Twelve Steps to Making an Offer
7/14/2006 1:42:27 PM
by David Hehman
I just finished all my homework to make an offer on a property in The Sea Ranch, CA. I thought it would be helpful to share the 12 steps that I went through. Why buy - Assess Your Primary and Secondary Motivation. For us, we want an additional real estate investment that affords some recreational use (enjoyment!). The “some recreational use” lines up nicely with current tax code ( see Tax Benefits and Second Homes). Retirement/lifestyle relocation is a distant third motivation as we are just starting a family.  Know What You Want. My investment hypothesis is that ocean view property under $1 million in California has great appreciation potential based on its limited supply. On the recreation side, we want a rural coastal getaway with lots of family friendly amenities (biking, hiking, golf, tennis, swimming, beach access, etc.). We want to drive to the destination and it shouldn’t be further than 2 hours. We are seeking a getaway destination that isn’t a tacky or an overly developed resort. Pick the Destination: Map it to the Why and What Above. We found a perfect match, The Sea Ranch, CA. Located less than 2 hours from Sebastopol, this small coastal community was created in the 1960’s. Not only did it have the attributes we were looking for, but it had the intangible feeling we were seeking to connect with. The small bakery and the kid/dog friendly neighborhood was a big plus too. People seemed diverse and friendly, so we could envision being part of the community. Define The Property Criteria. Before jumping in a car with the real estate agent, we narrowed our criteria to $600k-$800k, newer home (we didn’t want to manage a remodel remotely) with an ocean view. Select the Property. My experience tells me that the more you know what you want, the easier selecting a property becomes. One house clearly stood out on our tour of 8 homes meeting our criteria. Interview Owners. What do they like and dislike about the community? We talked to a few locals, some regular tourists, and home owners. All agreed that The Sea Ranch was a nice place to spend days. Talking to owners is especially helpful, see our article on how to interview owners. Do the Initial Math. Time to sharpen the pencil or launch Excel would be more accurate. I found a great spreadsheet to analyze the investment potential of real estate (see http://www.mortgage-investments.com/Real_estate_and_mortgage_downloads/downloads.htm). Get a Mortgage Quote. I loved using ELOAN as it was relatively painless to get an initial quote and the pre-approval certificate to make my offer more serious. ELOAN also builds an online account for you. Interview Property Management Firms. It was time to test my rental income assumptions, so I called a few firms the real estate professional gave me. See our article on how to interview a property management firm. Finalize the Financial Forecast. With the revised loan rate and new rental income projections, I revised my spreadsheet and focused on my true negative cash outflow ($5,000) each month and then my true negative annual cash outflow ($2,000). Luckily, factoring in 5% appreciation my return could be close to a positive $1,500 per month. Review The Pros and Cons with the spouse. The pros were easy: rural coastal family getaway for many lifetime memories with great investment attributes (rental income, tax benefits, appreciation, and forced savings via mortgage principal payments). The cons, unfortunately, were tough, but I could find justifications. The true cash burn was going to impact our life, although the after-tax amount would be more easily managed. Would we use it? YES. The road to get there is a bit hairy; we could get used to it. It was a 2 bedroom and we planned to convert another area into a double bunk room. Not oceanfront, could be better to be shielded from the elements. The oceanview would help with rentals, but oceanfront is king. Owning another house and the associated challenges: this, I told myself, would be offloaded to a property manager. The Moment of Truth: Make an Offer. In the end, my wife wasn’t ready to add another element to our life and she wants to experience The Sea Ranch some more. I hope the steps above help you think through your offer decision. About the Author: David Hehman is the president of EscapeHomes, and an experienced investor, who frequently shares his expertise on this website.