Why you should secure a good deal under contract before seeking investors or financing - a lesson learned from a student who lost a great opportunity by hesitating.
You're on your search for your first real estate deal. You're searching on the MLS, off the MLS, on Facebook groups, everywhere you can. Calling people, texting people, email, house showings, videos, you name it.
One day, a deal is coming. A deal that is good enough for you. You're thinking to yourself, "Wow, this is the one." You're starting to get crazy about this deal. You can't stop thinking about it. Numbers look correct. The area is nice. The seller is motivated. You really feel like this is the one.
Your agent is drafting the offer to purchase. You have negotiated the price successfully and you are ready to place your offer. And as you're about to sign that document, you're thinking to yourself - how am I going to finance it?
Your brain immediately starts to come up with solutions. You take out your phone and start calling people you once were in touch with, asking them if they will be willing to join you as partners. You're telling them there's this very nice opportunity you'd like them to take a look at, sharing the details about the deal.
Some of them are hesitant. Some of them have multiple questions. Some of them sound like they're in. You're talking and talking, and then you're thinking to yourself - why should I partner with someone? Maybe I should just take the loan for it because the numbers are good. I'll be able to rent it. The ARV looks amazing. I'll be able to rent it for very high rent. Maybe I should take a loan and buy it for myself.
Then you start calling mortgage brokers or hard money lenders asking what kind of terms they can give you. The hard money lenders give a very high rate but a very nice and easy way to start. The FHA loan is a little bit more tricky. You're not sure if the seller is going to accept it or not.
You're talking with your agent about this, trying to come up with solutions on how you're going to finance this deal. Then you're calling your mentor - and this is why I'm telling you this story because they call me.
The Call That Changed Everything
"Hey Dan, there's this deal. I really want you to take a look at it. I don't know what to do because I have hard money lenders' offers. I can do maybe an FHA or maybe just a typical mortgage. I can maybe try to come up with investors. There are two, three people that might be interested in this and I want you to take a look at the numbers and help me come up with a business plan."
This is exactly the story that one of my students had. He came to me with all these ideas in his head asking, "What should I do Dan? What do you think I should do?"
I told him the first thing he should do. The day after we talked, I sent him a message asking how everything was going. He told me they got a different offer from a different buyer and they accepted it and are going with them. The deal is no longer available to me.
At that point he felt frustration. At that point, everything seemed very difficult. At that point, he wanted to quit. At that point, he thought, "Well, I gave up on a great deal and it was so hard for me to find it. There's no chance I will find another good deal like this anytime soon. How stupid I was. How could I do that?"
The Critical Mistake
Remember I told you that his agent had drafted the offer to purchase? When he came to me, the first thing I told him he should do before he even talked to me or talked with any investor or talked with anyone about this deal other than his team on ground was to put it under contract.
Let's go back to that moment. You're sitting right in front of DocuSign. Asking price is around $100k. Renovation is going to cost you less than $20k. You've run the initial numbers. You did the napkin calculation. You feel like this deal is right for you.
At this moment, what you need to do is not go and find investors. At this moment, what you need to do is send that offer. If all the terms are acceptable, if you are standing behind all the terms, you should commit first to buy that property. You should click on the sign button in your DocuSign. This is what you should do.
And I know it's scary. That fear led you to talking with all the world before you even got under contract. That fear led you to lose that deal. This exact precise fear.
Courage Over Fear
We need to solve the fear. How do we solve this? The fear is never going to go away. Courage is not about not experiencing fear. Courage is doing something while you are afraid of it - doing something that you are afraid of. This is courage.
First you find the deal. And only then the money follows. Don't try to go the other way around. You know how this story ends.
If I go back to that moment in front of his computer, all he should have done was press that sign button. Why? Because if there is no good deal, there is no money. No investor will come if the deal is not good or secure - there's nothing to talk about.
First you go under contract, then you talk with me about whatever, you talk with investors about whatever, but first you put it under contract.
The Right Sequence
Even if you don't have the money, if the deal is good you put it under contract. That's it. Simple as that. If the deal is good, you put it under contract and then you try to raise money for it. You cannot go the other way around, especially when you are just getting started.
Maybe after you develop your name and people start coming to you and want to work with you, maybe then you can sign investors before you have deals. But first, you find a deal and if it's good, the money will follow. If the money doesn't follow, well, it's not good.
If you find a deal, you put it under contract, you go to due diligence. That's it. That's all you do. And in due diligence, you're verifying that your numbers are correct. You're verifying that this deal is good. No need to mix it up.
If the deal is good, put it under contract, please. Someone will buy it if it's good. If it's not good, no one will buy it and you don't want anyone to buy it as well.
But Is This Crazy Advice?
No. It depends on your contract. If your contract is like "I'm going to buy this in 24 hours" and you don't have the cash, obviously don't sign the contract. But if your contract has a 10-day due diligence inspection period and the earnest money deposit is refundable within that period - go for it for 10 days. Why not?
If the earnest money is refundable for any reason during the inspection period, fine. Go for it. Find funding options, do your due diligence, make sure the numbers are good. The deal is yours. And if it's not yours by then, well, it's not yours. Move on. Find a new one.
Don't be slow in real estate. Slow people don't do good deals. That's just the way it is.
The Right Process
Your initial calculation before you sign that contract should be very, very minimal - like five minutes, 15 minutes maximum. And it doesn't matter how big the deal is. Look at all the big players. This is exactly what they do. This is what I learned from my mistakes and my mentors.
Find a good deal. Do your initial calculation, napkin calculation, put it under contract, and go deeper with the numbers. That's the flow. That's what you should do.
And after you do that, you will find at the end of that road your first real estate deal. And after you do your first real estate deal, the second one is much easier. The second one is a lot less painful. It will take courage still, but it's a lot less.
Taking Action Despite Fear
If you don't need more material and you just need to be a little bit more courageous, you know what the secret is: Do stuff that you are afraid of. Do it wisely. Make sure you know your numbers. Make sure you're doing your due diligence. Make sure you sign the right papers. Use consultants. That's fantastic. Make sure you don't put yourself at risk.
But even if you are afraid, go for it. After you communicate with your fears, listen to them and take all the actions in order to prevent your fears from happening - go for it. That's it. You're ready.