How Much Due Diligence Will You Pay for Before You Own the House?

Question

An inspection flags possible foundation movement, moisture, old wiring, or a sewer issue—but still doesn’t give you a reliable repair number. At that point, you can pay for an engineer, sewer scope, mold test, or trade walkthrough before closing. Or you can price the worst-case scenario into the offer and keep moving. I hate spending money on a property I may never own, but discovering a major issue after demolition is obviously worse.

For experienced flippers, what findings automatically justify bringing in a specialist before closing—and what risks do you simply price into the deal?

Denise Supplee · Answer

Great question. From my experience, if there's a concern about the foundation, I'd want to know as much as I could before moving forward. Spending a little more upfront for the right information can be much less expensive than dealing with a major surprise later.

Bruce Woodruff · Answer

Before even getting a Home Inspection (which mean you are in Escrow) the most important thing a potential investor can do is to pay a General Contractor to walk the property, identify major problems, and put a price on them.

This will take an hour and will give the investor enough ammo to throw in the spreadsheet and crunch the numbers.

Peter Mckernan · Answer

This is a great questions.. I would frame it in two ways.

1. What is the price point I am getting the house. If the comps are worth $500K and you are getting it for $200K, and all that stuff you talked about is going to cost you 150K in rehab. You have plenty of margin within reason. If you know that this stuff will cost you 300K on a project like this then I walk.

2. Is this an on market, or off market property. This depends because on market deals you can typically do all the due diligence, and off market you might not be able to do even 1 inspection. So, if you get in with your GC and they tell you stuff like a foundation issue they see and so on while you know you cannot do full inspections I would walk away. Something on market, you can do these inspections have the protection of walking away and taking your EMD back, or asking the seller for a huge price reduction and if not walking away.

These are always the two frames I look at the deal in knowing what I know when doing the due diligence.

James Mc Ree · Answer

Your question is a good one, but possibly posed to hurt yourself. You are asking experienced flippers what they would do which seems like a good target audience. You need an answer in the context of a newbie (maybe, if that is you), not an experienced flipper.

Some of those sample issues are major issues. My solution is to not buy a big problem, especially one you don't know if you can handle...especially if you have no idea of its cost. You are correct to be concerned about spending a lot of DD money. Don't do it! Move on. You are only buying 1 property. Wait for another one to come along that is a good deal for you.

It would help if you gave a little more context. For example, are you really looking to do this? Your profile says you are trying to build software to estimate the cost of the work. Is that why you are asking? You can save respondents a lot of time by clearly providing this context.

How Much Due Diligence Will You Pay for Before You Own the House?

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