Archive for the ‘house inspection learn a valuable lesson’ Category

Avoiding Pitfalls When Buying Fixer-Upper Houses

Wednesday, May 25th, 2011

Pitfalls to buying fixer-upper houses, such as broken plumbing systems, worn out electrical wiring, and cracked foundations can be avoided with the help of a professional inspector prior to purchasing a house. Once identified, these conditions can be laid before the seller, who must either fix the problems to the satisfaction of the buyer, or the buyer can pull out of the deal.

Of course, it takes hard work to find a house, make all of the repairs, and learn how to deal with tenants. If it were easy, everyone would be doing it. You’ll learn not to take life, or tenant problems, too seriously. Shakespeare said, “A light heart lives long.”

The good news is that you learn valuable technical and people management skills that are useful in many other aspects of your life. You are also rewarded with a feeling of satisfaction in your accomplishments, a stronger sense of financial security, and the peace of mind that accompanies it.

Do This Before You Sign the Closing Documents!

Friday, August 29th, 2008

In the fixer upper house business sometimes we need to anticipate the unanticipatable!

What’s the most important thing that you should do before signing the closing documents to buy a house?

Check out my ezinearticles.com piece entitled Don’t Go to Closing Before Doing This, Or You May Really Regret It!.

The article recounts my ill-fated effort to purchase a house last month, and the valuable lesson that I learned.

Info on Terry’s Book

Press and Media

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Due Diligence and Property Inspection, Part 9: Qualifying the Inspectors

Friday, May 16th, 2008

,
Buying fixer-upper houses, repairing them, and renting them out is a safe way to generate short-term income and long-term wealth. But, how can you be sure that a house is worth what you are offering to pay for it? Based on experience, we can eyeball the property and probably be able to make a pretty accurate estimate of its worth 90% of the time.

However, that’s not good enough. We need more information than our educated eyeball can provide. In order to:
1.) avoid any surprise defects after its too late, and
2.) negotiate a lower selling price for the house,
we hire a professional inspector to do a physical and structural inspection.

For the last post related to due diligence see Due Diligence Property Inspection, Part 8 – pest control and property damage.

Most purchase agreements require the seller to deliver the property in good physical condition with all basic systems in good shape, unless the seller discloses otherwise. Generally, the inspection process reveals deficiencies that need to be corrected, whether they were disclosed or not.

So with inspection reports in hand, you are armed to arrange for the seller to correct the noted items at his/her expense. The seller is trapped in a corner. He reads the report and sees the photos showing the inescapable evidence that repairs are needed. He either makes the repairs or you walk.

Inspect the inspectors before you hire one.

Most investors hire a property inspector based on the advice of a real estate agent, which is not necessarily a bad way to go. But, you will be spending a tidy sum to hire an inspector, so its best to interview a few before deciding. You may see a big differences in experience, qualifications, and ethical standards. I would never hire an inspector who would not allow me to accompany him during the inspection.

Tagging along with the inspector presents a great opportunity to learn about your property, and will arm you with knowledge that will be invaluable throughout your entire ownership of the house. You’re the one paying for the inspection. How can the inspector say no?

If you want a true professional, hire a full-time inspector who perform 100 inspections a year and who carries “errors and omissions” insurance. This coverage tells you that the person is working full time in the field and is participating in ongoing continuing education.

To locate certified inspectors and find out more about the inspection process see the American Society of Home Inspectors web page.

Ask for a sample of one of the inspector’s recent inspection reports prepared for a comparable property. And, require your finalists to provide you contact information for 3 people who have used their service in the last 6 months.

Price should be a secondary concern because like other professional services, they often pay for themselves. An internet estimate of inspection costs indicates that prices range from $215 to $750, with an average price of $260 (in the southwest where I live).

Earlier articles in this series:

Due Diligence Part 7, Physical and Structural Inspection

Due Diligence Part 6, Tricks Sellers Use to Avoid Inspections

Due Diligence and Fixer Upper Properties Part 5 – the “as-is” sale

Due Diligence, Part 4 — Disclosure Requirements

Due Diligence, Part 3 — Inspecting the Property

Conducting Due Diligence, Part 2 — Reviewing books and records

Conducting Formal Due Diligence

Info on Terry’s Book

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Due Diligence Part 7, Physical and Structural Inspection

Monday, February 25th, 2008


The due diligence period is the time period between the acceptance of the offer and the close of escrow. This is particularly relevant to those of us investing in fixer upper houses. It is the time to find out if you really want the property. If you find something wrong with the house and don’t wish continue with the purchase, you can ask the seller for adjustments, or get out of the contract. Following the outline in “Investing in Real Estate for Dummies,” we now look the first component of actual inspection: the physical and structural inspection.

Areas that you may want to hire experts to help you inspect:

-overall condition of property
-structural integrity
-foundation, crawl space, basements, sub flooring and decks
-roof and attic
-plumbing system
-electrical system
-heating & A/C
-landscaping, irrigation & drainage
-doorways, walls & windows
-moisture intrusion
-seismic, land movement, or subsidence and flood risk
-illegal construction or additions and zoning violations

Be careful to check for water intrusion and signs of toxins and mold. These can result in property damage and negative health effects.

Tell-tale signs to watch for that might indicate serious structural issues:

Cracks: Some hairline cracks may be naturally occurring settlement of the structure over time, but if you can stick a screwdriver into the crack, something else may be going on.

Unleveled or squishy floors: Walk through the property and look for floors that slant or slope. And watch for soft spots in raised floors.

Misaligned structure: You can use a handy laser level (that seem omnipresent in the hardware stores) and see if floors, walls and ceilings are uneven or out of plumb. Watch for doors or windows that don’t open or close easily.

Grounds: Be sure the property drains properly. Excess groundwater, poor drainage, or cracked/bulging retaining wall are signs of soil issues.

Moisture intrusion: Look for ceiling/wall discoloration and stains. Living in an area where flat roofs are common, my wife and I automatically check the ceilings of all potential investment properties. Musty odors could indicate moisture issues. Sump pumps anywhere on the property are a red flag.

Plumbing leaks: Check under sinks, supply lines for faucets, toilets, dishwashers, and washing machines.

NEXT UP: PEST CONTROL AND PROPERTY DAMAGE

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Due Diligence Part 6, Tricks Sellers Use to Avoid Inspections

Tuesday, February 19th, 2008


Continuing the Due Diligence series for those who buy fixer-upper properties. The due diligence period is the time period between the acceptance of the offer and the close of escrow. It is the time to find out if you really want the property. If its not as good as you thought, you can ask the seller for adjustments, or get out of the contract. Following the outline in “Investing in Real Estate for Dummies,” here are

Two tactics that sellers use to avoid a thorough and detailed property inspection

1. The buyer offers the buyer a warrenty or property protection plan that covers repair costs for major systems and appliances of the property. Although they may sound good on the surface, in my opinion these plans don’t usually live up to expectations because:

a. they can have an up front cost of several hundred dollars;
b. there is a deductible of $25 to $100 each time you file a claim; and,
c. when you file a claim, you may find that what you thought was covered may not
actually be covered due to exemptions in the policy.

About four years ago, I bought a house with a pool and the seller included a property protection plan that purported to cover the pool too. When I called the company to get the pool repaired, I was informed that the contract included an exeption that excluded any work on underground pipes. This must save the plan’s company a lot of money, as I imagine that most pools have underground pipes. Granted, I never read the fine print in the contract. I just believed the splashy promises on the cover of the information brochures that said the pool was covered. My bad, but the brochures are misleading at best.

2. Sellers have a house inspection done ahead of time, so they save you the time and the money by providing you with a copy of an inspection report. If the seller was trying to put something over on you, they may contract with an inspector that has a reputation of not being diligent when examining the house. I think this can also be a good thing, as you can review the seller’s inspection report and pass it along to yourinspection team. It may give you a good general idea of the condition of the house to start with.

When to make use of inspections

Looking at it another way, when you are selling a house, I think it is a useful step to have an inspection done by a reputable inspector. This way you show you have nothing to hide, and it serves as a good starting point for negociations. The buyer may have another inspection done, and if it turns up the same things that your inspection did, it may serve to build trust with the buyer.

In his book “How to Sell Your House in 5 Days,” Bill Effros advocates having the house inspected by a professional home inspector, and if you have a well or septic system, have them inspected as well. He suggests using a company with reports that looks professional, and not a hand-written report with fill-in-the-blanks and check boxes. You want a report you will be proud to show to potential buyers. Effros says, by conducting these tests in advance, you answer buyers’ questions and reduce the time it takes to close on the sale. Since you’ve paid for tests often not performed by sellers, your home is even more desirable to buyers, who will save money and will know what they’re getting before they start bidding.

An earlier post with My Observations of a 5-Day Sale.

NEXT: NEGOTIATING CREDITS IN ESCROW

ABC of Wealth Building at moolanomy.com

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Due Diligence and Fixer Upper Properties Part 5 – the "as-is" sale

Thursday, February 14th, 2008


For many of us, fixer upper properties are the foundation for building wealth in real estate. Finding a good fixer-upper is one thing, but making sure we are getting what we pay for is something that often doesn’t always receive the same attention as the search process does.

Continuing with the Due Diligence series and following the outline from “Real Estate Investing for Dummies,” we now look at the “as-is” sale. The due diligence period is the time between the acceptance of the offer and the close of escrow, when the buyer must find out all they can about the physical and fiscal condition of the house. The purchase agreement should contain a number of contingencies that allow the buyer and seller the opportunity to cancel the transaction if certain things aren’t satisfactory.

Why Houses are Sold As-is

Some sellers try to sell their houses “as-is” to avoid disclosing any deficiencies in their house. They think that they don’t have to correct problems in the property during the due diligence period, and are not responsible for anything that crops up after the sale. They erroneously believe that their technique to dodge responsibility makes them legally bullet proof. What they don’t realize is that the as-is strategy actually only offers minimal protection to the seller. They may still be held responsible for misrepresentation, fraud, or negligence.

When you come across a house being sold as-is, a red light should start flashing in your mind. You could be dealing with a seller that is dishonest and trying to hide significant problems that would reduce the value of the house. A house offered as-is at an unusually low price may give you a headache for a long time to come, with no relief on the horizon.

Honesty the Best Policy

When you are selling a property, don’t attempt to hide anything from the buyer. For your own peace of mind, and to avoid long court battles, disclose everything of importance, and share copies of any invoices an reports that reflect on the value of your house.

An Early Experience with an As-is Seller

I once made an offer on a house that was listed “as-is.” At the time, it didn’t bother me that that the seller wasn’t disclosing everything. It would today though. But, what bothered me more, and set off alarms in my mind, was the egotistical attitude of the seller. He wasn’t willing to make any concessions and or negotiate anything. Everything had to be done his way. I was an inexperienced investor, but my sense of smell worked alright, and I could smell a rat. I think that the seller offering the property as-is was an insight into the whole self-centered attitude of the seller.

As you know, I prefer an open and friendly approach to negotiating the purchase of a house, as described in earlier posts with the “suppose that… technique” in House Buying Negotiating Techniques, and the Detective Columbo “just one more question” technique in Start Small Profit Big in Real Estate.

While I liked the property, my suspicions made me pull out of the deal. The seller blew up. I guess he had already started counting his money. He angrily told me that if I had signed a contract, he would have held me to it no matter what. I thought to myself, “I sure am glad I decided not to do business with this guy. If he harbors this much anger for someone he hardly knows, who know what lies he would tell to sell a house?”

NEXT UP: TACTICS SELLERS USE TO AVOID INSPECTIONS

How to Completely Remodel a Kitchen for Under $4,000

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Due Diligence, Part 4 — Disclosure Requirements

Monday, February 11th, 2008


Aimed at investors in fixer upper properties, this continuing discussion of Due Diligence from the “Real Estate Investing for Dummies” outline, ┬áturns to disclosure requirements. Due diligence is the time period between the acceptance of the offer to purchase a house and the close of escrow and completion of the sale. It is the time to get the answers to all of your questions about the house. You will never discover some of the problems that exist unless the seller tells you, which is what disclosure is all about.

The Tucson Police Example

The concept of disclosure reminds me of when the Tucson police were looking for a man they suspected of a string of burglaries. They had six photographs of the man, all taken in different locatoins and from different angles. They sent faxes of the pictures to police departments all over the country.

Three days later, Tucson received a fax from the police chief from a small town in Arizona. The report read, “We got right to work on those six pictures you sent. We’ver arrested five of the suspects, and we have the sixth under observation right now.” A classic case of a cloud of confusion caused by not enough disclosure.

Disclosure Requirements Vary

Many states have seller disclosure requirements fo residential renal property with four or fewer units. Sellers are required to supply the buyer with a written statement that identifies all known structural and mechanical problems, and in many cases, the seller must complete a comprehensive questionnaire.

However, buyers of residential investment properties with five or more units or any tyupe of commercial property usually don’t have the same protections. The idea is that buyers and sellers are more sophisticated and don’t need a formal written statement.

My opinion is that whether or not a formal disclosure statement is required, if you are the seller, it is in your best interest to disclose all problems that could affect the value or use of the house. Two reasons to fully disclose problems are: 1) morally, it is the right thing to do, and 2) the buyer could still come back and take you to court under claims of misrepresentation and fraud. Why take the chance? Once you sell a house, you want to be done with it and not have to worry about being dragged into court.

What about if a seller offers a house on a “as-is” basis? Does he or she still have to disclose problems?

The “as-is” approach to selling is the next article in this series.

How to Sell Your Home Smart

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Due Diligence, Part 3 — Inspecting the Property

Wednesday, February 6th, 2008

*
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

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Conducting Formal Due Diligence

Wednesday, January 30th, 2008

*
I am currently reading “Real Estate Investing for Dummies” by Tyson and Griswold, a well-written and thorough book that covers the basics of what real estate investors should know. I’ve long considered “Investing in Real Estate” by McLean and Eldred as one of the best introductory texts for real estate investing. Yet after reading the “Dummies” book, I find it equally as good, and perhaps a little more accessable for the new investor.

Here is my list of Top New Real Estate Books that I posted on Amazon.

To assist those who invest in fixer upper houses, I’m incorporating key parts of the “Due Diligence” chapter from the “Dummies” book with my own real estate observations.

Once you have made an offer on a house and it had been accepted by the seller, the “due diligence” period begins and you have until the close of escrow (or completion of the sale) to check out the physical and financial condition of the property. If you discover that the property has problems, but you think the deal is still worth pursuing, the seller may be willing to correct any deficiences, or give you money to to complete the necessary work yourself.

It’s during this time frame that you must get all of your questions answered and be sure you know what you are getting. If done properly, it will require quite a bit of effort on your part. But it must be done, if you wait until after the property is in your possession, its too late to ask the seller to replace that broken furnace.

You should work closely with the seller but take his word for anything. Only trust what you have in writing.

In my case, most of the house that I buy aren’t bought from the owner. They have been reposessed by a bank, the Veteran Administration or HUD. But I still do due diligence by having my friend/handyman go through house with a fine tooth comb. He knows more about the house repair than anyone I know.

There are two key components of due diligence process:

1. review of books and records
2. the physical inspection

A thorough look at these two components should allow you to determine if the property is worthwhile, priced right, and your goals. The due diligence is your last opportunity to either complete the transaction, or cancel the escrow, have your money returned, and look for another property.

Next post: Reviewing Books and Records

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |