While getting a property inspection done on a property you are thinking about purchasing may seem like a total nightmare, the property inspection is arguably the absolute most important thing you can do as part of your due diligence.
Question: What are the costliest expenses of owning an investment property?
Answer: 1. Unexpected repairs, and 2. Bad tenants (if a rental property).
The expense of bad tenants — well, that’s a topic for a whole other article (and potentially a long one, at that). Unexpected repairs, though… here we go!
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.
The Purpose of Getting a Property Inspection
Don’t make me say it out loud… okay, fine I’ll say it. The purpose of getting a property inspection is to confirm the true condition of the property before you buy it. Yes, I know, it’s a bit obvious what the property inspection does. I say it, though, because it ties into a lot of smaller facts that surround the whole point of knowing the true condition of the property. Also, did you notice that bolded word there — before? That is a key word to remember.
I’m amazed at how many times I’ve heard people asking if they should have a property inspection done on a property they are thinking of buying. I’ve also been amazed at how many people ask how the numbers on a property sound, but when they describe the property and the numbers, they are only guessing at what needs fixing on the property. Umm… I mean, yeah, when you are first looking at a property, you are probably going to run rough numbers through your head so you can take a first wag at knowing whether or not it will be a good deal, but if you are to the point of asking other people to go over your analysis of the property in order to get their opinions on the deal, you need more concrete numbers!
Getting a property inspection on a property is the best way to get at least a working idea of what repairs will have to go into the property. Don’t for one second take this lightly because repairs can be extremely expensive! I don’t care if you are buying a property to flip to have as a rental property, to have as your own, anything — if you are buying a property of any kind, get a property inspection. If you are buying an investment property, the bottom line has everything to do with how much money you make on the property, and how much money you make is directly connected to how much you have to pony up in repairs.
How to Find a Property Inspector
As with anything, I’d first recommend asking for referrals from fellow investors who work in the market you are in. The BiggerPockets Forums are perfect for this. If you can’t find any referrals, don’t hesitate to look on Yelp. I use Yelp for just about everything, and property inspectors are no exception. But if you can’t get a referral and Yelp isn’t giving you much, just Google home inspectors in your area and get a list of local inspectors. Then start calling each one.
Find out how much they charge, if they work specifically in the neighborhood you need them for, what their experience level is, and whatever other questions you want to ask. Also ask their availability. You can ask all the questions you want, but also just listen for their general tone and gauge your own interest and comfort with them. You won’t have to spend a lot of time with your inspector, but as with any customer service related position, it’d be nice to enjoy working with them.
As far as what makes a good or bad inspector — well, that one is a little tougher. Obviously a bad inspector is one who doesn’t catch something major during his inspection, and you end up having to pay out for it later. Now, how do you tell who those bad inspectors are? I have no idea. That leads me back to suggesting you get referrals.
If you want to be overly cautious, you could always hire two separate inspectors and pay for two separate reports to make sure everything is caught. I’ve never known of someone to do this, but I certainly don’t think it should be out of the question. Sure, it would be double the cost, but even that total amount is pennies compared to what an unexpected repair could cost.
In terms of determining if an inspector is good or bad, go through the report he gives you pretty thoroughly. You will likely be able to at least get a feel for his level of detail, how honest he’s being (if he’s honest about some pretty big things, he probably doesn’t have a reason to be dishonest about other things), and if you have any questions about his findings, he should be able to explain those easily for you. Inspectors often prefer you not to be there during their inspection, as it can be extremely distracting, but if you are ever at a property while the inspection is being done, you are likely to learn a ton — from a good one at least.
I’ll tell you, the best inspector I ever had was when I was buying turnkey properties, and the inspector absolutely hated this one particular company I was buying from (who are long out of business now). This worked out great for me because he wanted to find every way he could to stick it to the owner, and what better way to do that than to not miss a beat on anything that needed to be fixed because he knew it would be at their expense, not mine? Ha. Okay, maybe that’s not the most helpful for you in terms of finding yourself a good inspector, but funny nonetheless.
What to Do with the Inspection Report
Your inspector goes out there, he gathers all his findings, he puts them in a report, and now you are staring at it. Pretty overwhelming, huh? Maybe, maybe not — just depends on what you were expecting and how detailed the report is.
What you do with this report and what you get out of it depends on what kind of property you are trying to buy. If you are buying a property to flip, this report is going to be crucial in order for you to most accurately determine the cost of what it will take to get this property into flip-able condition. If you are buying the property to be used as a rental property, then it depends on whether you are planning to put work into the house or if you are trying to buy something turnkey or rent-ready. The latter I will get to in a minute. But if you are buying to fix it and hold it, this inspection list will give you a basis for determining how much it will cost you to make this house rent-ready, similar to how it works for flipping a property.
I don’t flip or fix and hold, so I can’t speak to this part accurately, but I’m assuming there will be a certain level of deciphering through this list of items needing repair. That deciphering will entail categorizing each item into (again, just guessing here): seller should fix, buyer (you) should fix once it’s bought, or ignore. Inspectors will usually put every single tiny detail on a report, so some of it may not be a huge thing for you. The bigger question is whether you or the seller should be responsible for fixing certain things. This is probably not a question with a lot of properties because buying properties like foreclosures or any other as-is property isn’t even going to offer you the option to have the seller cover any repairs. But either way, at least know whether it’s a possibility and if it is, always try to get the seller to fix everything you can.
Property Inspections on Turnkey Rental Properties
For any of you turnkey buyers out there, this paragraph should be highlighted and in bold all at the same time. The property inspection on turnkeys is HUGE. Why? Because the whole theory behind a turnkey property is that you are buying a property that needs absolutely no work. Otherwise, why pay more for the property than you would if you were going to do the work yourself? The point of the property inspection in this case is completely opposite of what the flippers and fixers need to get out it, which is an estimate for cost of repairs because the person buying is going to be the one paying that money. You, a turnkey buyer, are not. So the point of the property inspection for you is to confirm the property really doesn’t need any repairs, hence fitting the classification of “turnkey.”
Here’s the kicker, though. The inspection won’t confirm a property not needing repairs! Wait, what? This is what really gets turnkey buyers tangled up and throwing bows. When you, a turnkey buyer, have an inspection done on the property, go into it knowing that there will be items that show up on the report. In fact, there will be a ton of items! In my four year history of being nose-deep in turnkeys, I have only once seen a property inspection come back with only three small items listed on it. That property (which I totally bought!) was a freak of nature. Every other turnkey I’ve seen go under inspection, and that would be at least a hundred at this point, has had easily 15+ items, if not more like 20 or 30. This is normal.
But wait! A turnkey property is supposed to be perfect, and the inspection is supposed to confirm it’s perfect, so how can there be so many issues? Good question.
The inspection for turnkeys is not to confirm the property is perfect right then; it’s to confirm what needs to be done in order for it to be perfect.
You aren’t closing on the property right after the inspection, so there is no reason to freak out when items show up as needing repairs. The whole point of the inspection is to identify any last items that need to be repaired in order to get the property in perfect turnkey condition. You will give the report from the inspector to the seller, tell them to fix everything, and they will do it. There may be some things that don’t make sense to do, but if that happens, the seller will let you know. Only after all of those items listed are actually repaired, and you have seen proof of it (whether via picture, video, or a re-inspection), should you close on the property.
- A property inspection is crucial for any property you buy! No matter what you are doing with it.
- Never, ever buy a property to flip or fix without having as best an estimate as possible on how much the repairs will cost. Even with the most accurate of estimates, few repairs ever stay under budget, so don’t slack off on that estimate! The property inspection is a critical component in this.
- Consider unexpected repairs capable of completely blowing any return you may have seen on your property. Let that light a fire under you — get the inspection!
- If you are buying a turnkey property, don’t freak out when the inspection report comes out. Wait to freak out until the seller says they won’t fix any of it. At that point, you can bail on the property. Don’t bail before.
- Remember: With any property you buy, any repairs done before you close on a property are expensed to the seller. Any repairs done after you close a property are on you!
Current investors—what are your inspection stories? Any horror stories? Any near-misses saved by an inspection? Any advice as far as inspections go?
Leave me a comment, and let’s discuss!