There are a lot of things that people buy sight unseen, such as investing in stocks, ordering a Tesla online, and even remotely investing in real estate.
Today, many investors are making offers without seeing the property first to avoid losing out on great deals. In fact, 63% of homebuyers in 2020 made an offer sight unseen, according to recent research from Redfin—the highest share since 2015.
While making an offer without seeing a property first is becoming more commonplace, there are some important things to know. Keep reading to learn more about the pros and cons of moving fast, how to make an offer on a property sight unseen, and common mistakes to avoid.
Key takeaways
- Making an offer without seeing a property is common among remote real estate investors in highly competitive markets.
- Technology, such as 3D virtual tours and models, online neighborhood ratings, and tools for creating pro forma financial projections, are simplifying the process for buying real estate online.
- The 4 steps of making an offer for a property sight unseen are obtaining a mortgage preapproval, reviewing property details and existing due diligence documents, making a written offer and negotiating a purchase and sale agreement, and closing on the transaction.
- Common contingencies in a real estate offer include a home inspection, title report, and review of a rent roll and tenant documents if the home is already rented.
Pros and cons of buying sight unseen
Here are potential risks and rewards to consider before making an offer without seeing the property:
Pros
- Avoid losing out on a good deal in a market that strongly favors sellers.
- Avoid spending extra money traveling back and forth.
- Avoid wasting time on in-person visits by leveraging technology like virtual tours, drone videos, and teleconferencing.
- Analyze property details online, including pictures and floorplans, property inspections and title reports, and current tenant details if a home is already rented.
- Make an offer, negotiate with a seller, and conduct the entire transaction online through the close of escrow.
Cons
- Videos and pictures can sometimes be deceiving, so an investor may wish to consider having a real estate bird dog drive by the home or working with a trusted local property manager.
- Dimensions and room sizes can be difficult to gauge without reviewing a 3D model and floor plans.
- Making an offer sight unseen may lead to numerous seller demands, such as waiving contingencies to get an offer accepted.
- Buyers who waive an inspection contingency run the risk of buying a home with defects and hidden problems.
How to make an offer without seeing a property
Making an offer without seeing a property, and closing on the transaction, follows a process similar to buying a home in person, except that everything is done online.
1. Get preapproved for a mortgage
A mortgage preapproval is sort of like doing a dry run before financing a home for real. A lender will ask for income and debt information, run a credit report, and determine how large a loan a borrower will qualify for.
There are several advantages to getting preapproved for a mortgage before making an offer sight unseen:
- A buyer understands the maximum amount that can be financed and can then determine how much to actually spend.
- Mortgage preapproval includes interest rate and loan fees, which makes putting together a pro forma budget and cash flow statement much easier.
- Including a preapproval letter with an offer lets a seller know that a buyer is serious and reduces the risk of a deal falling through due to a problem with financing.
2. Get detailed pictures and review property details
Property floor plans and interior/exterior photos were being used by remote real estate investors well before social distancing requirements went into effect during the pandemic.
For example, single-family rentals (SFRs) and small multifamily homes listed for sale on the Roofstock Marketplace often come with a complete package of due diligence information to learn more about each property, including:
- Property inspection and valuation, title report, and insurance quote
- Online tools for creating pro forma analyses based on different rent prices, appreciation projects, and cost estimates
- Details on the tenant, payment history, and copy of the current lease if the property is already rented
- Neighborhood rating and local school scores
If you’re buying through the Roofstock Marketplace, a home inspection will be scheduled. The resulting inspection report will include additional photographs and property details that will give you a better feel for the place.
This will also help you get an idea of potential repairs needed so you can adjust your offer price accordingly.
3. Write up an offer and negotiate a deal
The next step is to determine an offer price, review different contingencies to include in a purchase and sale agreement, and make an offer to a seller.
To determine an offer price, a buyer can analyze market-specific factors such as population and job growth trends, change in home values and rent prices, active listings of other rental properties, and sales comparables of similar homes that have recently been sold.
Contract contingencies help to protect a buyer so that an earnest money deposit can be returned if the buyer chooses not to proceed with the sale for certain reasons. Common contingencies in an offer include appraisal, home inspection, and financing. In competitive real estate markets, some buyers will make an offer and waive contingencies, although a buyer may wish to seek professional guidance to understand the potential risks.
A written offer includes proposed terms and conditions of the transaction, including purchase price, financing terms, earnest money amount, contract contingencies, closing cost allocations, and the date the transaction will close.
If a seller accepts the offer as is, the purchase and sale agreement is signed and escrow is opened. Sometimes, a seller will make a counteroffer, requesting different terms. A buyer can accept or make a counter to the counteroffer.
Once all terms and conditions have been agreed to, the agreement is signed, escrow is opened, and the buyer begins due diligence and removes any contingencies once the required conditions are met.
4. Close on the transaction
An escrow company or real estate attorney will handle the closing, depending on the laws of the state the property is located in. Typical buyer and seller documents that are signed and notarized to close a real estate transaction may include:
- Promissory note
- Mortgage and loan documents
- Owner’s title insurance policy
- Settlement statement or closing disclosure
- Miscellaneous documents required by a title company or real estate attorney
- Personal identification documents
- Seller bill of sale and warranty deed
- Power of attorney for either party, if applicable
A property belongs to a buyer the day that escrow closes. If a rental property is already occupied by a tenant, cash flow belongs to a buyer on the day of closing.
Common mistakes to avoid when buying sight unseen
Making an offer without seeing a property can generally go pretty smoothly, provided buyers avoid these common mistakes:
- Forgetting to research the neighborhood to better assess specific risks and rewards, such as area home values, employment rates, and school district quality
- Writing an offer without performing due diligence, such as reviewing available documents, like a property inspection, title report, and the lease and tenant details if the home is already rented
- Not asking questions about subjective things like noises and odors in and around the home, actual age of appliances and finishings (even though the pictures look good), and the strength of mobile phone service in each room
- Hiring the first property management company that comes along instead of taking the time to look for a manager who is responsive, has transparent pricing, and has an admirable record of historical portfolio performance
- Waiving contingencies like a home inspection, which may result in a buyer purchasing a seller’s problem property
- Going forward with a transaction despite red flags, such as a seller who claims to know nothing about the property or a renter-occupied home with a tenant who consistently pays late
