mae property, my recommendation is to keep the earnest money amount as low as possible (in case it gets tied up for a long time), and make sure you are certain you want to go through with the deal before the inspection period is completed. Once it’s done, you’re locked in at that price.
As I mentioned, other banks tend to be more reasonable, but they certainly don’t have to be. Always expect that once the inspection period is complete (if you have an inspection period), you’re locked in at the price you offered. If the bank will let you renegotiate after that, great…but don’t expect it…
Did I miss anything?
Here’s one more due diligence item for your readers to be very concerned about: http://methlabhomes.com/
There’s an article on the site now that describes a HUD “as is” foreclosure that is unsafe to live in yet no disclosures related to meth are given. Another article describes how meth homes are not just in low income areas.
Be careful out there.
I have signed up for your newsletter, How do I access the business plan, checklist, templets,
etc.
Do I need to sign in when I visit your site?
Thanks for all your help!
Bob
Hi Bob,
When you confirm your subscription, you should receive an email with a link attached…shoot me an email to feedback@123flip.com if you can’t find it!
Great site and info! Been rehabbing my own homes for years, getting ready to make my first jump into flipping… so glad I came across this website.
Do you advise carrying Owner’s title insurance on your Fix and Flip properties, considering that I’m going to have these properties in my possession for at the most 90-120 days and the Lender already owns a policy?
Aaron –
You should ALWAYS get an owner’s title policy. Even if you only plan to own the property 3-4 months, you can still get sue 20 years down the line by future owners over things that happened prior to your ownership. And the lender’s policy will only protect your lender, not you. Trust me, spend the money…it’s worth it. It’s already come in handy for me twice in 40 properties.
Some insurance companies don’t like to insure flip houses (unless you plan to rent them out, in which you often have 90 days to fix them up). What insurance company do you use to carry insurance on your houses and indemnity for workers?
Hi Todd,
These days, we typically self-insure. In the past, we’ve used NREI with mixed experiences.
I seem to remember you mentioning in another post that you carry 2 million in indemnity insurance (but I could be mistaken). Is this something that you self insure?
Hey Todd,
That’s an umbrella liability policy that we carry through Allstate.
great post. here are comments from my days when buying and renting REOs
Ensure Access to Property:
• Make Copy of Property Key(s)
• Purchase New Lockbox–> that would mean new code ..check with local MLS that might be illigal in your area
• Place Key(s) in Lockbox and Install at Property
Careful. While buying REO..bank representatives (PM mostly) might want to visit the house at anytime prior closing. It happened to me that they were calling everybody trying to figure out where the keys are. You have an equitable interest in the property ..but its not your yet ..so careful with with keys ;-).
also
Prior to Closing
Final Loan and Closing Prep:
Obtain and Review HUD-1–> cpl days before closing
Obtain and Review GFE (if financing) –> that should be done before you secured financing. mortgage contingency timeframe and now you need to compare GFE with HUD1 that nothing changed from mortgage costs perspective. GFE is a document you make a decision on who (which mortgage broker) you will go with to closing.
Upon Closing
Day of Closing:
Get Keys
Change Property Tax Records to Home Address –> why would you put your home address on property tax dox. just remember when there are tax installments due and pay them on time ;-). I tend not to disclose where I live. even LLC dox I filed with the city has my attorney as a registered agent and his office address. i chose to keep privacy