Real Estate Deal Analysis & Advice

3 Pre-Inspection Red Flags That Make Me Run From a Deal

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One of the biggest mistakes I’ve made in the past was buying properties without getting eyes on them. I think it’s very important that you do a pre-purchase walk-through. If you have a trusted contractor or even a project manager and you’re doing multiple deals, you should also bring them along to view the property with you. Before scouting it out, you should have a scope of work checklist so you know what you’re getting yourself into before you buy the property.

I get it—there are some auction sites that don’t necessarily allow you to enter the property before you buy it, and that’s a big gamble, in my opinion. I’ve bought those properties, and those are the ones that cost me a lot of money because I wasn’t able to see what was going on in the basement. The basement is going to lead me to my first point, and that’s the foundation.

3 Pre-Inspection Red Flags That Make Me Run From a Deal

1. Damaged Foundation

Before you purchase, you need to make sure that the foundation is stable and that there aren’t any cracks. Look, I’m not a full-blown construction expert, but I’m smart enough to keep smarter people around me to do the things that I can’t do or don’t want to do. Once again, a trusted contractor can go with you to that property walk-through before you buy to make sure the foundation is good. Foundations are very expensive, and I’m not sure that once a foundation is repaired it will ever be the same. A damaged foundation also likely indicates that something is going on with the ground surrounding the house. So, who knows the full scope of the issues.

The only way I think you could purchase a property with foundation issues is if you completely redo the entire foundation. This is something that I would leave to more experienced investors and investors who have no other choice but to buy properties with foundation issues. A lot of you who are investors on the east and west coast can’t really pick your deals anymore like a lot of us in the midwest, where we still feel like kids in a candy store. If a property has foundation issues, we don’t even take another look at it. It’s a risky business.

2. Major Plumbing and Electrical Issues

The next thing that’s a red flag are major plumbing and electrical issues. I say that because these items tend to be expensive, and it’s not easy finding good plumbers and electricians. They all kind of live in a world of wizardry where everyone perceives a certain job or issue the way they want to perceive it. So it’s tough to find good folks who are going to do the right thing.

On top of that, you’re going to have to go through the ringer with the city. You’re going to have to pull various permits, and you’ll have to get licensed electricians and plumbers. Once the work is done, you’ll have to get the city to inspect and approve it. Thousands of dollars later, hopefully the property will be certified by the city and you can move on.

Look, if I’m buying a property, I prefer it not to have major electric or plumbing issues. I don’t remember buying a property ever that didn’t have some plumbing and electrical work, but a full-blown re-plumb and rewiring of an entire house along with installing a new panel and external power is not something I want to get myself into. Once again, I’m not the most sophisticated construction guy out there. I did work as a laborer for four years, but it’s not my bread and butter. Long story short, if it has major electrical or plumbing issues, forget about it. I don’t even want to touch it.

3. Roof That Requires Complete Tear-Down

Last but not least is the roof. Roofs are pretty straightforward and simple, but they tend to cost quite a bit of money. Personally, I like to buy a property that will have at least a 10-year life left on it. I just don’t want to touch properties where I need to completely tear off and re-shingle the roof.

Now, there is nothing wrong with any piece of real estate as long as the price is right. So if the property does need a new roof but the foundation is great, the electrical and plumbing are good, and the interior is not too bad, then you have to get a discount on that price based on what the roof will cost. Ultimately, you’re buying a problem and you’re selling a solution. That is the name of the game. However, you don’t want to buy too big of a problem.

To recap, make sure you check out the foundation, plumbing and electrical, and the roof. I strongly encourage beginning investors to not buy a property that has any of these three repair items as larger issues. I prefer for you do a cosmetic rehab and make money when you buy, not when you sell. So make sure that you negotiate hard and you buy cheap. So those are the three things.

Look, I’d love to hear from you. Is there anything that you look for in your pre-purchase inspection? Am I right, am I wrong?

Comment below.

Engelo Rumora, a.k.a.”the Real Estate Dingo,” quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He runs runs Ohio Cashflow, a turnkey real estate investment company in the country (Inc 5000 2017 & 2018) and is currently in the process of launching a real estate brokerage called List’n Sell Realty. He is also known for giving houses away to people in need and his crazy videos on YouTube. His mission in life is to be remembered as someone that gave it his all and gave it all away.

    Kevin Sapp Lender from Cary, North Carolina
    Replied 6 months ago
    A few more. Underground fuel tanks Mold, lots of it Asbestos tiles, insulation Old septic systems
    Dave Rav from Summerville, SC
    Replied 6 months ago
    Hey Kevin. Definitely agree with fuel tanks, mold, and old problematic septics! Reply Report comment
    Dave Rav from Summerville, SC
    Replied 6 months ago
    Hey Kevin. Definitely agree with fuel tanks, mold, and old problematic septics!
    Rohan Pryce Real Estate Investor from Atlanta, Georgia
    Replied 6 months ago
    It’s hard to avoid a lot of these major problems when looking at properties that require major renovation. The good thing is lost of these issues can be mitigated without losing your shirt as long as you buy right…
    Engelo Rumora Specialist from Toledo, OH
    Replied 6 months ago
    Hi Rohan, I agree that there is nothing wrong with any property as long as the price is right lol We are at a stage tho where we also place a value on our time. Since we do between 5-10 deals per month, we want to be as efficient as possible so we sometimes pay more for a property that needs less work. Plus, there are deals falling of trees in Toledo where we can pick and choose. We don’t need to take on the worst of worst deals just to turn a profit. Thanks
    Joann Julius from Baltimore, Maryland
    Replied 6 months ago
    Hi Engelo, Good post. I live on the east coast. Is it because of the 2008 recession that the pickings are so good in Ohio or other reasons? Thanks
    Eddie Memphis Investor from Englewood, Colorado
    Replied 6 months ago
    It is well worth the expense to hire a certified home inspector. He will spend several hours looking for defects in, on and around the dwelling. Most investors do not have the time or knowledge to perform this properly. An unbiased opinion helps open the eyes of an investor to things he would have otherwise missed.
    Engelo Rumora Specialist from Toledo, OH
    Replied 6 months ago
    Thanks Eddie, Only issue there is that the good deals don’t last. Home inspectors work on their own time. I prefer getting our in-house project manager to check out the properties we are buying. Other investors can use a trusted contractor. Time is of essence if you want to “get the deal” Thanks again
    Jay Harris Developer from Wesley Chapel, FL
    Replied 6 months ago
    I LOVE THOSE TYPES OF PROPERTIES! And exactly for the reasons you’ve stated. Most investors are scared to touch them, and/or don’t have the right team in place to bring a property back to life. The only thing I do steer clear of generally, would be major foundation issues, unless I can just tear the entire structure down and build a completely new home. 95% of my projects this year will be new builds. You just have to have the right team in place.
    Daren D Wagner Rental Property Investor from Salt Lake City, UT
    Replied 6 months ago
    Agreed, for me in 2 of our 3 areas where we invest, new roofs run between 5-8k for a complete tear down. Although these things eat into your ROI they do have a positive effect on your CapX. But of course you need a solid pricing quote before you jump in and the deal has to be solid right out of the gate because unlike new paint, adding a bed room or updating a kitchen, roofs don’t tend to bring in higher rents 🙂
    Daren D Wagner Rental Property Investor from Salt Lake City, UT
    Replied 6 months ago
    Agreed, for me in 2 of our 3 areas where we invest, new roofs run between 5-8k for a complete tear down. Although these things eat into your ROI they do have a positive effect on your CapX. But of course you need a solid pricing quote before you jump in and the deal has to be solid right out of the gate because unlike new paint, adding a bed room or updating a kitchen, roofs don’t tend to bring in higher rents 🙂 Reply Report comment
    Daren D Wagner Rental Property Investor from Salt Lake City, UT
    Replied 6 months ago
    Agreed, for me in 2 of our 3 areas where we invest, new roofs run between 5-8k for a complete tear down. Although these things eat into your ROI they do have a positive effect on your CapX. But of course you need a solid pricing quote before you jump in and the deal has to be solid right out of the gate because unlike new paint, adding a bed room or updating a kitchen, roofs don’t tend to bring in higher rents 🙂
    Engelo Rumora Specialist from Toledo, OH
    Replied 6 months ago
    Thanks Jay, There are so many deals in Ohio that we never do new builds and we just walk from homes that need major work. We are fortunate to be in the market we are in 🙂 Much success
    Amy Pfaffman
    Replied 6 months ago
    I’ve bought new roofs for almost all my properties, and they were worth every penny. I buy bargain-basement properties that previous investors have neglected and let rot away over the years. I come in and bring them up to snuff so I can collect consistent rent for years. So far, so good.
    Amy Pfaffman
    Replied 6 months ago
    I’ve bought new roofs for almost all my properties, and they were worth every penny. I buy bargain-basement properties that previous investors have neglected and let rot away over the years. I come in and bring them up to snuff so I can collect consistent rent for years. So far, so good.
    Bill Wilson from Longview, Texas
    Replied 6 months ago
    A good home inspector or even an remodeling contractor can determine quite a bit by just inspecting a home’s exterior. Bad foundations , rot and termites will cause sagging roof lines, decking and walls. Roofing can be checked for number of layers and age. The size and condition of the electrical cables coming out of the weatherhead will indicate if the service had been updated with disconnected drop lines meaning it has problems inside that weren’t corrected. Aerobic systems can be checked out. The water service behind the meter can be checked to see if it’s been replaced and then how new it appears to be. If the house is old enough to have galvanize iron water pipes then there’s a chance that the new service supplied more pressure that blew out joints that flooded the house and the last owner couldn’t afford to have the entire house replumbed.
    Engelo Rumora Specialist from Toledo, OH
    Replied 6 months ago
    Agreed Bill, We send project management on site to check out every home before we buy it. It’s vital in making sure the property is to our standard. As I mentioned in a comment above if it needs too much work, we just walk from the deal. Thanks and much success
    Jay Harris Developer from Wesley Chapel, FL
    Replied 6 months ago
    ?
    Dave Rav from Summerville, SC
    Replied 6 months ago
    Another good one. I would place these 3 items in there too. Though, I must admit I wouldn’t necessarily RUN from a property needing a roof. I would rework my numbers and this would play into my offer, but I wouldn’t necessarily run. One I would add (and saw someone else beat me to it – pardon me I was watching the Eagles-Saints playoff game!!) – septics. I would definitely run from a problematic septic!!
    Greg Parker Contractor from Montgomery, AL
    Replied 6 months ago
    I agree with Jay. When there is a bad foundation, septic system, termites(my personal favorite)(easy to kill), the other investors steer clear. No problem is too big to fix if the numbers work. Flood zone or underground springs…..might want to steer clear of that.
    Engelo Rumora Specialist from Toledo, OH
    Replied 6 months ago
    Thanks Greg, It also depends on your market. “Time is money”. We are based in Toledo, Ohio and any rehab that takes us more than 2 weeks we tend to stay away from. We have a high investor demand that we have to meet so we need to turn deals around much quicker. Much success
    Engelo Rumora Specialist from Toledo, OH
    Replied 6 months ago
    Thanks Greg, It also depends on your market. “Time is money”. We are based in Toledo, Ohio and any rehab that takes us more than 2 weeks we tend to stay away from. We have a high investor demand that we have to meet so we need to turn deals around much quicker. Much success
    Charles Connolley
    Replied 6 months ago
    Concrete raising of foundation issues isn’t nearly as big of a deal anymore as you might think. They drill holes and pump a limestone mix or a polythene foam into it to raise it up. Pretty neat stuff. Lots of video on youtube to explain further.
    Roderick Mills Jr. from Cincinnati, OH
    Replied 6 months ago
    Great read! How does this affect your decision to buy if the seller is willing to pay for some of the major fixes like new roof, fixing foundation, or fixing plumbing and electrical?
    Engelo Rumora Specialist from Toledo, OH
    Replied 6 months ago
    Thanks Roderick and great question. We have bought quite a few properties lately where the seller was willing to go out of their way to do the repairs. Keep in mind tho that most of them won’t want to do the repairs properly so it’s better just getting a further discount on the price in the amount of the repairs rather then getting the seller do them. Thanks again
    David Des Real Estate Investor from Wheeling, IL
    Replied 6 months ago
    Once you remove all of these , even a roof tear off , come on , then what shoudl we buy ? Ofcourse if you are established in the industry and have multiple sources of leads/connections , then thats a different story . I somehow feel that this article is written just for the sake of “writing an article ” . Though I have enjoyed the authors other articles . The simple thing to know is – you get paid for solving problems . The more scary , the more myths surrounding a specific type of issue , the better it is . I am not saying it is easy , but for an highly analytical person with good education , he might enjoy learning about the foundation issues and talking to experts. Also typically an area has similar types of issues , so there wont be 300 different types of foundation issues in a city , they will repeat, so you will be able to assess fast and get a deal. Properties with cosmetic issues , in hotter areas , have no margins whatsoever . If you are willing to work for 10k margin , someone is willing to work on these for 5k margin .
    Engelo Rumora Specialist from Toledo, OH
    Replied 6 months ago
    Thanks David, I disagree. Get established well enough so you don’t rely on buying turds. Time is money Just my opinion Thanks again