Rehabbers Beware: 5 Big Issues Distressed Properties Hide (& How to Detect Them)

33

Distress is often where the real estate deal is found. Distressed properties, those that need serious rehab and repair, are where the ability to add value lies and thus what I usually end up buying. Distressed properties can range from small single families to apartment buildings. I have bought them all, fixed them up and brought them back to life.

Most of the time, distressed properties are bought in what is termed “as is” condition. This means that the seller is not warranting anything related to the condition of the property. In other words, buyer beware! You as the buyer had better know what you are getting into since many such properties can be in pretty bad shape. Roofs may be leaking. Kitchens may be missing. Condensers may have been stolen, and paint may be peeling from every surface imaginable. Plus, you likely have to make a quick decision because another investor is right behind you, so there is no time for lengthy inspections.

All of these problems may sound bad, but to me they are all actually good things. Why? It is because I can see these problems. I can see the fact that I need to replace the roof. I can see that the condenser has been stolen. I can see that all of the walls need to be scraped, primed and painted, and I can budget for that in my purchase price. It is what I cannot see that concerns me and has cost me a pretty penny in the past.

Related: 8 Expert Tips for Rehabbing Buy & Holds for Maximum Rentability

The things that you cannot see will often not show themselves until after you purchase the property and begin the rehab job. Once you start removing old drywall and ripping up tiles or simply turn on the utilities, these hidden problems will become apparent.

Here are 5 examples I have encountered over the years, along with some things you can look for or do to find a problem that may be lurking and unseen.

How to Invest in Real Estate While Working a Full-Time Job

Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.

Click Here For Your Free eBook!

5 Big Issues Distressed Properties Hide (& How to Detect Them)

1. Termites and Carpenter Ants

These bugs can really do some damage if they are left to do their thing for a long enough time. Heck, they can even be long gone but leave behind enough damage to cause serious concerns. Sometimes bug damage is obvious, but other times it is hidden and unknown until your contractor tries to drive a nail and turns the stud into dust. I recently bought a house with some pretty severe termite damage that was not seen until we ripped out some old drywall. There was simply nothing left to screw the new drywall into. It ended up costing me $2,000 to fix it.

While my situation above was completely hidden, there are some clues you can look for. Rotten wood is an obvious one. Other clues can include thin tubes of mud running up a wall, small piles of sawdust in odd places and tiny holes in wood or walls. Look closely because they can be small. If you sense something may be hiding, try punching a screwdriver in the wall. Does it go right through? If it does or you see any of the above, proceed with extra caution.

2. Water Damage

Water can be really sneaky. It can drip for years behind a wall or under a house before damage will show. I have bought properties that had rotten beams under tubs and barely anything holding up the kitchen cabinets. There was really no way of knowing about these things until we ripped them out to replace them. Water damage can be pretty obvious, however, if you look in the right place and know what to look for.

Here are some tips.

  1. Lightly bounce on the floor near the toilet, tub and all sinks. If there is any give, investigate further.
  2. Look under the house if you can. Take a high powered flashlight. Are there standing pools of water or discolored joists? Ask why and investigate further.
  3. Look for mold. Mold needs moisture. If you see mold again, ask why and investigate.

3. Sewer Line Collapse

Sewer lines do not last forever. Tree roots and things flushed down the toilet eventually do them in. The trouble is, they are underground and you cannot see them. In addition, many times the utilities are not on so you cannot test them. Sure, you can hire a plumber and run a camera down there, but they cost time and money you may not have.

There are clues, however, which may tip you off. First, look for signs of obvious digging in the yard where a sewer line might be. Why was this area dug up? Second, look for green grass in an otherwise brown yard. Why is the grass green there? Third, look for small depressions or holes in the yard, as a broken sewer line often creates a sinkhole. Finally, if I see a neighbor, I like to ask them if they know anything. Just strike up a conversation and often their tongues will start wagging (works great for other issues as well).

4. Leaky Plumbing

As stated above, water can be really sneaky and leaks can be hard to detect. They may be behind walls, under the house or even underground. If the utilities are off, there is really no way to determine how leaky the plumbing system is until you get them on after you buy the property (sometimes you can get them on for a test before you buy a property, but that is a real pain here).

If you do have utilities on, check for leaks by finding the water meter. Take a look at it. Is the meter spinning or still? If spinning, there is water running somewhere. Make sure everything is turned off and try again. Still spinning? You have a leak. If you can’t find it in the house, it may be underground. Look around in the yard for puddles or running water, as your water line may be corroded.

Related: How to NOT Over-Improve Your Properties: 3 Key Levels of Rehab Finish

5. Electrical and Natural Gas Issues

These may not be as common as a leaky pipe, but they can be a lot more dangerous, as they can be very dangerous. With the utilities often off, it is impossible to smell leaking gas or know which breakers will trip and spark. Still, most of these problems are relatively minor and easy fixes, but they can get expensive, especially if a plumber has to search and search for that gas leak.

These hidden items have the ability to crimp your rehab budget and throw you off schedule, but you can prepare for them. Any time I estimate repair costs and a rehab timeframe, I like to budget extra for these hidden issues. Something on this list always pops up.

How much to budget? I like to add about 10% of the total rehab budget to an “oops” factor. Thus, if I think it will take $20,000 to rehab a property, I will add $2,000 to the budget for hidden items. I may not need it all, but it gives me peace of mind knowing that it is there. If a property is in really bad shape, I might bump this figure up to 20% to cover my butt — because you never know.

What hidden problems have you found in your rehabs? How much “oops” do you budget for?

Please share with your comments.

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

33 Comments

  1. margaret smith on

    Hey Terron-
    This is just great stuff- I particularly love the clues you give us as to how to inspect for hidden issues. I do want to add that there can be hidden problems on the contract side, too! Seems these problems are becoming more prevalent here in SW Florida, esp with distressed properties, and they can stop you dead in your tracks. Who wants to fix up a beautiful property, only to discover that you can’t sell it to the next buyer due to liens and title issues?

    As a private money lender, I have recently had to add to my own list of items to watch for- and have adjusted my lending criteria accordingly. Now, with every deal that a good rehabber brings to me, before I commit funds, I insist the immediate due diligence include a title search, a municipal lien search, and a survey, if none of these has been done recently. If these things can be satisfactorily done within the inspection period on the contract, this saves everyone huge headaches later on. To be sure that items which show up on these reports do not cause a problem, best to include a sentence or two within the contract for purchase, stating that problems which occur as a result of buyer’s due diligence in these 3 areas, and that may affect the clear marketability of title, may affect closing date. Any problems will be 100% rectified by seller within new timelines as agreed by both parties, or cancelled by buyer, with full return of any deposit by seller or escrow agent within _ days of receipt of written cancellation.

  2. Jason Miller

    Kevin, I run a sewer scope prior to any purchase. $130. I think you have to know your area as well. Some areas I invest in still have clay pipe that is working great, other newer areas have cast iron that had long ago collapsed. Often times you can see neighbors houses. If many neighbors houses have fresh concrete patches or yard work, but yours does not, you may have an issue.

    • Kevin Perk

      Jason,

      All very good points. In a hot market though, you may not have time to run the scope before the property is under contract to another investor. If you want the deal, you may need to move fast and just budget a bit higher. But I agree with you that a scope is an awesome tool if you have the time to get it done.

      Thanks for reading and commenting,

      Kevin

    • Kevin Perk

      John,

      Yes it does. And you are correct, these items can be hidden as well. At least you can leave two of them alone (asbestos and LBT). Mold however needs some immediate attention. Hopefully fixing the roof or plumbing leak will take care of it.

      Thanks for reading and commenting,

      Kevin

  3. margaret smith on

    Hi Kevin-
    Please accept apologies for referring to you as Terron! Must have been having a brain spaz- Won’t happen again! Anyway, just want to add to John’s post–that I look right, left and across the street for pit bull or similar action in yards. Imagine being your next buyer. Certain things neighbors are doing- or not doing- may well prevent your house from being truly marketable.

  4. Lisa Maceda

    What DIDN’T we find in our first property? Sewer line blockage-check. Hidden water damage-check. Carpenter ants attracted to the moisture in the water damaged wood-check. I’d do the scope on the sewer pipe any day of the week to potentially save $6,000 which is what it cost us to fix. Also look for piles of wood or trees with ant activity. The house we bought was the only one we looked at with an addition that wasn’t threatening to separate itself from the house, but that was too good to be true. No permit for it on file with the city so we got to deal with that too before we could touch it. I would check for that sort of thing again with the city next time I buy a place

    • John Hickey

      Great article Kevin, another I wished I’d read before I bought!

      I would tell people to beware of a finaihed ceiling or walls in the basement. It’s a great value to have a finished basement but there is so much down there that could be hiding water damage, termites, structural issues, poor electrical etc. An unfinished basement tells a lot about the house.

      On termites I bought a 3 family house. The first floor apt had new carpet and a newly finished basement. We did a house inspection, few issues nothing major all good.

      A few months after closing I pulled up the carpet to find a crazy patchwork of layers of plywood 2x4s and shims. Under that was the rotted subfloor and joists so badly termite damaged that every joist and the main beam had to be replaced. 36 joist’ on the first floor and 15 on the second floor. It cost a lot for the materials but I saved by doing the work myself with a buddy.

      I called the former owner to ask him about it and he said he had no idea what I was talking about. He said he must have bought it like that too. I wasn’t so sure about that because he bought in 05 and the plywood had Home Depot date stamps from 06. Buyer beware. Now I look for mud tubes, poke a few joists and the main beam with a screw driver just like you said. Good advice.

      Having said all that I’m a buy and hold guy so while it costs me money it doesn’t wipe me like it would if I was flipping.

  5. In cool climates basements are issues. Finished basements, to be exact. I am getting soaked right now because I purchased a home with a finished basement to find a massive horizontal bow and crack in the foundation from freezing/expanding soil. My new rule, if the basement is finished, $20,000 off the contract price. Even then, the fix is to dig out and add support beams. While the support beams are actually awesome in terms of permanently solving the problem, not all buyers like the look of the beams and clearly it shows there was a problem once. Then again, some buyers like the fact the problem is fixed.

    • Kevin Perk

      M,

      Basements can be fun. Not much of an issue here as they are uncommon, but guess what I bought to live in, yep, a house with a basement. It had water issues but I found that some gutters and drains to move water away from the house solved the problem. But I know that sometimes it can take a lot more than that. I am much more careful now if I come across a house with a basement.

      Thanks for reading and commenting,

      Kevin

      Kevin

  6. Thank you for your article. I just wanted to point out that old houses like the ones in San Francisco where I live may have really, really, really old wires in them. My home was built in 1885. In the downstairs flat all of the wires are burning out. They’re so old that it costs over $400/ month just to run a few lights, a fridge and a few computers. I’m going to have to rewire the entire flat. The other units upstairs must have had their wires replaced because the cost is not as high to run several times more devices.

    • Kevin Perk

      David,

      Wow, I have never heard of such a thing. I run across old knob and tube here but if left alone it is generally ok. Then again that is after 1920 or so. I will have to keep that in mind if I look at a pre-1900 house.

      Thanks for reading and sharing,

      Kevin

    • Joe Cummings

      @David Sundy

      Whoever told you that your K&T is running up your electric bill is full of shlt. I’ll bet you find some kind of parasitic load, like you are supplying common areas or another apartment off of your meter.

    • Jen Shrock

      I agree with you about the old wiring. When I purchased my own personal house, I replaced all of the knob & tube wiring and my electric bill dropped by almost half. It wasn’t something that I expeced, but something that I certianly appreciated.

  7. Jared Caplinger

    Hey Kevin,

    Good article. Thanks for sharing your experience.

    Have you had any experience with damaged foundations? I know there are companies that will repair cracked foundations with epoxy injections and carbon fiber straps. They claim that these are guaranteed for life and that the warranty is transferable, but I’m concerned about the effect on the properties resale value. What are your thoughts on owning or re-selling a property that has a visible foundation repairs?

    • Kevin Perk

      Jared,

      Not really. I find that a letter from an expert, like an engineer will do wonders, but you will have a harder time on the resell. That said pull permits, get expert advice and document everything and you should be ok in the long run.

      Thanks for reading,

      Kevin

    • Kevin Perk

      Theodore,

      It gets really fun when they put a pool over the field lines!

      Thanks for the heads up to everyone out there. Replacing a well or septic is big, big money. Have them tested if your can before you buy.

      Kevin

  8. Jerry W.

    I always replace knob and tube wiring. There are just so many things that can go wrong. It seems like every third house I buy in about 5 years the sewer line develops a problem. I tend to take garbage disposals out of rentals, they seem to invite abuse. Cast iron pipes can also look great in one area then have major rust/rotting only a few feet away.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php