Should real estate investors use a home inspection as a buying tool?
Buying property to renovate and rent is one of the most important things you do as an investor. A rental home located in a good area can earn you a lot of money.
Can You Make Money?
Your goal is to buy a house in a decent area that will be easy to rent. The best deals on property are often homes that are not in great shape. These homes will almost always need significant rehabbing to make them rentable. The goal is to get them cheap enough so that you can afford to rehab them. These deals can actually cost you a lot of money if you mess this part up!
Buying property to renovate and rent is one of the most important things you do as an investor. Click To Tweet
Home Inspection Before Rehabbing
This is where a home inspection might make some sense. I have heard both sides of the home inspection debate. Some investors believe you should have a home inspection before you close on the deal and others feel it is a huge waste of money at this stage of the game.
Are You Stressed Out Yet?
The problem is that while these homes in bad shape are typically the best deals, it can also be very stressful to buy a house that is this condition. How do you know you aren’t spending too much? Or, how do you know there isn’t some catastrophic problem lurking where you can’t see it? Are you experienced enough to make lemonade out of lemons?
If you are a new investor, you will need someone to look at these homes before you pass the point of being able to get out of the deal. Remember, it is much better to lose a deposit than to be stuck with a home that will only cause you to lose money!
You Either Made Money Or Lost Money When You Bought It
You make your money the day you buy the house. The bottom line is that if you pay too much for the house, it will be difficult, if not impossible, to make a profit. Miss a costly defect in a property that you bought and you can lose all of your profit margin. It could cause the entire deal to turn into a huge loss.
A full home inspection at the rehab stage is not something you need. No one cares about cosmetics at this stage of the game. It is also an unnecessary cost as most of the house will be torn apart during the rehab.
As an investor, you just need to know that the structure of the home is in good shape or is easily fixable. For example, a major structure problem like a crumbling or missing foundation, a main beam that is badly damaged or a house that has settled unevenly can all come with a huge price tag to fix.
If you can find a qualified home inspector who is willing to forego the traditional home inspection, this will be helpful to you. What you need is more of a down and dirty review of the structural aspects and the major systems of the home. Finding a home inspector willing to do this type of inspection will make it worth your money, especially if you are a new investor.
Do You Want Top Lose Money?
Your job as an investor is to make money. I don’t know anyone who buys property and doesn’t care if they lose money! Unless you are independently wealthy or have someone willing to just give you money, you have to be careful. A bank or a private money lender will want to be certain they are loaning you money wisely. After all, they expect to be paid back!
The right home inspector can help you determine if this property has defects that you can live with. Defects are expected but you need to know what they are and how bad they are.
The right home inspector can help you determine if this property has defects that you can live with. Click To Tweet
Vanishing Home Inspector
The flip side of this is that most home inspectors don’t want this job. They may hide from you. My mother and I had a home inspection company for 17 years. We dreaded getting calls from investors. Why? Because these homes are difficult to inspect, take more time, are more risky and we felt it was a waste of the inspectors time.
Home inspectors are trained to look at the home with a fine tooth comb and their main concerns are items that will affect the safety, structure and habitability of the home. Most rehabs are full of safety issues, structural problems and are not habitable!
The average home inspector may be booked out 5-10 days and wants the easy jobs. They spend less time and make more money on a normal house. Every home inspector I know wants to inspect your finished rehab! Most of them won’t call you back when you call them about inspecting a home you bought at auction.
Should You Hire A Contractor
Again, your goal is to make money. Home inspections cost more money than a qualified contractor. In most cases, I think it makes more sense to find a local contractor who is willing to look at these homes with you. A contractor will be better able to assess the problems that are found.
Most home inspectors are going to say something like “The main beam is cracked. Recommend further evaluation by a qualified contractor prior to closing.” Well, that statement doesn’t help you out much!
Qualified Contractors Can Save You Money
Teaming up with a qualified contractor can cut down on the time you spend making a decision to buy or pass on the property. Qualified contractors will have a general idea if you are going to spend a few hundred dollars or a few thousand dollars to correct a particular problem. This person can usually go back to the office and have a quote to fix everything for you by the next day. A qualified contractor will probably save you time and money.
Better Fit For A Home Inspection
I personally feel that it is a better choice to have a home inspection when the rehab is completed. Hopefully you have decided what you are going to do with your finished rehab in order to make money. You should ideally have more than one exit strategy. Real estate has its ups and down. Sometimes you will be forced to change course when the rehab is completed.
What Is Your Exit Strategy?
If you are looking to build your rental portfolio, you can take it into your inventory and rent it. When you put a good tenant into it, you will collect rent and get paid every month. You can also decide to sell it either to another investor who is looking for ready to rent homes or to a buyer. This will net you a lump sum of money that you can use to purchase another home with after expenses.
The home inspector will be eager to inspect your newly renovated property and can provide a lot more value for your money. You can use the home inspection to make sure there are no major safety issues for your new tenants. The same report can also be passed onto a new buyer as a “pre-inspection”. It helps to cut down on price negotiations and helps buyers feel more confident in their purchase.