Buying a profitable lemon rental

14 Replies

I am buying an old house built in 1953 that has problems. The house is slightly settling in the back and the plumbing is "iffy". It's basically a lemon and if I get an inspection performed, it will not pass. That being said, The house is a duplex and it is very close to a college campus and has been continually rented out for over a decade and finding tenants is hardly ever a concern. My question is, Should I get an inspection performed, even though the results are not going to be pretty? It's for sale-by-owner and owner financed. Or should I wait until after I have bought the property and have it inspected then. I don't think the inspection results will change my purchasing decision.

Get an inspection performed before purchasing. Unless you are a seasoned contractor that can do all the repairs yourself or you are generating a lot of monthly income why would you take the risk? I know a landlord with 20 rentals significant monthly income still does a property inspection on every single house before purchase.

For $300 you are having a professional spot out every problem in the home. I am 100% sure they will find things you and the current owner do not know about.

You may even be able to get a reduction in price once you show the owner the inspection.

It will give you peace of mind and make you more knowledgeable about what condition the home you are buying is in.

Always make an offer contingent on inspection.

Originally posted by @Daniel Calderon:

Should I get an inspection performed, even though the results are not going to be pretty?.... I don't think the inspection results will change my purchasing decision.

IMO, the ones that NEED the inspection are the ones where the results won't be pretty. You need to know just how "un-pretty" a situation you're getting into.

I do remember the inspector at my first investment property shaking his head and saying "Are you sure you're ready for this?" I bought it anyway and it worked out fine, lol! But I'm glad I knew exactly what I was in for.

@Daniel Calderon   if you plan to finance this purchase make sure to add a financing contingency some banks may not lend depending  on the current state of the property.

Find the best inspector in town, pay more if there's one that comes highly recommended. 

I'm always leery of these types of deals. Owner lets deferred maintenance build up over the years, when things are coming to a head, the owner finances it to someone with a substantial down payment and puts them on the hook for the major repairs; and he hopes they eventually walk.

I'd be interested in the property analysis. 

Thanks for the replies. As it turns out, I hired an inspector to perform the service tomorrow morning. Luckily he was available on short notice. It will be a 4-hour process during which the inspector will have to disturb the tenants. I'll be happy to share the results.

There is more to this purchase than meets the eye... The properties in the surrounding area have skyrocketed in value over the last 2 years, and anytime a property appears for less than 100k, it gets bought out by cash investors in the blink of an eye. This one in particular is in very close proximity to the University campus, which makes it very good for me

It is being offered as-is by a school professor who has owned it for 35 years, who's been renting it out continuously. It does indeed have a great deal of deferred maintenance, but he has invested in some hefty repairs. The ceramic piping beneath the house became crushed and he had a company tunnel under the house to replace it with PVC piping. Also, there are signs of foundation movement such as diagonal cracks in the Sheetrock above the doors. He said a leaking pipe caused him to pull up the wood floor in the living room, which has been replaced with wood laminate flooring. So it does have its problems and he admits to them. It is an investment property. 

Apart from all that, the rental income has been continuous and he currently charges the tenants less than what they would be willing to pay. (its a duplex).

Sounds like you may have a winner here. 

Just as expected, the house inspection brought up a whole slew of problems including foundation, electrical, plumbing, and ventilation deficiencies, along with two cracked rafters in the roof. As it turns out, the previous owner has deferred maintenance for decades!

There are no smoke detectors or carbon monoxide detectors in the house, which worries me somewhat given that there are tenants currently living inside. Also, the inspector mentioned something about the electrical wiring being a hazard because there is no ground. The house is from 1954 and is grandfathered in with the electrical. Also no permits have been pulled by the current or previous owners for the house including the water heater replacement.

I expected the house to have significant problems prior to the inspection, but this house seems to be deficient in every category. The owner is a scientist college professor who know absolutely nothing about maintaining a house!

I'm leaning on the yes side at the moment. Really, the list of deficiencies is right here in front of me so there are no more surprises.

I would call an insurance agent and find out how much or if it will qualify for insurance coverage in its present condition.

So let's go through the inspection report items to determine how significant any item there actually is. Inspectors will point out every noticeable thing when they are so inclined, and this inspector seems to have that inclination. 

No CO or smoke detectors? Easy and inexpensive fix unless you are required to have hard-wired detectors. 

No grounds in the electrical wiring? Replace every receptacle with GFCI and label them all as "no ground" if you are really concerned. You must use GFCIs in wet locations such as kitchen, bath, laundry, garage, outdoors, etc. 

No permit for replacing the hot water heater?  Did the inspector point out that this was not properly installed otherwise? If it is OK except for no permit, most investors would just not worry. 

The cracked rafters might or might not be a big matter. The repair is somewhat straightforward. The rafter pieces are brought back together as closely as possible; this might require jacking or temporary support braces. Then a new rafter is sistered alongside the cracked rafter and the two are attached to each other using lag bolts. 

Now that doesn't sound as bad as an inspector would make it sound ...

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