3 Potential Maintenance Hazards That Tank Deals (and How to Spot Them!)

27

G’Day, everyone. I hope you’re well and that you had a great Easter holiday. It’s time to get back into things and hit those numbers again. How many emails, calls and meetings have you committed to? I always stress that if you do the small things consistently, it will allow the big things to just fall into place. Keep pumping the numbers daily, and you will see the miracle happen.

Today I want to share with you my opinion on the top 3 potential future maintenance issues to look out for before purchasing a property. This is not exactly my complete area of expertise, but I have always followed a rule of having smarter people around me doing the things that I can’t do or don’t want to do. Using this approach has enabled me to learn as I go while growing my knowledge base.

Imagine this scenario. You have found what appears to be a steal in a hot market like Toledo or Dayton, Ohio, and you have an accepted offer and are in the inspection period. It is easy to look at the purchase price as well as the drafted after repair value based on comparable sales and be on cloud nine about what you have in front of you. However, do not get ahead of yourself — because some homes that may seem like diamonds in the rough turn out to be big lumps of coal if you do not examine these three key maintenance hazards.

Related: Act Now, Thank Yourself Later: A Preventative Maintenance Checklist for Landlords

The 20 Best Books for Aspiring Real Estate Investors!

Here at BiggerPockets, we believe that self-education is one of the most critical parts of long-term success, in business and in life, of course. This list, compiled by the real estate experts at BiggerPockets, contains 20 of the best books to help you jumpstart your real estate career.

Click Here For Your Free eBook

3 Potential Maintenance Hazards That Kill Deals (and How to Spot Them!)

Maintenance Hazard #1: Foundations

One of the first things we look at with the homes we intend to purchase is the foundation. No matter if it is a basement, crawl, or even slab (rare in the area, but still an item we have found), we want to be sure the foundation is in good shape. Without a good foundation, the cost of repair and ongoing maintenance can be a profit killer for any deal. We look for signs of cracking on the exterior of the home, examine the ground around the home to determine if water damage could be possible, and pay very close attention to any chips or blocks that seem out of sorts, broken, or shifting. From the exterior view, we can generally tell major issues.

In the case of a basement, we will always look for signs of water infiltration and issues by again looking for cracking or worn out grout on the interior of the basement walls or staining on the walls, especially a few inches off the ground. We also examine any mechanicals in the basement to see if any water has damaged them in the past. If we see any warning signs of current or previous foundation issues, we will not go forward with a purchase and will escape our contract within the inspection period of the purchase agreement.

Maintenance Hazard #2: Roofs

During our walk around the property examining the foundation, we will also look at the roof as a potential maintenance hazard. This hazard can be a very pricey item down the road if we do not take prudent steps in looking over the roof, gutters, shingles, and more in our inspection. We will look for major slopes, grooves, or weak spots on the roof. This could be a sign of issues with the roof decking, indicating weakness in the structure of the home or aged materials requiring costly repair down the road.

We will look at the condition of the shingles (and if there are multiple levels of shingles). Curved shingles, missing shingles, or more than two layers of shingles all point towards the age of the roof being over 15 years. We will examine soffits and, if applicable, venting. In general, we are looking for an age on the roof to be no more than 10 years and in proper shape to avoid maintenance hazards down the road and to assure we do not see major expenses early in the life of the property.

Maintenance Hazard #3: Electric Panel and Furnace

Ok, maybe there are technically 4 maintenance issues. The last two are simple to explain, but are indeed very important to review as you finish your inspection walk through of the property. When we hit the basement or garage, or wherever we find the panel, we are looking to see if the house has a minimum of 100 amps. These days, with all the electronics tenants and homebuyers have, if you do not have 100-amp minimum, you will undoubtedly run into issues with electric in the home. These issues are not only maintenance hazards, but fire hazards as well.

The furnace along with the electric is one that requires care in examination. We are looking to see if the home has at least an 80% efficient furnace. Without due care in examining the furnace and the age of the unit, this can quickly lead to issues once you get the property to close and begin work, let alone once you have the unit tenanted.

Related: 4 Common Maintenance & Repair Mistakes Property Managers Make

When buying a property, do not be fooled by great pricing with motivated sellers and the perception of a great margin. We will never allow major maintenance issues to slip by us because we are looking at the potential profit in the deal, as maintenance issues should never be passed along to the next buyer. Keep your head in the game, be thorough with your inspection, and when in doubt, get a second opinion from your trusted partners and contractors just like I always do.

Investors: What items would you add to my list? Have you ever been burned by purchasing a property with one of these major issues?

Leave your comments and tips below!

About Author

Engelo Rumora

Engelo Rumora “The Real Estate Dingo" is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

27 Comments

  1. sean matthews

    Great post Engelo. I have an apt on a higher floor, so most of these are not relevant. However, its also good to check out the small irritating aspects as well, especially when your cash flow is not that high. I would suggest a simple check of all the plumbing and electricals inside to check for any signs of electrical/water damage – try to look and find patch work; signs of patching up burns, leaks, etc. – can be a good indicator of past deficiencies.

    • Engelo Rumora

      Hi Sean,

      Thanks for your comment and input.

      Another thing to consider is having a trusted contractor accompany you or take a look afterwards just to make sure something wasn’t missed.

      Thanks again and have a great day

  2. Chris Newman

    Great info, Engelo! This is superb House Inspection 101 stuff that everyone needs to learn as early as possible.

    While creative deal design and financial considerations are certainly big deals, ultimately most deals involve determining the actual physical conditions of buildings. It’s not necessary to be an experienced contractor to understand the basics and you’ve shared that nicely.

    There is such an overwhelming amount of new information to learn with real estate investing that it’s easy for newbies (and not-so-newbies) to have not yet figured out which condition assessments to focus on first. A purple bathroom, dirt or broken windows may make us wince, but those are cheap and easy to fix. 75 year old original wiring isn’t, but you need to understand what it even looks like.

    After “location,” the three (well, four) physical considerations that you covered are pretty much the most important to check in the first cut. Most of the potential major problems aren’t that tough to recognize, if you know what to look for.

    Things like chipped foundations, high water marks in the basement, electrical fuses instead of breakers (and how to read the numbers on master breakers to determine amp capacity) etc. are all excellent red flags, once they are understood and we become sensitive to them. Once we recognize red flags, we can then decide what to do next: Consult with an expert or just walk on to the next potential opportunity, with our money still in our pocket.

    One nice thing is that we don’t even have to be considering buying the property in order to practice and strengthen our awareness of physical conditions. For instance, every time you see a house, check out the roof and try to assess its condition. After a dozen times, it quickly becomes second nature, which is the essence of mastery.

    At the risk of going in too deeply, from a startup REI education perspective, this prioritizing is a variation on the idea of triage: “When resources are limited, the best results will come from focusing them onto the areas where they will have the biggest long term positive impacts.”

    In other words, the best results will come when you focus your efforts where they will do the most good, despite how we may instinctively feel about it. i.e. Focusing on “The One Thing.”

    The same idea applies to education, and especially the kind of self-guided education that is the course of most real estate entrepreneurs, and especially here on BP.

    Our time and mental resources for education are limited. So, we’ll serve our goals best if we first focus our “learning resources” on understanding the big expensive physical elements, like foundations, roofs and electrical issues. You’ve summed them up nicely here.

    Have you thought about distilling your advice into a “Red Flag Checklist” for preliminary building assessments? This could mostly be a simple checklist that folks could download from the BP FilePlace and print out for reference as they walk a property – sort of like you holding their hand during the inspection. Within the several categories would be red flags, such as foundation cracks etc. I know that I don’t have to explain that part to you. 🙂 There’d certainly be room for you to do a little self-promotion at the end….Anyway, I’d download it and be grateful.

    Thanks again for another great article. We’re looking forward to more.

    • Engelo Rumora

      Hi Chris,

      Thanks for your kind words and detailed comment.

      I very much enjoyed reading it 😉

      Yes and Yes, construction is definitely not my area of expertise and the basic hazards to look out for that I mention in the blog have been brought to my attention by other more experienced investors and contractors that I have worked with over the years. Construction here in the US is a different world to construction in Australia so I think I give it a good GO with what I know here hehe

      I will definitely look into that “checklist”. I have been very pressed for time lately and am finding it hard enough to submit these blogs as is haha

      Thanks and have a great day.

    • Emily S.

      Chris, your idea of a remedial check list to take on walk throughs, potentially even before having a contractor or inspector look at the property would likely be well received by this community. Anyway, I’d download it and be grateful, too!

      There have been several blogs I think and even posts from people like Dawn Anastasi (I think it was her) that elucidated some basic walk through criteria and were very helpful. As a beginning investor, I struggle with wasting time of other professionals simply due to ignorance. These blogs, posts, and ideas like checklists are what make this slightly less embarrassing for us little guys, as long as we’re willing to put the time in to learn from them. Thanks for your insight!

      • Chris Newman

        Ah, a kindred spirit, Emily!

        What would make a lot of sense to me would be for a bunch of BP folks to work together in a dedicated forum post to crowd-create this list.

        Everyone, of whatever skill level, could contribute the best of what they’ve found or learned about preliminary structure walkthrough inspections, then decide how to winnow that down to an ideal list for everyone to use. If we’re going to play with buildings, we need to learn how all the parts work and this is how.

        Some new connections should come out of that, too. Isn’t that part of “The Bigger Pockets Way?”

        All it would take to try this is for someone to assume the leadership and get the ball rolling. Maybe let Brandon know so that he can feature it in one of the newsletters, and contribute himself.

        I don’t have the time to do this, but would be happy to contribute. May I suggest that you take the reins on this new project? It will be good practice at leadership, with nothing really to lose.

        If you can bear with some philosophizing, a common BP theme is newbies who just can’t bring themselves to take the first step. The central stopper, as near as I can tell, is a leadership issue because most newbies aren’t used to the role of being the leaders of their own lives. Their learned mindset is Subjective, rather than Objective. So, they seize up like a deer in the headlights.

        I have two thoughts on Leadership:

        “Nobody ever gives you leadership power: You have to reach out and take it.”

        “Unless you’re the lead dog, the view never changes.” 🙂

        Something to think about, at least.

        If you launch this new group project, please PM me to let me know.

        Chris

      • Engelo Rumora

        Hi Emily,

        Thanks for your comment.

        Don’t be embarrassed.

        I still get 1-2 contractors to walk through with me on every deal.

        Many times they will be like “Engelo, and you’re telling us you have done 300 deals but you don’t know this” lollol

        My reply is always “That’s why I pay you to know” haha

        Thanks and have a great day.

  3. Ayodeji Kuponiyi

    Great article Engelo. Those 3 will hurt an investor’s profit if there’s any issues with any of those 3. It’s pretty much like house inspection 101. Unless you’re ready to pay for any of those 3, it’s best to walk away from a house that has all those problems.

  4. Brendan Morin

    Hey Engelo,

    Great article! I’m a newbie investor under contract on my first 4plex. One of the things the inspection did reveal was that the furnaces were all very old (original units from 1983 home) but still functioning. This was a bit of a red flag for me due to the potential for pretty significant short term CapEx, but as of right now, I am still pressing forward with the deal (on the condition that the furnaces are professionally serviced) for two reasons:

    1) Half-life – They’re all the same type of furnace. While they may all be old, if something was going to go wrong with this particular furnace type, it would likely have happened to at least one of them. Since all 4 are all still kicking, it seems like a pretty good indicator that they’re not quite at the end of their life yet.

    2) Cash flow – Even with conservative (high) maintenance estimates on the property, it still cash flows pretty well and allows me to budget establishing a property furnace fund that should cover all 4 unit replacements within 2 years of purchase, should the need arise.

    I’d be interested in hearing what more experienced investors think – is Murphey’s Law going to destroy me, or is this sound reasoning?

      • Brendan Morin

        Deanna,

        That’s certainly a possibility! That said, even if that’s happened a few times over their life, that still shows some pretty great longevity that they haven’t required a full replacement yet. Now that I’ve bought the place and have my contingency fund established, I like to be optimistic about their future lifespan =)

  5. Engelo Rumora

    Hi Brendan,

    Thanks for your comment.

    Maybe you could also ask for a slight reduction on the price?

    Always over estimate your expenses and underestimate your income.

    If the numbers still work, then the deal might be a good one 🙂

    Thanks and have a great day.

  6. Darren Sager

    Great read Engelo! I would also add a major fourth to your lists which is pests. Primarily wood boring insects. If there are any signs of damage anywhere you can’t get financing on the property without proof of treatment. It’s very important to learn how to spot evidence of termites, carpenter ants, and other nasty critters that munch on homes. Good mention about venting the roof. So little truly understand the importance of this.

  7. John Barnette

    All good. But also relative to “the deal” and overall cost. Also the typical housing stock. Here in SF Bay Area much of the housing is old, not frequently well maintained, and quite expensive. However also rarely goes below 40 degrees or above 80 in the city. Thus not really a big deal to have an old inefficient furnace or lower amperage electric panel (no ac and often gas appliances). Plus the approximate $6000 each give or take to update is paltry relative to home costs and rents.

    Water issues – absolutely. Always checking out how a property sits on the lot and drainage (hopefully) away from house. Old houses and foundations, wood construction, fairly wet climate and for sure foggy, porous soil. An all you can eat buffet for termites and wood beetles.

    Good article for the less seasoned. Great points. But also can make for a great deal if you can find a significant discount on a fixer in right area and right size, layout, special features….

  8. Dina Garcia

    Well I can see right now I am setting a new standard for the group(that might be new “low” standard). I say this because the house I just bought (for 14K in back taxes+ 1K before auction)has all of these issues. I plan on fixing the foundation(12k) done, repairing the electrical system (starts Monday $1200) replacing the plumbing (estimated at 3k since everything is exposed and readily accessible) a new roof at 6K, new floors, walls, cabinets, and a few windows. All in all I budgeted 35K for rehab, daily expenses , and closing costs and ARV is 102K on the low side. I expect to double my money and have set a schedule to be completed in 10 weeks or less. I really believe I can do it. The last (and first) flip took me 6 months for repairs and it was under contract the third day it was on the market. I made 20K. This one is more work so I hired more contractors instead of me trying to do most of the work. I knew the damages when I bought it but thought it was cheap enough to make money. I guess you all have already learned better and can sit back and smile and ask me in three months how it’s going, huh? But until then I would appreciate a lot of “you can do this” if you have any to spare. I am also busy trying to buy my next (less distressed than this one) property before it is auctioned off. Thanks I love Bigger Pockets! For someone just jumping in it has been a blessing!

  9. William Carson

    For those of us that rehab in rural areas with on-site septic, the septic and waste disposal systems need to be checked too. when you’re talking 20k to install a new sand mound, that could at up all of your margin if you don’t check them out first.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php