Is Foundation Damage Always a Deal-Breaker?
When I received the inspection report back on my third BRRRR property, all the red ink highlighting deficient items made my head spin and palms sweat. I was just starting out with this phase of my investing and hadn't really tackled many repairs past cosmetic and mechanical items. If you can make the numbers work, those repairs are slam-dunk wins.
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But the inspection report for my third BRRRR flagged a major foundation repair. My heart sank.
On paper, the property still penciled out very well—even if I had to sink $40,000 into the foundation repair. But was I ready to take on such a challenge? What could possibly go wrong?
If you’re dealing with foundation damage, you’re probably panicking, too. Believe me—I feel your pain. For both homeowners and real estate investors, foundation damage is one of the scariest to-dos you’ll find. This damage manifests in a number of ways, from foundation cracks to a damaged concrete slab to leaks in the basement walls.
Regardless of the severity of your foundation damage, here’s how to assess and tackle the problem.
First: Signs of foundation issues
While you should always hire a structural engineer to evaluate any and all properties with suspected foundation, there are a few easy clues visible to the naked, uneducated eye.
- Plumbing problems: Leaky pipes don’t always indicate a foundation problem, but they do always indicate that further investigation is necessary. Dripping water can damage concrete over time.
- Poor drainage: Ground sloping toward the house—also called negative drainage—can cause water pooling. Remember: Water plus foundation is always bad news. If one part of the property is located on loose, wet soil and another part on compacted clay soils, for example, it can cause differential movement. That’s when parts of the foundation shift in opposite directions, leading to cracks.
- Trees: If there are trees located too close to the property, keep an eye out. Tree roots can push against the foundation or dry out the soil, causing your foundation to shift.
- Hairline cracks: These can be common, especially when they appear in the mortar between bricks or concrete blocks, but they can be a sign of foundation issues. While sometimes these are caused by seasonal expansion—especially when located around window frames and doorways—make sure a structural engineer evaluates the scene.
Know what you’re willing to handle
When you dive into real estate, you have to understand what problems you are willing to deal with—and which ones you need to walk away from. This list might change depending on your investing stage. Most first-time home buyers will want to skip properties with foundation warning signs. Seasoned flippers who’ve scored a serious deal, however, may brush these off as no big deal.
Technically, anyone can do anything. However, every investor will eventually find the sweet spot problem they like solving… and the ones that will make their skin crawl. In addition to foundation damage, other big-ticket snags include:
- Electrical damage
- Termite damage
- Extensive mold damage
- Fire damage
- Flood damage
Your list may grow as you encounter more problems during your real estate journey. Personally, I’ve added raccoon infestations and trees breaking through the second story.
Still, keep in mind that staying strict with your “no” list may hinder your investment success. Sometimes, what makes a deal so smokin’ is the fact that there is a HUGE problem to solve with the deal. Think financial distress, owner distress, or property distress. A deal where all three distresses are present? This could be a home run… if you’re up for the challenge.
Back to my third BRRRR, with that terrible inspection report. In this case, I had all three: a probated property where the family couldn’t afford the repairs and a caving-in foundation.
Making an informed decision
So how do you know when you should take on big distress like a foundation repair?
Hire a structural engineer
If you're buying a house, hiring a structural engineer in your due diligence phase can help tremendously. (Yes, in addition to your home inspector, who can identify a potential sign of foundation damage but can't always interpret the reason why.)
Even if you’re dealing with an existing property, don’t skip out on their expertise. They’ll examine the home’s structural components and determine the extent of the problem. Then, they’ll help you decide if you want to proceed, create a report, and develop a proposed action plan.
It’s tempting to skip this step, but when you’re dealing with foundation damage, structural engineers are always money well spent. You’ll pay about $200 to figure out what exactly is going on.
For example, the engineer may tell you that the corrective action is minimal. A foundation repair company might try to sell you on unneeded services. I got a $50,000 discount on my offer because one of those companies told the owner it needed huge repairs… but it turned out the property only needed $1,000 in downspout and grading work.
Ask your engineer if this is issue can be resolved with a simple repair. Or should you expect to deal with future issues? Some water table issues can be mitigated with a sump pump. But perhaps you’re dealing with ongoing shifting soils beyond your control. Ask your engineer, “What’s the fix?”
Interview foundation crews
Speak with a number of different foundation crews. Ask them to visit the property, assess the damage reported, and provide an estimate for cost to repair.
Don't have a go-to foundation crew? No problem. Most people don't! Ask other investors or your real estate agent for the area's best foundation repair crew. And prepare your budget, too. This isn't the time to be cheap!
Make sure you and your crews are clear on your timeline to fix the issue, especially if you're planning a flip. The foundation must be corrected first before any other work is done in the house. (If a contractor tells you differently, run!) Correcting foundations can take days to weeks to resolve, so build this into your overall renovation timeline.
Before signing an agreement, research the foundation company you chose. Evaluate their work on other projects, ask about their track record for warranty claims, and talk to referrals. If a company won’t give referrals, this is a red flag. Here’s what you should ask:
- What is their warranty process? Warranties make you feel all warm and fuzzy—think back to that scene from Tommy Boy and the brake pads. They’re also a great sign that the company will stand by their work. What will happen to the warranty if the company is bought out or folds? That could nullify your warranty overnight.
- Can I see an engineering report and repair estimate? Make sure see both of these reports prior to purchase. I’ve seen investors “guesstimate” with their Realtor or contractor… and be very, very off.
Finalize your budget
Add a contingency budget to your entire construction budget to account for any surprises. Most experts recommend a 10% contingency, but you may want to add more to this budget, especially if it’s one of your first investment deals.
Lastly, make sure your numbers still work! Now that you understand just how much your foundation repair should cost (with that contingency included), rerun your analyses. Does the deal still work? Has your return on investment changed? Make sure you're still happy with the numbers.
Resolving a foundation correctly will increase the value of the property. In some cases, a new foundation means you can add additional living space in a basement and make it a more attractive rental or flip. Repairing a foundation incorrectly will plague the property and cause future headaches.
Foundation damage was once an issue I ran from. Now, I’ve purchased several homes with varying issues requiring anywhere from $1,000 to $40,000 of work—and correcting minor foundation issues ($1,000 to $10,000) is my sweet spot.
More importantly, I have flipped and sold these homes without issue or impact to the value of the property because the work was done right.
But I certainly don’t buy every property with foundation damage I come across. I always make sure to check off all of the points above.
One parting pro tip for investors: If you should take on the challenge of a foundation repair, partnering with the right foundation companies can create a hot source for off-market deal leads.
As an investor, what do you do when foundation issues arise on a potential property?
Share with a comment below!