322: How to Save Thousands with Inspections Before You Buy

SHOW NOTES FOR EPISODE 322: HOW TO SAVE THOUSANDS WITH INSPECTIONS BEFORE YOU BUY

Buying the right property the right way is critical to every real estate investor’s success  And property inspections are an essential due diligence element required to insure an investor buys properties the right way.  In this episode, Bill shares the reasons why property inspections are so critical and what key things a good inspection must include.

First off, I want to thank the Wamhoffs (much valued listeners to the Old Dag’s REI Network Podcast) for bringing to my attention that we haven’t had a lot of information on property inspections – yet they are a critical part of the property acquisition process.  Therefore, I want to thank them for inspiring me to do today’s podcast on inspections.

So you’ve found the property you want, at the right price, in the right market, all the numbers work and it looks like it’s in pristine condition. But always keep in the mind that, particularly when it’s an off-market deal and you’re dealing directly with the owner, the property has been “dressed up” to accentuate its best features and minimize its potential flaws. So, before you close on the purchase of a property — or sometimes even before you make an offer — you should insist on an independent inspection by a professional inspector.

Many sellers have had inspectors and appraisers look at the their property for purposes of the sale and are aware (or should be) that buyers will likely ask for another inspection independent of their own. This podcast will focus on why inspections are necessary, what to look for during inspections, and when to carry out inspections.

Why Property Inspections are Important

If you arrange for an inspection by a professional before the sale goes through, the problem is still the seller’s. If you choose not to have it done, the problem, unfortunately, becomes yours.

The number of inspections performed increases each year, with more than 90 percent of home sales involving a house inspection, according to the American Society of Home Inspectors (ASHI). While this number doesn’t differentiate between a seller-based inspection and buyer-based inspection, it certainly indicates the significance of inspections in the buying process.

According to most inspectors, homes are sometimes not particularly well cared for by owners, who are slow to fix leaky faucets, replace heating or A/C filters, or clunky furnaces.   So, if a person’s personal home that they are living in can be uncared for, imagine what conditions a foreclosed home or apartment can hide. Mold can grow if the water hasn’t been turned off and the environment becomes moist. If the home is boarded up and there is no ventilation for weeks or months, black mold can grow fairly quickly.

Because of its importance and the implications it might have on the actual value of the property, you should make the purchase contingent on your approval of a home inspector’s report.  When making a written offer for a property, simply make it a condition of the purchase.  If your  inspection comes back clean, you can proceed with the sale with confidence.  And if the report is negative, you can reduce your offer, make the seller pay for any repairs, or even back out of the contract altogether.

What a Property Inspection Entails

It is important for buyers to know what they should expect from the inspection process, and what you generally get for your money. Because there is no uniform certification or licensing process for inspectors (more on that below), inspections vary according to the person or company that does them and the type of property.  Generally, an  inspection will include a report on the type (and relative health, where possible) of the house’s heating and cooling system, electrical system, plumbing, walls, ceilings, flooring, foundation, roofing, drainage, and basement.

Because inspectors are not licensed in most states, inspections will typically not include analysis for problems which licensed professionals generally give advice. These issues include termites, chemicals and gasses (such as asbestos or methane gas), lead, or rodents.  You should inquire into the presence of such problems. Inspectors may be more willing to share such information “off the record” (because of their lack of certification in a particular area) and then you can call a professional in that field to give a written analysis.

For example, you might ask an inspector if there is a termite problem, and he may tell you that there’s a good chance of it but not put it in his report.  It would be incumbent upon you to get a pest inspection of the property to get an official report.

Note that an inspection generally covers only moderate to serious issues and does not detail each and every scratch and dent in the property. If you want a more exacting report, you should discuss this with your inspector (a higher fee is likely) and walk through the property with him or her during the inspection if possible. (I do this with every inspection and will walk through every unit – even if it has hundreds of units). Not only will you learn more about the process, the tenants and what to look for, he may give you information on small flaws that he may not include in a report but you might want to be aware of for the future.

A house inspection will run about $300 to $500, an apartment inspection can run $100-200 per unit depending on the person doing the inspection and factors such as the size, age and type of property.

What to Look for In an Inspector

The first thing to note is that most states do not have a certification or licensing process for inspectors.  If your state does not have licensing criteria, there are organizations such as NASHI which are nationally recognized as maintaining and requiring a certain level of expertise and competency from their members. You should make sure that your inspector is a member of such an organization or is a licensed professional in home construction (e.g., a general contractor).

Because you want the inspection to be independent of the seller, you should not take the seller’s inspection report at face value. You may not even want to hire an inspector your realtor/broker hires because the the realtor/broker has a vested interest in the sale of the property.  Many owners do take a referral from their realtor, however.  Ideally, you want someone licensed or part of a professional organization, who is completely independent of all of the parties involved in the sale of the property.

Other Inspections

As noted above, general inspectors are not licensed to inspect for particularized issues such as pests, gasses, etc. although some will include that info as part of their report.  It would probably be in your best interest to get at least a pest inspection done, particularly if you’re in a high risk area.  If you are in a high risk area for floods or earthquakes, a specialized inspection to gauge the property’s susceptibility to those risks would be wise as well.

For most commercial properties you would also need to include an Environmental Survey as well.

We have a more detailed breakdown of the inspection process and an inspection checklist in one of our blog articles entitled “What to Expect When You are Inspecting.”  A link will be provided in the Show Notes.  And here is the NACHI Official Report Checklist.

Well, that’s it for today!

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