Should You Spend Money on a Home Inspection?
There was a recent post in the BiggerPockets Forums on whether it is smart to hire a professional home inspector. There were many arguments for getting the home inspection done by a professional and a few arguments against it. I think it is very important to get a home inspection done on any potential purchase, but I don't think you always need to pay for it. There are certain circumstances where a professional home inspector is a waste of money and may even cost you a deal.
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The decision of whether to get a professional home inspection done will depend greatly on the amount of experience an investor has.
I think almost every new investor should get a professional home inspection done. As a new investor you need to learn every detail you can about properties you want to buy and about what repairs to look out for in future properties. As a newbie, I would actually walk through the entire inspection myself with the inspector and pick their brain about everything. Ask about the roof, foundation, electrical, plumbing and anything else the inspector looks at. Your are paying at least a few hundred dollars for this inspection, so get your monies worth and grill that inspector!
A new investor may be shocked at the amount of items a professional inspector will find wrong with a home. The inspector’s job is to find everything that is not perfect on a home and most do a very good job of finding faults in properties. I am a Realtor, and I have had quite a few buyers scared off by the little things inspectors find in properties. I always try to show buyers the serious faults in a home and hope they will look at the minor issues as just minor issues. I have even been scared off by a home inspection, because of all the little things that were found and I ended up missing out on a great deal!
What a Home Inspector Actually Does
In my experience a home inspector goes through the basic systems and looks for any obvious issues. If he finds obvious issues, he usually advises the potential buyer about why he thinks there may be a problem and then advises that an expert be brought in to evaluate the situation further. For the experienced investor who is paying the home inspector a large fee for his services, this can become frustrating. You pay a professional for their opinion ( the inspection is an opinion they have no liability in most cases), then when they find something wrong, they need to bring an expert in to see what is really wrong. If they find mold, they want a mold expert, if they find a crack in the foundation, they need a foundation expert, a roof expert, an electrician, a plumber etc. The catch is, the inspector won’t find these experts for you, that is your job an in some cases those experts will charge as well.
If you are a new investor and don't know how to spot these potential issues, then a home inspector can be a great resource. If you are a seasoned investor who can spot potential trouble areas in a house, why not bring the expert in to begin with and save the $400? Better yet, have your general contractor go through the house and find any trouble areas and have him bring in any experts needed.
Repairs That Are Planned
When doing a fix and flip, repairs are almost always required and in some cases a total remodel is needed. On many of my buy and holds, I do a complete remodel as well. If you are buying a home that you know will need new electrical, new plumbing, new roof, new paint and new floor coverings, why are you hiring an inspector to look at the plumbing, roof and electrical? Decide what parts of the house you want to save and have an expert inspect those areas of the home. It seems silly to have an inspector go through the entire house when you know you are going to remodel half of it in the end.
If you still want a professional inspection done on a home you know needs a lot of work, see if the inspector will negotiate with you. Ask him if you can get a price reduction on the inspection if he skips the roof, skips the plumbing or doesn’t have to test every electrical outlet. A great idea I heard on the forums is skip the written report from the inspector. It takes a lot of time for the inspector to write up a report, download pictures and make it all look pretty. If he only has to give you a run down without that fancy report, he may be able to reduce his price as well.
I am a HUD listing broker and I have to mention HUD inspections for those who are not familiar with them. I wrote an article covering the basics on HUD homes here, but I want to get into HUD inspections again.
HUD has an inspector do an inspection on every HUD home before they are listed. Even though an inspection is done on the home, please do not depend on it for your inspection. When the HUD inspector is looking at the house, the electric, gas or water is usually not on. That means he can’t test the furnace, hot water heater, or the plumbing, except for an air test. The inspector looks at the roof, by visually inspecting it from the ground. I have had many HUD inspectors say a roof is fine, when it had hail damage and needed replaced. If you are buying a HUD home, do not depend on the HUD inspection to tell you everything.
Investors are given a 15 day inspection period from HUD after they have a bid accepted, but it really means nothing. HUD will not give an investor their earnest money back if they cancel due to inspection results. Even if the HUD inspector said the plumber held pressure and it turns out there are 30 leaks, HUD will not return the investors earnest money. HUD will not make any repairs based off the inspection either. Please do your due diligence before making a bid on a HUD home so you do not lose your earnest money.
I list homes for many banks and asset management companies as well. Unlike HUD, some banks like Fannie Mae will turn the water and utilities on for you for your inspection. In some cases, the bank will even repair the plumbing for you if they find leaks when they are de-winterizing the home. I always find it beneficial to get an inspection done on a bank owned home, because you might get some free repairs out of it. That is, unless you are in a bidding war and you decide to remove your inspection clause to get the house.
I went off on a bit of a tangent their with HUD and REO inspections, but I felt that was important information for buyers. I think every investor should have an inspection done, but that does not mean they have to have a professional inspector do the job. Every house is different, but look at the repairs you know need done and determine if an expert can check out the rest for you or if you can get the inspector to reduce his price for you.
Finally, let me close with a story of a deal that I let get away. I had an inspection done that found mold, foundation cracks and a ton of other minor issues on a short sale I had under contract. I was going to use this home as a long-term rental, but decided to cancel due to all the repairs needed. A few months later, another investor had purchased the house for the same price as I had it under contract for, and flipped it for about a $30,000 profit. I let all the minor stuff get into my head and I made a bad decision. I'm not saying you should ignore the minor repairs, but make sure you analyze the cost carefully. I let the inspector talk me into how bad the home was and did not run the numbers, I just cancelled. Rookie mistake!