Costs of Inspections for Prospective Flips

[Daniel Evans]

So I'm about to write an offer for a prospective deal, and I'm pretty sure I've buffered enough renovation costs for the amount I'm offering. However, I'm concerned about the costs I may incur during the due diligience period. Consider the following scenario.

1. I offer 30k to purchase a property. I anticipate repair costs will be 20k, and I believe I can sell it for 75k.

2. The seller accepts the offer of 30k, and I order a home inspection that costs say $400 and a structural engineering inspection for $400 (I know that this property has an issue with the foundation).

3. The inspection comes back and mentions some serious issues with the house that I didn't see when I walked the property. I get bids for these repair costs, and they are estimated at an additional 10k

4. I take this to the seller and ask for 10k off the purchase price of the property, but the seller refuses an reduction in asking price. 

5. So I either have the choice of backing out of the deal and losing the costs I incurred during the due diligience period ($400 for home inspection in this case), or I can take the property as-is. If I take the property as-is, then I'll be dealing with very little profit potential. If I'm wrong about resale or additional repair costs come up, then I'll probably lose money.

So in terms of what to do in this scenario, you'd probably just back out of the contract. If this were to happen for on multiple properties though, then I'd start racking up a decent sum of losses (5 properties x $800 = $4000 in losses). 

So my question is how do you prevent this from happening? Do you do an inspection yourself and just make sure you are very confident that repair costs will come in as anticipated before making an offer? Is this just a cost of doing business, and as I gain more experience, this scenario will happen less often? 

[Moises R Cosme]

@Daniel Evans

1. This will happen

2. I think your issue is that your offer amount is so low that your proportional costs are way too high ($800 is 2.5% of your purchase)

3. We inspect the properties ourselves and we buy without inspection contingencies

4. If I were in your position I would back out & try again in 2 weeks (odds are time will do some of the work for you, the Seller wants to sell & if your offer reflects fair market value he's going to keep fielding the same number)

4a. Alternatively, what do you think the property would appraise for after you rehab it? Appraised values are normally higher than resale prices, it may be worth it to buy, renovate, cash out refi & rent it out.

I hope this helps.