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.
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.
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.
- Lightly bounce on the floor near the toilet, tub and all sinks. If there is any give, investigate further.
- 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.
- 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.
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.