HELP! Got the inspection back on our 1st property--stay or walk?

29 Replies

We are in the process of buying our first official real estate investment! (YAY!!) We got the inspection back today; the issues are as follows: 

mold beyond the surface mold we originally noticed when checking the house out, wood rot in left side floor, damaged roof joist, poor ventilation in the attic and mold, many of the chimney bricks are loose, standing water in crawlspace--potential mold, leaking shower and toilet leading to damaged floor/ceiling underneath, plumbing material issues, electrical not all properly grounded. 

Because we are new, we see all of these things as bad :(

I know we are supposed to be "problem solvers" as real estate investors per one of the podcast guests, but we also don't want to move forward if the problems are bigger than the budget. 

As it stands, this will be a cash flowing property by about 400 a month after costs. Does that justify staying with the deal and handling the issues? 

Thank you in advance for reading this far and for your help! 

Lindsey

Every property is going to have issues. If not this one, then it will be another one.

How bad is the mold issue? Some mold issues are not a problem at all, and some might require the property to be fully gutted.

Just ask for a credit to offset some of the repairs.

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Russell,

Thank you! From your reply, I gather the mold is probably the biggest concern and the others are just typical upkeep issues. 

I really appreciate your swift response! 

Lindsey

Well What are the numbers like ? Purchase price rehab estimates taxes expenses 

Dennis, 

I'm new, so please let me know if these are not the numbers you're looking for! 

$89,000 for duplex

$1,000 for mold remediation (the original surface mold we saw) and $1,000 for washer and dryer hookup

$5,400 for closing and points

We would house hack and the other side would rent for $600 paying the mortgage/taxes plus change. 

We pay the mortgage for the duplex we currently live in, but won't officially own it for another 2 years (made a deal with my parents a year ago). Anyway, the mortgage is $600, One side rents for $675 and the other for $650. 

We estimated about $5,000 in repairs for the new duplex. 

We would live in it for 6 months then house hack at a new place charging at least $600 for the second side. 

Does that answer your question? As you know, there are dozens of numbers in this game!

Lindsey

Dennis--Just to clarify: The sellers are giving us the $7,400. Those are not part of our expenses.

@Lindsey Thomspon

Don't be so quick to walk away. As a beginner, you should be treating every single experience you go through as something to be milked for its learning value.

Mold scares people and usually Everyone  makes a bigger deal about it then it really is . Most mold is harmless and fairly cheap to remedy . The various  issues you stated don’t sound like it’s a game changer atleast not me . Listen Use those issues as leverage to get the seller to drastically reduce the price and use that savings to fix the problems .preferably by doing the work yourselves . The numbers appear to work out so it may well be worth pursuing this deal despite the roadblocks 

EVERY inspection you get will have stuff like this...every one...unless you have a unicorn property...or your inspector is trash.

What you describe doesn't sound bad...hard to know for sure without more details. Don't sound like "don't walk...run away" stuff. Use it your advantage to get a better price and make sure your repair numbers are fairly accurate with some wiggle room.

Sounds like you are still ok to me.... but keep working it

Originally posted by @Lindsey Thomspon :

We are in the process of buying our first official real estate investment! (YAY!!) We got the inspection back today; the issues are as follows: 

mold beyond the surface mold we originally noticed when checking the house out, wood rot in left side floor, damaged roof joist, poor ventilation in the attic and mold, many of the chimney bricks are loose, standing water in crawlspace--potential mold, leaking shower and toilet leading to damaged floor/ceiling underneath, plumbing material issues, electrical not all properly grounded. 

Because we are new, we see all of these things as bad :(

I know we are supposed to be "problem solvers" as real estate investors per one of the podcast guests, but we also don't want to move forward if the problems are bigger than the budget. 

As it stands, this will be a cash flowing property by about 400 a month after costs. Does that justify staying with the deal and handling the issues? 

Thank you in advance for reading this far and for your help! 

Lindsey

Hey Lindsey,

Congratulations on taking that first step.  Well done.  Think of how many people never get this far.  Take a breath and enjoy.  Okay, enough of that.

Now that you've had cold water thrown in your face and the cold reality of the situation (the potential to make a big mistake) has hit you, how are you going to react?  Here's your pro tip of the day; don't panic.  It's just math.

What's the after repair value?

After you get the issues with the roof, the floor joists, the shower, the toilet, the flooring, the electrical and the mold taken care of, what's the delta between what you paid, what you spent and what it's worth?  That's the real question.  As a rule of thumb, if you're sitting at 70-75% cost  to value, you're in good shape.

Buying properties like this should not be an emotional ride.  Don't let it be.  It's math and only math.  If the numbers work, you buy it and if they don't you walk away.

Best of luck.   You're going to be fine.

Stephanie

@Jim K. Yes, I know part of the process is learning from mistakes, but I would love to avoid as many as possible! But I'd definitely rather make a mistake as a real estate investor than not start at all!

@Dennis M. Great to hear! I appreciate your incite on the mold--we have no basis for anything at this point. But we will absolutely be using the issues as leverage! I really appreciate your advice!

@Ned J. Wait, I thought the first property was supposed to be a unicorn... I appreciate your encouragement and advice! For repairs, should we talk to a GC or companies/individuals or specialize in specific areas?

@Stephanie Potter Wow! I appreciate the perspective! Good to take a moment and be thankful, but also, reality needs to be addressed :) 

Math. is. king. 

After the encouragement and advice from these awesome BP friends, I think we will pull a Brandon Turner and give them two offers--One with the price knocked down to make up for the repairs, and the other requiring the issues to be resolved before we close. Either way, the numbers will work. 

I really appreciate your reply. Thank you Stephanie!

@Lindsey Thomspon Get a few estimates from reputable contractors then decide based on the numbers. The issues you describe could be small or could cost thousands to properly repair.
@Lindsey Thomspon wood rot (potential siding and window leaks), mold in attic could be a ventilation problem with the bathroom, ceiling damage from leaking bathroom above (in walls too most likely), water in the crawl space (poor lawn grading which is probably the reason for most of the moisture), just to name a few. You are looking at a lot more than $5000. Just my two cents, I’m surprised by the comments on this post. Trust me I’m all for tackling a tough project and remaining optimistic, but I would reconsider your renovation costs on this one.

As others have suggested, get estimates and do the math. Personally, I would not give them 2 offers. They have not maintained the property to your standards, do you trust they will have it remedied to your standards? I prefer to use the estimates to negotiate a price that works for me.

Good luck

@Lindsey Thomspon I agree with the guy saying your going to spend more than 5k. We do all the work on rehabs ourselves for the most part and I have spent more than 5k to get a place ready to rent that was in better shape than what your decribing.
@Lindsey Thomspon if you’re hiring out the work it will be a lot more than 5K. I’d get an extension on your due dilligance period, get estimates from contractors, present estimates to negotiate down on price. Then learn how to DIY. There’s a YouTube video for everything.
@Lindsey Thomspon I see you have mold at $1000? That is not right. If you go with a professional mold company it should be $5000-10000. Anything with mold on it has to be removed AND the problem causing the water needs to be addressed AND whatever was taken out needs reolaced. I just had a mold problem and it was $25k. It was caused by a collapsed chimney flue allowing the water from the furnace condensation to collect in the chimney, which migrated to the walls. Any mold in attic will require new insulation. Mold remediation is remove everything you can, spray with killer, seal with an encapsulant.
We're also trying to get our first property, so I don't actually have a whole more experience... But I would say that if you think you can cash flow $400 a meeting month, that's great on paper anyway. What's your ROI? If it's somewhere around 20% or higher, and you think you can fix all of those problems, I think it could be a great investment.

I agree with most of the comments already. For everything else I would get a few estimates from contractors if you are not planning on doing the work yourself and then see if the #'s work. The problem is most of these issues aren't big value adds. Just maintenance type stuff. I would 100% spend the money on having a licensed mold company doing a thorough inspection and giving you an estimate. Like a few people have mentioned there are lots of times where mold is no big deal. But on the other end, there are times that it is a big deal and could really blow your budget out of the water and be a huge headache. I'm a new REI but there was mold in my first real investment property and I saw first hand how it can escalate price wise quickly. Good Luck!!

@Lindsey Thomspon Hard to say without seeing the house but 5k won’t get you very far in addressing issues of long term water penetration which appears to be what you’re looking at from your description. I second the folks saying to get bids from several experienced contractors, perhaps including a restoration company. Mold isn’t that big of a deal in itself if caught and addressed early, which means stopping the cause (water penetration) early, but if you have rotten wood, saggy floors, ceiling damage etc. then the ship has sailed on nipping it in the bud early. Now you very well may be dealing with structural issues, and the masonry damage is a concern for that as well, so you’re potentIally looking at a very expensive rehab. Get some expert’s eyes on this one. nobody wants a money pit as a first or even 50th Investment property. In my experience as a carpenter, when you have visible rot, you’re opening a can of worms and want to budget for a big project. Take the bids you get from your trusted contractors to the sellers and ask for a price reduction. If they say no then walk. If they agree, make sure you’re prepared/capitalized to take on the work and can afford the vacancy time. Projects like this often run well over budget and take months to complete because once you start pulling things apart more and more problems are discovered. Let us know how it goes!

are both sides affected by this issue or just one? it sounds like it will be more than $5k, for sure, but if you're willing to learn how to repair things, while having one side pay your mortgage, it might not be a deal breaker. however, to echo what others have said, make sure you get good estimates on what the reapirs will cost. 

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