Due Diligence, Part 3 — Inspecting the Property

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Following the outline from “Real Estate Investing for Dummies,” aimed at investors in fixer upper houses, we now move to the property inpection part of due diligence.

You have made an offer on a house, it has been accepted by the seller, and you are now in a period where you must determine whether or not the house is really worth puchasing. If you inspect the property and the physical condition is not satisfactory, almost all purchase contracts allow you to gracefully back out of the deal with no loss of earnest money.

Even if the investment property looks good on paper, and your pre-offer inspection didn’t unearth any skeletons, a wise investor will always do a thorough physical inspection before purchasing.

Although we investors tend to be frugal (see, skinflints), this is not the time to cut corners. You need an extensive inspection by qualified experts. I mentioned in an earlier post that I have a handyman/friend who has extensive experience in the construction & building trades, who inspects my investment properties. Unless you know someone that has that kind of background, you ought to hire someone who does.

Almost always, the inspection pays for itself. You will find problems in need of repair that are of far greater value than what you will pay the inspector. And the good part is, the seller will have to pay for the repairs if he wants to sell the house.

Many investors use a two-track approach to property inspection. You are looking for two types of problems:

1. Patent defects — those which are more superficial and can be spotted by merely looking at the property. These include broken doors, cracks in walls & ceilings, and spots in ceilings indicating a leaky roof.

2. Latent defects — those which are not visible to the naked eye, and are only identified through delving deep into the bowels of the house where few have treaded. In fact some potential problems, such a water pipes inbeded in the slab would be nearly impossible to evaluate. In fact, you couldn’t evaluate it at all unless you had a disclosure from the seller.

Next Time: Disclosure Requirements

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