Just finding a property in today’s high-cost, high-stakes market is a challenge, but getting an offer accepted? That’s even more difficult. Unfortunately, the hurdles don’t stop there, and even once you have a contract on the table, there are still plenty of things that can throw off your purchase.
Want to make sure that the next investment property is locked in once you find it? Here are three common challenges you might face -- and how to avoid them.
1. Appraisal problems
Appraisal issues are all too common these days -- especially for those targeting fixer-uppers and homes in popular areas (hello, suburbs!). Because of skyrocketing prices, many times, these properties sell for well more than they’re worth. Though that’s certainly an issue when it comes to ROI, it can also cause problems on the financing end (if you’re using a loan to cover the costs).
Lenders will only pay up to the appraised value, so if you offer too much for the home, you may not get the loan you need to cover that price. In this case, you'd need to renegotiate, make up the difference out of pocket, or back out of the deal entirely.
This is why doing a detailed comparative analysis of a property is always critical -- before you put in an offer. Working with a tuned-in local real estate agent can help your case, too.
2. Loan approval issues
There are a lot of issues that can crop up if you’re financing your investment -- especially since investors are often held to stricter standards than other mortgage borrowers. There might be problems with proving your income, you may lack the documentation required, or recent expenditures on other properties could send up a red flag for lenders.
This is why many investors prefer to pay in all cash. For one, it eliminates the chance of any loan-related hiccups, and it also requires a ton less hassle and documentation. In many cases (and especially in today’s competitive market), it can even give you a leg up over other buyers -- and equal steep discounts.
If you’re not able to pay in cash, you should take these steps to prevent any unwanted financing issues:
- Gather your documentation early, and be thorough: Check with a loan officer before applying, and make sure you have the property documentation before you start the process.
- Get preapproved: This can speed up your loan application and reduce the chances there will be an approval issue later.
- Be careful with spending in the months leading up to your purchase: Avoid big-ticket purchases, and don’t open any new credit cards or lines of credit.
Improving your credit score and offering a hefty down payment can always help your case as well.
3. Problems with the title
This is common with foreclosures, short sales, fix-and-flips, and other types of distressed property purchases. There may be liens against the property, errors in the public record, forged documents, boundary disputes, problems with the deed, and more, all of which can throw off your sale.
In the case of liens, you may actually need to pay those off before you’re able to purchase the home, eating into that bottom line even more.
To prevent this, make sure to really dig into a property’s public records before making an offer -- especially if it’s a foreclosure or distressed property. You should also have a title company you trust do a deep dive, and consider purchasing an owner’s title insurance policy to protect you from future claims against the property.
The bottom line
Plenty of issues can throw off your next investment purchase, so do your research, come to the table prepared, and be thorough when determining what to offer. It may take some extra work on the front end, but it should pay off in the long run once that property’s officially in your portfolio.