As any seasoned property investor knows, real estate is a tough business where all that glitters definitely is not gold. This is why the details really matter when taking a look at your first property. Case in point: the property inspection. Aspiring homeowners need little convincing regarding the value of a home inspection, what with the twin requirements of their lender demanding one and their better-judgement knowing they can’t afford to risk their nest egg without one.
Investors, however, often stand at the threshold of a property with a false sense of confidence, guided by their ‘instincts’ or ‘gut feeling’ on the potential upside of the deal, which can cloud their ability to spot issues during a walkthrough.
There’s no denying that today’s market is red-hot, which, together with an appreciating neighborhood, can cover-up a multitude of sins for a poorly-selected property. Most properties, however, won’t be so lucky to have an upside material enough, especially in the first five to seven years of ownership, to conjure large returns out of thin air on their investment. As such, the condition of the property is crucial, especially during the first 12 to 24 months into ownership when cashflow is thin and expectations are high.
Imagine for a minute buying a new home, only to have the roof leak the next day, literally raining on your parade. Or having your tenant point out large ruptures in the wall that you hastily wrote off as ‘settlement cracks’, which now seem to threaten the very foundation. These are the issues that a thorough home inspection can uncover, providing you with a clearer path to returns on your investment.
To this end, My Smart Cousin has developed a Definitive Home Inspection Checklist to arm you with your own toolkit for your first or twenty-first home inspections. Before diving into this, let’s understand what a home inspection is, and those areas it should cover.
WHAT IS A HOME INSPECTION
The word “inspection” may sound invasive and even induce some knee-knocking, but it’s not as frightening as it may seem. A home or property inspection is a physical exam or check-up to gauge the infrastructural soundness of the house. Home inspections work in favor of the property owner to-be, that is, lil’ol’ you, and are particularly important to use when considering houses that are vacant and have sat unoccupied for many years.
The home inspection profession is regulated in nearly all states, and licensed in a few. Your first step in selecting a home inspector is to ensure that he or she is licensed and insured. You are able to accomplish this by requesting a copy of the inspector’s license and liability insurance policy for the current year.
WHAT INVESTORS SHOULD LOOK FOR IN A HOME INSPECTION
Investors should use a home inspection checklist when looking to purchase an investment property, even if the only one doing the inspection is them. With an inspection, you can identify potential problems hiding beneath the surface. Some problems might be minor, say holes in the drywall or doors, while others could require significant repairs and remediation, for instance, extensive mold, flaking lead paint, or exposed asbestos insulation.
Grouping issues into major and minor categories can help determine whether there are any issues that are significant enough to walk away from the deal.
As mentioned earlier, home inspections serve buyers’ interests and can be a great bargaining tool for investors. If a long list of items doesn’t pass inspection, the prospective buyer can use one, some or all of the items on the list as leverage to negotiate a lower price. This is particularly the case if the investor is working with a motivated seller— a bank or a house that has been listed for months on end. And if the seller doesn’t bite and offer concessions, well, no harm no foul, you can proceed on with the deal if you’re satisfied with it as is.
WHAT TO DO WHEN THE INSPECTOR FINDS AN ISSUE
Once the inspector completes their inspection, they will provide an inspection report. The inspection report is a crucial part of the home buying process that will likely uncover at least one problem. Minor problems won’t affect your offer much and should be placed in the category of ‘fix-it-yourself’ once you purchase the property. But heavy-hitters affecting the structural integrity of the property will require a conversation or two with the seller. If the seller agrees to accept a reduction to the price or some other trade-off, ensure that the concession is binding by having it enshrined in an agreement that your lawyer prepares.
And, of course, if the issue is too extensive or costly to repair, even with a discount, then walking away might prove the better option.
Pro Tip: If you are a new investor, your real estate agent and home inspector can be great resources in understanding how bad, or not so bad, things really are.
After your home inspection, you’ll receive a comprehensive report numbering some 20 to 40 pages that includes detailed descriptions and images of each item in the house that was inspected. Think of your home inspector as your teacher or mentor when you receive this report— ask the inspector to go through the report with you. Once you sign the report, you’ve essentially agreed that it’s complete and you accept it as-is. As such, now is not the time for bashfulness. Put aside any qualms you have about not wanting to be a bother, and get all of your questions out of the way regarding the report.
CONDUCTING AN INSPECTION ON YOUR OWN
Self-inspections are the best way to go if you want an affordable home inspection, and the property appears to be in good shape. Properties that are currently occupied with a renter can be good
candidates for self-inspection because the house is habitable at some level. A do-it-yourself DIY inspection can also be used if time or money is in short supply. If so, then just ensure that you’re not trading in a short-term problem of not enough cash for an inspection, for a long-term and much more expensive one of having to remedy structural and equipment issues with the home.
Pro Tip: Before going the DIY route on an investment property, practice on your own home first. Arm yourself with My Smart Cousin’s Definitive Home Inspection Checklist, and get comfortable with and practiced in looking for trouble spots.
THE MOST IMPORTANT AREAS FOR INSPECTION
So now that you’re geared up and ready to hire your home inspector, let’s review those areas for your inspection checklist.
• Pests: If termites or other pests are compromising the property’s structure, then prioritize assessing the extent of the damage, and determining the cost to remedy and prevent further damage.
• Roof: on the face of it, a roof is a roof is a roof. But an inspector can tell you not only how old and how much wear a roof has, indicators of whether you will need to replace it soon, but also how many layers it has. Up to two layers are allowed for asphalt shingles, but prior owners, seeking to avoid the cost of a roof replacement, might’ve created a virtual seven-layer cake’s worth of shingles, requiring urgent attention from the new owner (read, you). Flat roofs are more prone to leaks than sloping roofs, as ponding or pooling can occur in low spots on the roof, eventually leading to seepage.
• Electrical: electrical wiring that is up to code is critical when evaluating investment properties. Your home inspector will check the panel box, circuit breakers, surge protection system, outlets, switches, interior and exterior lighting, grounding and other potential electrical issues.
• Foundation: a cracked foundation can cause a house to collapse. If serious foundation issues are raised, the inspector will likely recommend that you have an expert, such as an architect or structural engineer, evaluate the property.
• Well and Septic System: If the property is not on the public water and/or sewage system, you will want to hire a well inspector and septic inspector. Unfortunately, both of these inspections are separate from and thus added costs to the home inspection. But issues with either can run into the several thousands of dollars if not addressed.
• HVAC System: the HVAC system comprises the heating, ventilation and air conditioning systems in the house along with the ductwork and vents that moves the heated or cooled air throughout the house. As such, stand alone electric heaters or window air conditioning units are separate from the HVAC system. The most expensive HVAC items to replace are the furnace, which can cost $10,000 or more with installation, and the need for ductwork in several rooms, which requires breaking into walls to thread in new ductwork.
Once the inspector has provided the house’s major items with a passing grade, you can begin checking lower-priority items to determine what will need to be repaired or replaced.
KITCHEN
• Cabinetry: Check the kitchen drawers and cabinets to ensure that they open and close smoothly, and that none of the cabinet doors, shelves or drawers are broken or missing hardware.
• Stove: Check the stove burners and oven to ensure everything is working. If the stove needs to be repaired, you’re probably better off replacing it, as the cost of repair is often neck and neck with the cost to replace.
• Dishwasher: Check the dishwasher door and make sure it opens and closes properly. If the water is on at the property, run the dishwasher through a cycle to ensure it washes, rinses and dries. If the pipe leading to the dishwasher is leaking and you’re quoted with a high price to fix it, an alternative might be to remove the dishwasher altogether, cap the pipe and instead build in existing cabinetry for storage.
• Sink: Test the water pressure in the sink and ensure the faucet isn’t leaking.
Pro tip: place a paper towel under the sink, run the water, and then turn off the faucet. Leave the paper towel there while you walk the rest of the house. Just before you leave, check back to see if the paper towel is wet due to any slow drips that may have occurred after turning off the water.
BEDROOMS
• Doors: Check the bedroom and closet doors and windows to make sure they open, close and lock.
BATHROOMS
• Toilet/Tub: Flush the toilet and give the tank and seat a light push to make sure they’re secure. Check the sink and tub for leaks.
• Extractor Fan: Confirm that the fan is working.
BASEMENT
• Leaks: Put aside any fears you have about spiders and creepy- crawlies and go into the basement. Check to see if there are any water stains on the walls or floor, which could indicate flooding issues. Also check for cracks or holes in the wall, and signs of mold or mildew.
EXTERIOR
• Curb Appeal: Test the water pressure in the sink and ensure the faucet. Decisions are often made based on first impressions. And even if you, as the buyer, can look past the overgrown weeds and broken fencing surrounding the house, your renter or purchaser might not be able to. Take a walk around the front and back and examine the steps, porch, lawn and even sidewalks and driveway along the house.
Pro tip: not only can sidewalks pose a tripping hazard, your property insurance company may raise the premiums or refuse to insure the property at all, if the sidewalk or steps look like lawsuits in the making.
• Check that the exterior lighting works, and if not or if it is quite dim, add to your list of purchases the need for solar powered or battery powered security lights.
PREPARING FOR THE HOME INSPECTION
To get the most out of your property inspection, follow the list of guidelines below.
• Prompt Arrival: Arrive on time for the property inspection and in fact, a few minutes early, so you can see what issues in particular catch your eye that you want the inspector to check.
• Bring a List: Prepare a list of questions to ask at the inspector. Remember, you’re paying for it so you want to get your money’s worth, both in terms of the inspection quality, and the lessons that you absorb from the inspector.
• Disclosure Statement: Request a disclosure statement from the seller. This is not always available, particularly for foreclosure properties. But if you’re able to obtain one, a disclosure statement can point you in the direction towards issues, as well as give you a measure of protection regarding problems you didn’t catch, but likewise that the seller didn’t disclose.
Pro Tip: Consider each item revealed in the home inspection as an opportunity for three actions to occur:
1) to walk away from the deal because the issue will take too long or too much money to fix,
2) to negotiate a price discount from the seller, or
3) to accept the issue and budget the repair cost for it, either as something for you to fix, or for your contractor to address.
AFTER THE HOME INSPECTION
Once the home inspection is complete, the inspector will prepare a report and email it to you. The report will provide pictures and a written description of all issues encountered. Importantly, the inspector will not make a recommendation on whether to buy the property; likewise, the inspector will not estimate the cost to repair or replace the items. If you have asked the seller to make the repairs before you purchase the house— and this is almost never the case with an investment property— then have the seller verify in a written document that they have completed the repairs, along with providing receipts of the work performed.
LONG-STORY SHORT
In summary, home inspections are a vitally important part of the property investment process. Inspections serve as your early warning system of potential lemons— which yes, with some work can be turned into lemonade, but who ordered lemonade in the first place? When properly used, property inspections can reveal flaws and provide important information on the likely after-repair cost of the home.
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