Inspections are increasingly becoming a part of almost every real estate transaction made. From real estate agents to banks, to flippers to buy and holders, to wholesalers to buyers and sellers (forgive me if I forgot you), inspections almost always have their place in the course of a real estate deal.
I want to take a moment and view home inspections from a flipper’s point of view.
My investment company currently holds mostly a short term exit strategy on our residential buying opportunities. In short, we are looking to get the property under contract and wholesale it to another investor or we take the project on ourselves to fix-up and place on the open market (MLS) for a retail sale.
With either exit strategy, we initially perform our own inspection. Every deal’s success hinges on the amount of quality information gathered in the beginning. Real Estate investing is always calculated backwards from the exit strategy to the acquisition price. The quality of due diligence is often equal to the quality of the investment. In other words, the inspection of the property itself is one of the most important pieces of the due diligence puzzle.
In my experience with other investors, many do not approach the inspection of the property in a way that helps them to close deals. If you will follow these steps when contacted by a residential home seller, you will close more deals and shine among other investors in your area.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
Investors need to train themselves in 3 areas concerning inspections:
1. Phone discovery
Your inspection of the property starts on the initial phone call with the seller. 3 Questions you should ask the seller:
1. “Can you describe the property to me?”
They will begin to pitch the story they want you to believe. Usually you are going to hear how many beds, how many baths, how good the neighbors are, etc.
2. “What are some of the good things about the home?”
I ask this question to find out if they are a salesman or just a normal person trying to sell their home. I treat a “salesman” differently than a “grounded” seller in my negotiations. Also, by asking this question, the seller has revealed positives that I may never have known, which is helpful when you eventually sell the property.
3. “What repairs does the home need to bring it to retail condition?”
I have found that most people are fairly honest when you ask them this question. They may not tell you about every little thing but will tell you about the big ones. If they tell me the house is in perfect condition, I immediately ask them why they are calling someone like me and not a real estate agent to list their property on the open market. Many times this approach lowers the seller’s defenses.
Bonus: The more time spent with them on the phone, the greater the rapport you’ll build, increasing your chances of acquiring the property.
2. Initial visit inspection
Do your primary inspection on your first visit. Most homeowners do not want to labor with you as you make multiple inspections and get multiple professional trades to the home. They would just rather find someone who can make an offer quickly (just like we always advertise). As a rehabbing investor, you need to be trained to quickly inspect houses in your area. In Central Texas, we have 5 big ticket-items. They are:
- Plumbing (water heater, sewer drain issues)
I am trained to look for tell-tale signs for these issues. If there are suspicions of necessary repairs on these big-ticket items, I make my own educated guess instead of calling a professional out and paying for an inspection/estimate. I usually err on the side of caution and factor the repair into my budget. However, recently while on vacation, I got a house under contract with an inspection option built into the special provisions. I agreed to his bottom dollar asking price and felt like he would concede a 7-day inspection option in the special provisions section of the contract. He did.
3. Balancing seller’s desires with managing due diligence
Inspections are a very important part of the negotiation process. As you build a rapport with the potential seller, you have to sense how much flexibility the seller is going to give you and how much competition you have on acquiring the property. If you engage a seller with the mindset that they owe you due diligence, you will lose some deals! Investor, they owe you nothing! You are buying their property at a deep discount in exchange for a simple, quick, and no-fuss transaction. Otherwise, they would just call a real estate agent or list it FSBO.
The investor that can give the seller the feeling that the transaction will go smoothly will often times become the buyer.
TIP: Please do not practice the strategy of some, where the investor gets a property under contract with an inspection provision intending to re-negotiate the price in the end. This is unethical and is considered a SCAM by the public. Let’s continue to build a solid reputation for Real Estate Investors!
Master your inspection process and rise above your competition!