Is it worth $300-$500 to have a professional home inspection prior to making a purchase? This is a question that I ask myself frequently. For most people the answer is absolutely! The average homebuyer does not have the experience or the knowledge to effectively evaluate a home prior to purchase. Experienced real estate investors, and especially rehabbers, probably have enough of a background to make a decent evaluation. However, that doesn’t mean that they shouldn’t have an inspection done.

That First Rehab

My first rehab project was a bank REO that I purchased in New York about 15 years ago. The price seemed right, but it was an as-is purchase. I had some construction experience but I was not an experienced rehabber. The house was in a great area but needed to be completely redone, I naively assumed that it would be a piece of cake. (see article: That First Rehab )

Since the house needed everything I thought that an inspection wouldn’t be necessary. If I had done one I would have learned about many problems that I had missed. I didn’t see the termite damage to many parts of the house; I missed the carpenter ants that had devoured a large part of the roof deck. I also didn’t find the pipes that had frozen and burst and I certainly would have liked to know that the furnace needed to be replaced. Had I spent the $300 for an inspection I would have known about the unexpected repairs that cost almost $10,000.

I probably would have gone ahead with the purchase anyway, but I would have done so with a better understanding of the problems that I faced.

A Negotiating Tool

Today I have a much better idea of what to look for prior to making a purchase. And while a home inspector may not find anything that I can’t find myself, the inspection report can be used as a negotiating tool. If the inspection uncovers anything significant I can seek a price reduction or additional concessions from the seller. If you use a home inspection contingency (and you always should) in your purchase contract you will have the option of walking away without a penalty should something significant turn up.

One thing to remember is that a home inspection is only as good as the home inspector. If you are using a knowledgeable and experienced inspector it almost certainly pays to have it done. If the inspector is not thorough it is probably going to be a waste of money. Seek referrals from experienced investors when choosing an inspector and you should be able to find a good one. The bottom line is that a home inspection will either save you from making a huge mistake or give you peace of mind when making a purchase.

A man who carries a cat by the tail learns something he can learn in no other way.
-Mark Twain

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Tags: certified inspector, home inspection, house inspector, inspector, real estate, real estate investing, real estate investor

The other day I went to a listing appointment and gradually asked enough pointed questions and did enough research that I passed on listing the property. Upon first glance the lot seemed simple, but I noticed some odd layout to the side of it that made it unclear where the property lines ran. After doing research I found that the lines were absolutely crazy. This is an old section of town and the agreements through the years with neighbors left the property legally with no ownership to the side of the house and half the front yard.

It was the oddest example I’d seen. The property had all kinds of gentlemen agreements about who could use what piece, and the house is owned by someone who’s had it 25 years. I could see someone buying it and all the agreements not known, then the buyer having to face litigation problems in the future if anyone came to claim their piece of the property.

Perhaps the attorneys would discover it doing a title search, perhaps it could be missed because of all the convoluted arrangements. The point is that while doing inspections get a survey done so that you have all the information. Coordinate all inspections, physical inspection of a building’s systems and structure, with inspection of all leases, with title search, with special environment inspections for that area, with a survey. Then do a little snooping.

When problems, or red flags, occur, check them out thoroughly. I was once representing a buyer back when seller’s were responsible for termite inspections before closing. I convinced the buyer to have someone go by and inspect the home on the buyer’s dime to double check. I had received a clearance from the seller that no termite infestation was present and had a letter from the termite company. While the buyer’s inspector was not looking for termites, he did notice signs of infestation. I called the listing agent and the listing agent said that she trusted the termite company and that my guy was not experienced to determine infestation. On my dime, I had another pest control company go out with the buyer’s inspector, and they found infestation – I went over and saw the termites with my own eyes.

Stay alert and be thorough with all inspections and at any sign of trouble go into detective mode and bulldog the problem until you are satisfied you understand the full extent. Too many times people ignore red flags and pay dearly later. We’ve had flooding problems in Savannah, so I started the practice of going around asking neighbors whether water drains or stands in that area – I often get a different response from neighbors, especially if they are renting. Sellers will sometimes fudge and if water has never actually flooded the building they report no flooding problems. However, if you are going to start a restaurant and the parking lot holds water, even though it doesn’t come into the property, then you would probably want to find a higher, drier location.

As stated in a previous post the contract should allow you to easily walk away if the problems mount and the seller is uncooperative, or seems to be hiding information. Be a detective, follow leads thoroughly – hear loud warning sirens at every sign of a problem.

I would also ask that you consider something that seems out of place here, but I feel is very important, the psychological factor. Sometimes we get bogged down in nuts and bolts and miss some obvious parts of every process. One of my first posts here talked about the excitement of investment and how the excitement can cloud judgment. What happens in the inspection process is minimization of problems due to the excitement of finding a “good deal”. You might say – “oh, I can fix that” – or, “that won’t cost much to remedy.” As someone who’s underestimated repairs before, I urge you to overestimate repairs, especially on older properties, because what seems like an easy fix can turn out to be more complicated and costly once you’ve gotten into it. What you thought you could do yourself winds up something that requires an expert’s knowledge and skill, then you wind up spending in the thousands when you estimated in the hundreds. Don’t underestimate the repairs and don’t overestimate your ability to fix them.

It would pay to have an experienced, objective tradesman give you a good estimate, then if you can save money doing some of the repairs yourself, fine, but at least you will have the correct estimate with which to negotiate.

Tags: buyer, Buying real estate, flooding, inspections, inspector, real estate, real estate inspections, real estate investment, seller

The days of the “Fogamir” mortgages are gone. Surely you remember the Fogamir?

“Yes Sir! We can give you a mortgage. If you would just take this application and rather than fill it out, could you breathe heavy onto that reflective square at the bottom?” If it fogged up, you got the mortgage.

It was nuts. The lenders were granting mortgages to borrowers who had no business merely applying for a loan. It was beyond nuts. Remember the late 90’s? Lenders held firm at only lending up to 80% and buyers had to secure a second mortgage for 15% and just about everyone buying needed to bring 5% down to the table.
During this recent boom, the lenders were loaning 100% of value and some would even roll closing costs into the loan.

My specialty is pre-foreclosures. Most people not in real estate keep telling me that I must be on Cloud-9, considering the record number of foreclosures.

Let me tell you something . . . Just because the number of foreclosures have gone way up does not mean the number of deals has gone up as well. When you have an abundance of 1, 2 and 3 year old mortgages at 100% of value in default… No investor wants any of those houses. Why would they when they can buy a new construction home at 20% off market? No one is going to bid on a house like that at the auction. All those houses are making their way to the lenders’ REO departments.

The lenders messed up. In fact, they messed up REAL bad. Bad enough for smaller lenders to go belly-up. Bad enough for Countrywide to lay off 12,000 people and on and on and on.

The lenders are taking back properties like the Titanic took on water after hitting the iceberg.

So the lenders finally take notice of this problem and decide they need to fix the problem fast. So what do they do? They tighten up their criteria to get a mortgage. No, wait… That isn’t really a fair explanation. What they really did was over-compensate to the point to where the sub prime market has slowed to a trickle.

How nice. The lenders mess up by approving nearly everyone and their REO inventories continue to grow.

They messed up so bad that all of the public attention is aimed right at them.
Even I have said recently, “these banks are hurting themselves again but, it won’t be too long before the government has to step in and slap the lenders’ hands before buying out all their inventories and having an early 90’s-like HUD fire sale.

And the public eye will still be on all the lenders because they are the ones that took the hit for their mistakes. It is at this point that I disagree. Yes, all the lenders are either starting to or have drowned. What the media isn’t paying any attention to is all the other real estate professionals that the lenders have pushed into the water along with them.

When a lender denies a new mortgage to someone, it means an inspector will not get hired to submit a report. An inspector is only the start.
How about appraisers? How about contractors losing out on repairs that would have been needed? How about title companies? Escrow agents, abstracters… it keeps on going. No loans, no buyers, no listing agent or buyers agent commissions. Loan officers lose out. Mortgage brokers go hungry. Sellers like me, feel the pain because our houses stay on the market longer.

When all of those real estate professionals start complaining that the lenders are killing their business… That is when I predict the government will step in and bail the banks out again and hope all the lenders learned their lesson.

Why would they learn this time? They made a mess of things again less than 15 years after they made the last mess.

I for one am ready for the government to come in and slap their hands, bail them out and start the fire sale. Just don’t go overboard and drown yourself because history shows that it won’t be long until the lenders are back doing what they do best… Making a mess of things for the rest of us to clean up.

Tags: appraiser, Housing, inspector, loans, mortgage crisis, Mortgages, real estate, real estate professional, realtor