This article was originally featured in March 2018 Think Realty Magazine and written by Adam Pontier, owner of KCPE LLC.
When I was young, my father bought a home that we gutted to the bare studs and put back together as our family home. This was my first taste of construction and real estate investing. I loved it. Over the years, my father ended up buying more investment homes, some to hold and some to flip. I worked on nearly all of them and loved the rehab process.
Thanks to that experience, I decided to become an electrician and eventually specialized in HVAC work as well. Several trade schools, years of fieldwork experience, and, eventually, a business degree later, I became a certified home inspector and started my own business.
Shortly thereafter, my father began buying real estate for rentals. Of course, he would call me to come inspect the properties. During this time, we also began managing homes for a hedge fund buying in the area. Soon, we were managing more than 500 homes.
Unfortunately, there was a small problem that eventually became a big one. Whenever the hedge fund would buy a new home, I always offered to go out and inspect the property before the deal was done. My offer was always turned down because the investors did not want to pay the inspection fee.
Once we got the keys to manage the properties, I would go look them over. I often noticed issues with roofs, foundations, and the mechanicals. Many of these issues were surprises to the manager of the fund as well and, even more troubling, not in his rehab budget. Sometimes, despite the risks, he opted to overlook some of the issues to stay on budget.
Eventually, those issues came back to us in the form of maintenance requests from tenants. Then, the investor had to fix them, but often the tenants were so fed up they just moved out. The investor simply refused to adjust his practices, and eventually we got out of the property management business.
Some Deals Never Have a Chance to be Profitable
I remember thinking those deals were doomed from the start. Investors make their money when they buy. When you buy a home as an investment to flip or hold, you also buy all its problems whether you know what those issues are or not.
Inspectors often joke about fix-and-flips they are inspecting for retail buyers. All too often, everything is pretty until you look “under the hood.” I’ve heard other inspectors joke that they should charge more to inspect fix-and-flip properties because there is so much “hiding” beneath the surface.
Since I grew up with a real estate investor, I understand a little better than most inspectors what it takes to flip a home. Sometimes you must make tough decisions. Of course, an inspector who respects the deal (and the investor) can help you prioritize those repairs and determine if you should even take a property on in the first place.
Investors See Things Differently
I’ve heard investors ask many times, “Why should I pay someone to tell me about a house I plan to tear apart and put back together?” Here’s the truth: There are a lot of facets of an inspection you don’t need if you are going to do a full remodel anyway. But there are five things you must have inspected, formally or informally, to get the entire picture on a home. These things that must be fixed if they are broken and must be in your budget:
Some investors refer to these five nonnegotiable items as “integrity items.” I just call the bare-bones inspection dealing with them a 5-point inspection. Most investors do not realize that some inspectors offer this type of inspection and, furthermore, that they may be able to negotiate a lower price on the less-involved inspection. Some inspectors may even do the inspection without the written report to keep costs down further.
Accept the Inevitable: You are Going to Get Inspected
If you are buying a house, you will eventually see a home inspector at that house. Realistically, you might want a sneak peek at what an inspector is going to say.
Here’s what can happen if you opt out:
After inspecting a completed rehab for a Kansas City investor, I was compelled to share some troubling findings. Her flip was lovely, but she still had an obsolete breaker panel, two HVAC systems that needed to be replaced, and some serious foundation issues. Even worse, she had used her entire rehab budget, so she was not going to be able to sell at retail because the buyer was going to have to resolve the issues after the purchase.
How did this happen? The inspector had relied on her contractor for the initial inspection, and it turned out he did not specialize in any of these areas and had (we’d like to think) simply missed the problems. To further complicate matters, investors are sometimes hesitant to believe a contractor insisting that the job is bigger and more expensive than they originally predicted.
Objectivity Leads to Trust
Remember, a home inspector does not have to tell you what to do. They can (and should) be an independent, third-party consultant on your project. After all, their pay does not correlate to their findings. Be honest with your inspector about your goals for a property, and you’ll find the inspection costs pay for themselves nearly every time.
As an investor, you must be objective about what repairs will meet your buyer’s desires or tenant’s needs and still meet your bottom line. An inspector with experience in real estate investing can help you walk that line.