Ten Terms for Today’s Market
Pharmacist, real estate agent, and investor, Nate Hedrick explains ten common real estate terms in today’s market and what they mean to potential investors.
Summary
Nate Hedrick switches roles on this week’s episode. Instead of interviewing a guest, Nate is interviewed by his YFP Real Estate Investing podcast co-host, David Bright. Nate shares his personal pharmacy story, how and why he chose to pursue a side hustle as a real estate agent, and how he got started in real estate investing as an investor. Nate explains ten real estate investing terms for the current market, what they mean, and how they can impact future real estate investments.
Ten Terms for Today’s Market:
- Contingency (in a contract)
- Waiving inspections
- Pass/Fail inspections
- Appraisal gap
- Escalation clause
- Offers reviewed upon receipt
- Highest and best deadline
- Possession after close
- Pre-approval vs. pre-qualified
- All-cash offer
The final infusion questions focus on strategies for managing real estate investing with a pharmacy career, recommended resources for pharmacists interested in real estate, and advice for pharmacists considering real estate investing in the future. Nate’s strategy for making sure that real estate investing goes hand in hand with his pharmacy career is through the use of teams and his network. Nate also shares that one of his best personal resources for real estate investing is David Bright, himself! Nate explains that open communication with like-minded individuals who understand the real estate investing picture can be beneficial. His final infusion advice to pharmacists considering real estate investment is just do it!
Mentioned on the Show
- YFP Real Estate Investing 02: Long Term vs. Short Term Rental Property Investing – One Pharmacist’s Perspective
- YFP Real Estate Concierge Service
- YFP Real Estate Investing 02: Long Term vs. Short Term Rental Property Investing – One Pharmacist’s Perspective
- Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! by Robert T. Kiyosaki
- YFP Real Estate Investing Podcast
- Connect with Nate Hedrick on LinkedIn
- RealEstateRPh
- YFP Real Estate Investing
- Join the YFP Real Estate Investing Facebook Group
Episode Transcript
Nate Hedrick: Hey, David, how’s it going?
David Bright: Hey, good, thanks, man. How are you doing?
Nate Hedrick: I am wonderful. It is the end of a busy week right here. But it’s been a really good one. We’ve had a lot going on.
David Bright: I know. We were just talking earlier, but you were telling me that you’ve bought a house personally as an investment and then your agent business is going crazy, so tell me what’s going on.
Nate Hedrick: Yeah. So I closed on a house, an investment property, yesterday. I’m really excited about that one. That’s up in Michigan. So really excited about seeing where that goes. Just got off the phone a little bit ago with my property manager about getting that all under, taken care of, which is just a side note — it’s so nice having a good property manager because that all closes and it just, like, they take care of everything. I just — you get what you pay for, and they are fantastic. So it’s been really nice to have that. And then yeah, my agent business is doing great. I closed on a house for a client, an investor client, on Wednesday of this week. And then I’ve had actually a concierge client that closed today and a concierge client that closed earlier in the week this week. So it’s been kind of a crazy week but a really good one.
David Bright: No, that’s awesome.
Nate Hedrick: Yeah, in this super hot market, it’s hard to find deals, it’s hard to find those opportunities. But we’re still finding a way to make it work and again, excited for ourselves and excited for the clients that I work with. It’s been really fun.
David Bright: Yeah, and I think what we wanted to talk about today a little bit is that super hot market, things that are going differently today because I know you were also telling me a story — like those are some good news things — you were also telling me a story a minute ago about something that didn’t go quite as well where the hot market is also being a little difficult to navigate.
Nate Hedrick: Yeah. So Kristen, my wife, and I have been looking for — kind of casually looking for either a short-term rental or maybe like a weekend vacation property. In our ideal vision, it would be in Cuyahoga Valley National Park or next to it in some regard. And so if anybody’s selling, you know, give me a call. But we’re really kind of looking for that perfect like in-park property, and one came on the market just a couple of weeks ago or just last week I think. And we went out and looked at it, the land was absolutely incredible. And so our thought was, maybe we’ll do this as a short-term rental and then we can use it on the weekends that it doesn’t rent. Like it’s kind of the perfect mix of short-term rental and vacation property. And we did the math, we were running some numbers. I actually got to connect with Jared Wonders back from Episode 01 — or Episode 02, excuse me — and learn more about what the heck to do on short-term rentals because I don’t have one yet. So that was really helpful, and shoutout to him for that help last minute. And anyways, so the numbers kind of worked at the list price, but immediately, it became evident that this was going to go nowhere near list price. Right? This had multiple offers. I think by the time it was all said and done, they had 11 offers come in. The agent told me that all of those were over asking. Most of them had escalation clauses, and most of them had no inspection contingencies. So you know, just a ton of reasons why it immediately did not work for Kristen and I. And we’re seeing a lot of our clients that are running into the exact same situation. So the thought was today, maybe we could dive in, talk a little bit about our current market and how best to handle that.
David Bright: Yeah, and that’s exactly right. We’re going to flip this a little bit where I will be interviewing Nate as the guest. And we’re doing that because a lot of these terms, just like Nate has been saying, a lot of how you navigate this market is drastically different than it’s been a few years ago. So if the last time you bought a house was 2, 3, 4, 10 years ago, or if you’ve never bought a house before and you’re reading older articles, older books, older podcasts you’re listening to, those kind of things, the advice in those may not be pertinent to today’s market and some of the lingo and just strategy of getting a house in today’s market. So that’s where we kind of wanted to pivot this to today. So with that, let’s go ahead and start the formal interview where I’ll kick off interviewing Nate, the guest.
Nate Hedrick: Yeah, I’m in the hot seat. I’m ready.
David Bright: Yeah. So Nate, welcome to the YFP Real Estate Investing podcast. Thanks for joining us today.
Nate Hedrick: Super nice to be here, David. Thank you for having me.
David Bright: So we do want to make this as much of a normal podcast as possible. So if you could, kick us off with your pharmacy story for those that may not be familiar.
Nate Hedrick: Yeah, that would be great. So I graduated from Ohio Northern in 2013 and thought I was going to go full clinical track. I really liked emergency medicine at the time. I was actually an EMT during pharmacy school, so that was really fun. And I thought emergency medicine was my schtick. Went through a residency at Akron General Medical Center and fell in love with pain management and palliative care, just a total pivot for me. But I absolutely loved it and ended up kind of almost specializing in that area. And then went on, was lucky to find a position working in hospice care for a number of years. I actually worked for a hospice-specific PBM called ProCare, had a great time with them, did a lot of consulting, did some sales work with them, and got into a role where I was traveling all over the country seeing clients, which was really fun for about six months and then it was really exhausting. And it was right around the time where I had Lucy, my first daughter. And then it just became too much. Like I was away from home too much. And so shifted to a local company, Medical Mutual, which is where I work now. Medical Mutual is the largest and oldest insurance company in Ohio. And I actually support their sales team, just like I did with my old job, as their clinician. So I go out with the sales team, traveling all over Ohio, talking about our pharmacy programs, and get to kind of mesh my sales experience, my natural gift of gab, and my clinical pharmacy background all into one role. And I really, really like it. It’s where I work 9-5 every other — every week and really enjoy that part of my pharmacy career.
David Bright: Oh, that’s awesome. And that’s obviously taken a bend into real estate as well. So tell us about your real estate why and your journey so far.
Nate Hedrick: Yeah. So all of those things were kind of happening at the same time, right? Like the transition from one job to another, having a daughter. Around that time — I think I’ve shared this before, but I read “Rich Dad Poor Dad,” and it totally changed my mindset about how I wanted to approach my finances and my overall career and things that we were doing. So when I should have been getting my BCPS or some sort of certification, I went and got my real estate license instead and really loved the idea of trying to invest in real estate. And at the time, I had a ton of student loans and just no way to kind of get into real estate investing right off the bat. But I wanted to learn as much as I could, and I thought getting my license would be a good way to do that. And I started working with investors, started working with other pharmacists, and that really grew my experience in the real estate space so that as soon as I was ready to pull the trigger, I could get my first rental property and I felt like I had a lot more background so it wasn’t just going through and reading about it, wasn’t just watching videos and listening to podcasts. I had lived that experience of walking through a house with an investor, evaluating that alongside them, and felt like I had a leg up. And so in 2019, my wife and I bought our first rental property. That was here locally here in Cleveland. And then last year in 2020, during the middle of the pandemic, I bought my first flip rental property. That was a BRRRR that we did. And David, you helped a lot with that, so appreciate that. And then we again, just closed on another property this week or yesterday, and that will be my third rental property. So I’m a bit newer on the personal investment side. But I’ve done tons of transactions with local clients, investor clients, here in Cleveland but also around the country supporting investors wherever they’re investing.
David Bright: Very cool. Very cool. Well, and I think that experience is why it seemed perfect to interview you about things that are going on in the market name, how that’s shifted over the last few years, and we thought that we’d focus that around 10 terms. So we’ve got 10 questions that focus on 10 key terms that you need to be familiar with these terms in order to be competitive in today’s market. So the first one that we’ll kick off with is purchase agreement/purchase contract. What is a contingency and why would that matter?
Nate Hedrick: Great place to start. So contingencies are effectively clauses that are in your purchase agreement that says, “We’re going to follow through on this purchase agreement unless the following occur or until these things are resolved.” And so for example, the most common contingency, even though people don’t think of it as a contingency but it is, is actually your funding. It’s your financing contingency, right? So if a bank does not approve me for this loan, I can’t close on the house, meaning I don’t have $300,000 in my wallet to go handle this property. So if the bank doesn’t approve it, the contingency is I will not be able to proceed with this purchase. So that’s actually the most common one. The ones that people often think of, though, are things like inspection contingencies, maybe a home sale contingency. What that means is that if these criteria are met, we will then either waive these inspections or waive these contingencies that are put in place and then proceed with the purchase or we will leverage those contingencies to either walk away or renegotiate. So in its simplest form, right, an inspection contingency says that until we get in there and do our inspection according to the rules of this contract, we do not have to purchase this home until we waive that, until we feel good about it.
David Bright: Yeah, and mechanically in the contract, my understanding — and correct me if I’m wrong since you’re the agent here — my understanding is that each region of a state or maybe a whole state has a realtor group, and they tend to use a standard purchase agreement in that. So all of these, all of the language would be standard amongst offers that are in that space. So if you’re a very detail-oriented pharmacist type as I would imagine a lot of our listeners are, you could always ask your agent for a copy of that contract and review some of that language in advance.
Nate Hedrick: And you’re right. We actually have ours based on our MLS location. So our MLS covers most of northeast Ohio almost all the way down into Columbus. And so basically everyone that’s on that MLS uses almost the exact same purchase agreement. What makes that a bit tricky, though, is that if you get someone that doesn’t use that exact same purchase agreement for some reason or if you go outside the MLS area, you can have vastly different contingency rules. I ran into an issue with a client down in Kentucky where their local board of realtors had decided that an inspection contingency cannot be waived — or you can’t walk away from a house because of an inspection contingency unless you give the seller an opportunity to make repairs. You have to give them an opportunity, which is vastly different than ours, right? If I get an inspection report that comes back and it’s bad, we can just walk. We don’t have to ask for specific repairs. But this local association had determined a different way to do that. So you have to really follow those local regulations, like you mentioned.
David Bright: OK. So then kind of a piece of homework or a tip for the listener is to talk with your agent, get a copy of that, and understand these thoroughly, particularly if offers are going out quickly, this is not — if you’ve got like a 5 p.m. offer deadline, you don’t want to be having these complex conversations at 4:45 p.m. or something like that trying to get that offer out.
Nate Hedrick: Yeah. Always make sure you know what that contingency means and what your reactions are. I think it’s funny, I talk to a lot of clients, especially the local clients that they think the moment that is most scary is when they put in that offer, right? It’s like, this is it, I’m buying a house. The reality is the scary moment is when you waive the contingencies in our case because you basically are saying, “Alright, this is an offer, but it’s contingent on these things happening.” Once you waive those, now it’s real life, right? The game is going to continue, and you’re going to purchase that house. So that’s — it’s really a two-phase process.
David Bright: Perfect. So the second question then is all about waiving inspections. So you’ve mentioned that as kind of the running example. Why on earth would someone waive inspections? That feels like a big piece of safety to have those inspections and to know that the house is solid.
Nate Hedrick: Yeah, absolutely. So waiving inspections is usually something we only see in a strong seller’s market. We are seeing that today. It’s something that I never recommend to my clients, at least not unless there are very extreme situations. But your inspection is your last line of defense to give you that professional look at the home and look for things that are going to be potentially very serious of an impact to that property. Right? So major dollar amounts in terms of costs that would need to be taking place to repair things or health and safety violations, things that may harm you and your family if you’re going to be the ones living there. So those inspections are super, super important. But we’re seeing offers where someone wants that house so bad that they say, “You know what, forget it. I’ll deal with the ramifications. The house is still standing up, it can’t be that bad, right?” And so they’ll waive those inspections and just roll the dice on hoping that there aren’t too many hidden problems that an inspector would catch. It’s a strategy in a seller’s market to help your offer get accepted. But it’s a potentially dangerous one because of the ramifications and what that means.
David Bright: So then that comes to the third question. As far as strategy with those inspections, what about making inspections pass/fail only? Or having some sort of dollar threshold of we will only claim something if it’s over x?
Nate Hedrick: Yeah, so there’s like three ways that I see this come across. This is kind of that middle ground between a true inspection contingency and then waiving them. And I like this, actually, because it’s a decent approach. So we either call this pass/fail inspections, like you said, a dollar limit inspection or we won’t come back until there’s a dollar limit on a problem, or what I’ve also seen is inspections for informational purposes only. And what that’s effectively saying is, “We want an inspection, but we’re not going to come back to you and ask for trivial repairs. If we find a $500 electrical problem, we’re going to tackle that ourselves. But if we find a $10,000 foundation issue, now we need to have a discussion. And either we’re going to walk away or we’re going to renegotiate based on that major problem that we found.” And so again, that’s kind of a nice middle road for buyers that want to make their offer more competitive but also not truly waive those inspections and run away from all that protection that they provide.
David Bright: OK. And that does feel like a healthy middle ground there. Do you ever advise people to get inspections before they submit the offer? Like is that ever a workaround that could ever make sense for someone?
Nate Hedrick: You can try that. It’s a little slow. There’s two problems with that: One is that there’s five other people who aren’t doing that putting in offers right now. So all of those offers are going to look better than yours, which is a problem. The other problem is that inspectors are so busy, right, we have less and less inspectors available. And now most of my favorite inspectors that I go to are between 5-15 days out from a scheduling standpoint. So trying to get them in there in a fast, timely matter, it’s very difficult. So what I am seeing is that people that have good friends that are contractors, for example, they may do their initial walkthrough with that contractor and then they’ll waive that true inspection because they’re kind of having that person there to look for those major red flags. The problem is if you don’t have that friend or you don’t want to pay an inspector to walk through every single house that you like, that could be a problem too.
David Bright: So those first three questions really talking a lot about the inspections and contingencies there. But I know another common thing that’s creeping up as we’re seeing values escalate like they are are all kinds of things with appraisals. So would you ever recommend waiving an appraisal contingency? What is an appraisal contingency? And how would you manage any of that?
Nate Hedrick: Yeah, and we’ve had to deal with a lot of this locally with several of my buyers recently where effectively, what’s going on is that the house — housing prices have inflated so much so fast that when an appraiser goes out from a bank to do the comparables, right — they’re doing a comparable search, looking for what that value is on that potential property, and if they go out and they look at the comparable sales, and let’s say the house went under contract, we’ve pushed that value to $300,000. It was listed at $270,000. It got elevated to $300,000 through negotiations. And now it’s under contract and now we’re working through appraisals. That appraiser is going to go out, they’re going to look at comparable properties in the area, things within a half a mile or so and things that are similar in square footage, bedroom/bathroom count, finish quality, all that. And when they look at those properties, let’s say on that $300,000 deal, everything is coming back and showing that house is only worth $280,000. Right? There’s nothing else except for our number to support that value of $300,000. And so they come back and they say, “Bank, I think this is only worth $280,000.” So now there’s a $20,000 appraisal gap. And someone needs to fix that, right? So that gap needs to be bridged in some way. And there’s basically three ways that you can do that. One is you can have the seller come down. They can come down off of $300,000 down to $280,000. That happens in a buyer’s market occasionally, but it’s a tough conversation to have because you’ve agreed on this purchase price and now you’re asking the seller to give a lot of that away. Option 2 is you can have the buyer cover that in some capacity, right? So they can actually bring cash to the table and say, “Fine, I will bring the extra $20,000. I will basically sink this equity into the property, and I’ll cover the difference.” And then Option 3 is obviously you can walk away. The deal just doesn’t make sense for everybody, and so we kind of walk it back. And I guess I should also say, there’s Option 4, which is you go back to that appraiser, provide new data, and ask for a reappraisal and hopefully get that value that you’re looking for. But that’s sometimes a tough road if you don’t have really good data to support that reappraisal. So all of those options, right, are kind of sticky, no matter how you handle it. And so one way that buyers are getting their deals accepted or getting their offers accepted is they’re saying, “I will cover that difference. I am willing to come to the table with extra cash so if we don’t appraise, don’t worry. The deal is not going to fall through. I am up front telling you that I will cover that amount.” Now, there’s two ways you can do this. One is you can set that amount, so I will cover appraisal gap up to $10,000. Anything over that I can’t bring more cash, but I will cover $10,000. Or in a very extreme scenario, you can waive your appraisal altogether, meaning that no matter what the gap is, if it’s $50,000, $60,000, $70,000, I will cover that. That to me is the most dangerous way to do that. I think setting that limit is what I always advise my clients is say, “Figure out what your number is if we need to pull this appraisal gap because we need to make sure that you have that in hand, otherwise it’s going to be quite a scramble.” So I’ve had a couple deals recently where we had appraisal gaps in place. I had one accepted a couple of weeks ago. And we bid about $25,000 over asking, and we offered up to $15,000 in appraisal gap coverage. And that got our offer accepted. So it’s working, but again, that’s something that you have to have in your bank to basically come to the table with it if the appraisal doesn’t go right. Now luckily this appraisal just came back a couple of days ago, and it appraised right at our purchase price value, so we’re good. But it can go the other way as well.
David Bright: OK. So it does sound like if I understand correctly, the appraisal is kind of one element of safety. And I know that pharmacists are very safety-oriented. So folks latch onto these things. The appraisal is a measure of safety to ensure that you’re not paying any more than what that house is worth today per that appraisal, correct? So and that’s kind of where setting that limit of well, I really, really, really love this house. I will pay this amount over the appraisal but nothing more than that. It kind of balances that nicely to leverage that safety but also set a boundary on making sure you don’t go overboard.
Nate Hedrick: Exactly. And then again, the thought process is — right, because the natural question, well, why the heck would you do that? Why would you pay more than the house is worth? And the thought is well, if it’s the perfect house and you’re going to be living there for a long time, generally, real estate values go up over time and you can wait that out and make up the difference. But it is a risk.
David Bright: OK. I think another risky thing when it comes to offers but I hear it more and more is an escalation clause. So fifth question is what is an escalation clause?
Nate Hedrick: Yeah, so an escalation clause is something that I use a lot, especially in this market. And effectively, what that is is you’re saying, I will beat any other offer by a certain amount and up to a certain amount. So traditionally, the way that I write these is that we will do an escalation clause with an escalation factor and a cap. So the escalation factor is how much you’re willing to beat another offer by, so in most cases, I do $1,000. And then the escalation cap is up to what amount will I do that. So let’s say the house is under contract or listed at $250,000. And everybody’s bidding, everybody’s throwing in their offers. And we want to go up to $270,000. What we don’t want to do is just throw $270,000 at the seller and then the next closest offer is $260,000 and now we’ve overpaid by $10,000. So the way I mitigate that is you say, “OK, well, I’m willing to pay $250,000, the list price. And I will beat any other offer through an escalation clause by $1,000 up to $270,000.” And that protects you. It gives you that $270,000 offer without having to pay it out of pocket no matter what everybody else does. And so I always make sure that the language is very clear that it has to be another signed offer. And I’ve had a couple of these accepted where I have to go and say, “OK, show me the other offer that we’re escalating off of because I need proof that this is actually taking place.” And so that — again, like you said, it provides that safety from overpaying while still giving you the best opportunity to potentially get that property.
David Bright: That makes sense. And it feels like that probably has something to do with offers all being received about the same time, which I know kind of brings me to the next question is what’s offers being reviewed upon receipt versus a highest-and-best deadline? So that’s kind of question six and seven together.
Nate Hedrick: Offers reviewed upon receipt is something I would love to see in this market but don’t really see anymore. Effectively, what that means is that as soon as you put an offer in, we’re going to basically take that back to the seller. As an agent, we’re going to say, “Hey, seller, this is the offer that just came in. What do you think? Let’s give a response on that.” And either you’re going to counteroffer, you’re going to accept, you’re going to decline, whatever. But at least you’re reviewing that offer in a pretty timely fashion, usually within 24 hours or so. What we’re seeing in this market, however, is like you said, the next one, which is highest and best deadline. And what we’re seeing is where offers are coming in so fast and interest is so high that agents are saying, “OK, the property is going to be coming soon on Thursday. It goes live on Friday. You can start doing showings on Friday and Saturday and Sunday. But at 5 p.m. on Sunday, we need all offers in, and we’re going to review all of those in one big basket. And we’re going to go back to the highest and best.” And so basically, buyers are stuck in this spot where they have to go look at a property, very quickly figure out if they like it, and then we put in these offers and then there will be 10 offers in some cases. And that agent is going to sit down with the seller at the end of the weekend or whenever the deadline is, review all those offers in turn, and then decide who to go with.
David Bright: OK. OK. So that kind of caps off those four questions about getting that price right. So this is where an appraisal gap or waiving appraisals, escalation clause by that factor and that cap, knowing in advance whether offers are reviewed upon receipt or there’s some real urgency to get something done or there’s a highest and best deadline where there’s no real incentive to get it done before the deadline, but you’ve got to get it done before the deadline. So then that brings us to our last three. So one I know that gets negotiated a lot right now is when do you get possession when you buy a house because I think a lot of people — I know the first house we bought, I just assumed OK, at the closing table I get keys and I go in key in, and it’s my house, right? Like that’s how it works on TV, right?
Nate Hedrick: Right.
David Bright: So how does that work in the real world?
Nate Hedrick: I thought the exact same thing when I went to my first closing for our first house. I was like, OK, cool, I signed all the docs. Where’s my paperwork? Where’s my keys? Can you put them in my hand? Like that was not how it worked at all. So generally what happens is that at closing, you are officially closing on the loan. You are not necessarily closing on the house, so to speak. Title is actually what needs to transfer before you take ownership of that property. And usually that can take a couple of hours to even a day after you sign all the mortgage documents. They’ve got to transfer things around, record it with the county, so on and so forth. So usually possession doesn’t occur the day of closing. And if it does, it’s usually later in the day or toward the end of the day. And so one of the things that we’re seeing though is that because sellers are struggling to basically find where they’re going to go next — right, because the housing market is so tight — that some people are negotiating in possession after close. What that could look like is June 1, I’m closing on a house, let’s say. June 1, I go to the bank, I sign all the documents, the mortgage goes through. Title says, “Yep, title has transferred on June 2. You now are the owner of that property.” But the seller does not want to move out until July 1 or August 1, so a whole month or two where they’re going to be basically possessing that house after close. And so there’s a couple ways you can handle that. Most of the time, what we do is what’s called a lease back. So you actually make that owner, that previous owner, a tenant of yours. And now you’re basically leasing or renting that house back to them. And that allows them more time to basically get out of the property, get their affairs in order, get their housing situation figured out. But it means that you’re owning the house while they continue to live there. The other way you can handle that is you can delay closing. This is less commonly seen because people want these houses to close as soon as possible, especially if you’re a seller. You don’t want the market to change, especially when it’s as high as it is, right. You don’t want something to turn downward. So you can delay close, meaning that if that possession date is — or the move-out date is August 1, you could have all your affairs in order, all your paperwork ready to sign but not sign that until July 31. So there’s two methods, but what we’re seeing right now is a lot of possession after the close where there’s lease back period and basically you taking ownership of the house but the owner is not moving out right away.
David Bright: And on the seller side, if I understand correctly with the possession after close, one of the nice things about that is that because there is a closing and the buyer’s loan is closed and all that, that you then get a check. And so particularly if you have equity in that house, now you have that check in hand and you can go use that money as the down payment on the next house. So sometimes this can be helpful on the seller’s side to stay after closing. Is that right?
Nate Hedrick: Yeah, absolutely. And again, sellers are in a position right now where they can negotiate that in, right? Most cases, once a buyer closes, like I want that house. Like you said, I want my keys at the closing table. But now because the sellers are in a preferred spot, they can negotiate that in, get that check in hand, take their time with getting their property in order wherever they’re going to move to afterward.
David Bright: OK. So I know that possession after close, that sometimes goes in the notes in the offer and things like that. A couple other key things about that offer are making sure that you are pre-approved or pre-qualified prior to looking at houses. So walk us through the difference of pre-approved versus pre-qualified, when in the process that all needs to happen, and what that looks like.
Nate Hedrick: Yeah. So in general, getting pre-qualified for a loan means that you’re going to a bank and saying, “Hey, I’d like to purchase a house. Here’s kind of how much money I make, here’s generally my credit score. Do you think you could lend to me?” And the bank says, “Yeah, based on what you’ve told me quickly over this survey, I do think we could lend to you.” You’re pre-qualified to have this purchase up to $400,000 let’s say. What pre-approval is is a whole second step, right, where they’re actually taking that information that you gave them and they’re verifying it. They’re running a hard credit check, they’re actually verifying your income, they’re looking at your employment history, they’re looking at your other assets, your other debts, all the things that go into that actual loan underwriting process. And what we’re seeing right now is that in a typical market, pre-qualification is plenty, right? Most people are fine with that. Sellers are accepting offers with pre-quals in place. But I’m advising all my clients right now to go get pre-approved because then you really have this confidence as a seller that this person who’s pre-approved, they are going to be able to close on this loan. And so if I’m looking at 10 offers as a seller’s agent and eight of them are pre-approved and two of them are pre-qualified, I might throw those pre-qualified offers right out the window because I don’t want to get three months or three weeks down the road and now it turns out they actually don’t qualify for that loan and they won’t get pre-approved. So pre-approval is really important because it’s that extra step that you can take as a buyer to really show that you are truly, truly qualified and ready to get that loan. It just gives the sellers confidence in accepting your offer. So it’s a good way to jump in, make sure that you have that confidence going into that transaction.
David Bright: OK. And then the last question, 10th question about how to design an offer is what is an all-cash offer? And particularly in different markets at different price points of houses, I can think of some markets out there where that just sounds impossible. How do people actually put together cash offers? And why would someone do that? Why would it matter?
Nate Hedrick: Cash offer, just like the name suggests, is that you are effectively coming to that with no mortgage, no financing contingency. Like I mentioned, that is your kind of primary contingency that everybody has. You are coming in with none of that. You basically have said, “Here is a proof of funds letter. This is verification that I have this money sitting somewhere. And I am ready to purchase this property. And I don’t need a bank to do it.” You’re right, in my experience, like in a typical market, it’s almost impossible to see cash offers for properties. I mean, you’re talking about having $300,000, $400,000, $500,000 in cash on hand. That seems like an insurmountable number. What we’re seeing, though, is that people are selling their properties, especially out in higher income areas or higher cost of living areas, California and New York, and they’re moving to lower cost of living areas, right, Cleveland, Ohio, for example. And they’ve got $400,000 in equity from selling that New York house and now they can put an all-cash offer in. And so those are actually becoming more common, and as a seller, if you’re looking at which offer to accept, obviously that looks like a better one, right? You can close faster, they can usually close within two weeks, and you don’t have that risk of the bank not appraising, the bank not closing on the loan because of certain issues with your credit or anything like that. It’s all just here’s a proof of funds, you tell me when to send it to you, and I can get it to you, right? And it’s up to title at that point. So it’s a very strong offer. It’s very hard to overcome those offers. And we are seeing more and more of them as people move from those high cost of living areas to lower cost of living areas.
David Bright: OK. And I’m also hearing stories of people that are borrowing cash or using lines of credit or cashing out a 401k or IRA, which just sounds scary.
Nate Hedrick: Yeah. I’ve heard of a couple of those. I’ve not had any clients that I’ve run into myself, but I have seen where, yeah, someone will say, “You know what, I’m going to cash out this 401k, now all of a sudden I do have $300,000 cash I can go buy a house with.” Definitely don’t advise that unless it makes sense with your financial plan or what have you, but yeah, it’s a crazy market out there, and it’s one way that people are trying to get ahead.
David Bright: Yeah, and I think that goes back to one thing that we’ve said many times on the podcast of making sure that a house purchase, whether it’s for a personal residence, whether it’s for an investment property, that that fits in with the larger financial plan, and so completely obliterating a 401k to buy a house, you know, that may not make sense for most people. So making sure that you’re cautiously taking this piece in with that overarching financial plan.
Nate Hedrick: Yeah, and quickly — not to discourage you from doing an all-cash offer either, though, right? So if you’ve got an investment property that it needs a ton of work, you might be able to get that for a pretty decent price. You actually may have the cash to purchase that. And then you can come in, and all of a sudden, your offer is that much stronger. You can also leverage that to your advantage in markets where that cash price would be a little bit lower and you have the funds available to do that in an investment situation.
David Bright: Yeah. I think there’s also investment situations where a house may not qualify for a conventional or an FHA mortgage just because of damage to the property or repairs needed or things like that where it may require an all-cash offer. But again, oftentimes, that’s not your $800,000 house like that. So.
Nate Hedrick: Correct.
David Bright: Well then, those go through the 10 questions all about the different contingencies and inspections, all about appraisals, escalation clause and coming up with a number, and then some of those finer details in writing that offer. So hopefully those terms are helpful for folks that are trying to offer and buy properties in today’s super hot seller’s market. With that, we’ll pivot to our final infusion questions, the same three questions we’ve asked every guest so far. And so now you get to be the recipient of these, Nate.
Nate Hedrick: I’m not sure if I’m ready. Alright, let’s do it.
David Bright: Yeah. First off, what’s one tangible strategy that you use to make sure your investing works hand-in-hand with your career as a pharmacist?
Nate Hedrick: Yeah, I think that’s super important. Again, like we’ve been touting on the show, right, really important to focus on that fact that we are pharmacists first and investors second. And so I use a lot of teams and a lot of networking to make sure that I can handle this. Making sure that if I have a contractor issue or a repair that needs to be taking place, I’m not the one going out there and handling it myself. I’ve got either a property manager or local teams that I trust that I can send out to that property and get that taken care of. So networking ahead of time before you get that property, again, I had the unfair advantage of being an agent first and getting to see who did good work and whatnot. But I do recommend having that network, building that relationship ahead of time so that when you do pull the trigger, now all of a sudden it’s not going to be a burden on your pharmacy job because the investment property has a problem, right? You know how to go, you know how to handle that. And if you don’t have those people already, talk to your agent. Likely it is that they have run into several individuals that can help you out. And that way, it’s already taken care of for you. So definitely recommend building that network before you ever pull the trigger.
David Bright: And I can echo that. Working with a really good agent can help with that because when we moved to Michigan, I didn’t know anybody in real estate in Michigan. And we bought a house that had a plumbing problem. And so I texted my agent, and I got a list of plumbers, like right like that, of people that could be trusted. So yeah, definitely you can leverage that through finding a really good agent also. Second question, what’s one resource that’s been most helpful to you in your real estate journey, whether that’s a book, podcast, person, author, website, whatever that would be?
Nate Hedrick: Yeah, that’s a great question. I’m going to be a bit cheesy, David. I’m going to pick you as my person that’s helped my real estate journey. I — networking again, just talking about finding a good contractor, but like finding somebody that you can talk with and actually build a real estate portfolio and kind of talk to, like that’s helped me a ton. And so someone like yourself has been great for me. I know others that have connected with me that it’s been just super helpful in getting me off that plateau of wherever I’m at and getting to that next phase. And so again, I think finding that person, either that mentor or that peer that is in the same boat as you and just start talking about real estate. That can help tremendously in terms of getting you that next step.
David Bright: No, I agree completely. And I would echo that one. It’s been great to talk through a lot of this stuff and just get out of our own heads for a minute as we think through all this stuff, even though we’re in different states and all that.
Nate Hedrick: Absolutely.
David Bright: So what’s one piece of advice you’d give to a pharmacist that’s contemplating a start in real estate investing?
Nate Hedrick: Yeah, this one is one that when I think back to when I first bought my first property and what got me to do that, it was just enough people telling me and enough podcasts and enough books that were just saying like, you’ve just got to get that first deal, just go out and do it. It does not have to be perfect. If you screw up royally, you still have a house that is worth something, right? This is not like typical investments where if you goof up and it goes to $0, you’ve lost everything, right? There is certainly risk involved in real estate, but it is not this monumental feast-or-famine that you get in certain other types of investments and moves. And so once I kind of got over that headspace of, you know, this has to be perfect — I’m such a perfectionist pharmacist, like I have to do this the right way — it just became, OK, let’s just try this, see where it goes. If it all goes to crap, you know, the worst that’s going to happen is we’re going to lose a couple thousand dollars. Right? That’s not going to financially ruin me, so let’s just go for it. And once I was able to make that move, it really accelerated my career and my ability to invest. So my advice is get off the couch, go buy a property, you’ll figure out the rest along the way.
David Bright: Very good. I know we always end with the question of where can people find you? So is there anything you want to plug there?
Nate Hedrick: Every Saturday, right here on the YFP Real Estate Investing podcast is where you can find me. No, you can find me online, LinkedIn, you can hit me up at RealEstateRPh.com. You can find me all over the YFP Real Estate Investing page, and I’m often in the YFP Real Estate Investing Facebook group. So definitely check that out. If you’ve not joined us already, really encourage you guys to join that Facebook group. It is an awesome community of individuals that we’ve got great talks going on all the time. And I’m there quite frequently, chatting with other investors and just connecting with other pharmacists that are doing what we’re doing. So definitely take a look at that and hit me up.
David Bright: Sounds great. Well thanks for being the guest on today’s show. Really appreciate it. And I’m sure we will be talking more soon.
Nate Hedrick: I’m sure we will, David. Thanks much.
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