Tuesday, August 11, 2015

An Open Letter to Real Estate Investors (i.e. Flippers)

As a home inspector in Maryland, D.C., Virginia, and Texas, I see a lot of homes that have been flipped.  Some are well done, and are homes that I wouldn't mind living in.  Unfortunately, this is the rarity.  The vast majority of them are poorly done, if not down-right dangerous.  The sad part of it is, I have to break this news to the buyers that have fallen in love with a house that looks really nice, with the brand new kitchen and bathrooms, nice hardwood floors, and beautiful landscaping.  When I start showing them all the areas where the flipper took shortcuts, I can see the disbelief building in their faces until it becomes straight-up anger.  Sometimes this leads to a huge list of items on the repair addendum, and sometimes just an outright cancellation of the contract.

So, why am I telling you all of this?  Chances are, that some of you reading this have had a deal fall apart after an inspection, and you probably blamed it on the over-zealous home inspector.  I'm writing today to tell you how to avoid this situation altogether, and hopefully make more money.  See, I don't personally have anything against flippers.  I am one myself!  I see the benefit you could provide to a community, and to the buyers of the houses you renovate.  By doing a few simple things, you can actually provide a better product, reduce stress on everyone involved in the transaction, and likely make more money!

First off, let's go over the common things I find on flipped houses.  Then I'll tell you the secrets to preventing these issues.

Permits!  Yes, you most likely need them.  And with today's online systems, it's really easy to see if you pulled permits, and if you got the final inspection.  In most jurisdictions, you need permits if you are going to knock out a wall to make the desired open-concept layout, or if you need to replace things like the HVAC, water heater, or electric panel, or finish a basement.  When I see any of this work done on a home I'm inspecting, I automatically insert a note to the buyer to check with the local jurisdiction to see if permits were pulled and final inspections passed.  Guess what happens when they find out this wasn't done?

Use a licensed contractor.  If your area requires contractors to have a license, make sure they are actually licensed.  I am also an FHA 203(k) consultant, and part of my job is to verify contractor licenses.  There are a lot of people out there flying under the radar claiming to have a license.  This not only helps to ensure they do quality work, but it protects you from unlicensed (and probably uninsured) contractors screwing up your investment.  Also, unless you actually know what you're doing, it's easy to see the work done by unlicensed individuals.  YouTube is great for entertainment, but that how-to video on electrical repairs is likely going to lead to trouble.

Electrical.  This one really deserves its own post, but I'll hit the highlights here.  One of the most common issues I see is outdated electrical panels.  This can be easily fixed for a couple thousand dollars, but is often overlooked.  And while you have the electrician there, spend a bit more to have them check over the entire electrical system.  I often find poor electrical work in the attic and basement where someone just decided to tap into a circuit to add the recessed lights, or the electric for the new island in the kitchen.   Another big one to watch out for is the actual wiring.  There are two things you need to be careful of.  Knob & Tube and solid strand aluminum.  K&T wiring was used in the early 20th century, and is easy to identify by the porcelain knobs and tubes along the wiring.  It's very outdated, and many home insurance companies will require that it be replaced before insuring the home.  While I have found occasions where the system was still present in the attic, the most common situation I see is that it's been cut out and replaced in the attic/basement.  However, you need to remember that the whole house was wired with this system.  If you have a home with K&T, it will need to be completely rewired.

Aluminum wiring was commonly used in the 60s and 70s as a cheaper alternative to copper wiring.  While multistrand aluminum is still used today on larger circuits (main service entry, AC compressors, electric ovens, etc.) and is perfectly safe there, we are concerned with the solid strand aluminum used on the smaller branch circuits (lights, plugs, etc.)  You should have your licensed electrician check the house for aluminum branch circuits, and if it's found you can either replace it (preferred) or have them make sure the connections are properly made.  Of note, there are not any approved wire nuts for copper-aluminum connections.  For a CPSC article on aluminum wiring, click here.  Once they have done this, have them certify this in writing.

Water intrusion.  Very simply, invest in a moisture meter and learn how to use it.  Nothing scares a potential buyer like water in the basement.  Check the basement periodically throughout your project, and especially after a good rain, and make sure it's staying dry.  If it isn't, get it fixed.  Also, the various brands of interior waterproofing paint don't fool the moisture meter.

Plumbing issues.  I have inspected houses where water was literally coming out of the side of the house.  Going back to the previous section on water intrusion, water issues in general will scare a buyer away.  Pay a licensed plumber to check, and fix, the system.  Once they are done, run the fixtures and check for leaks.  Fill up the sinks and tubs and drain them a few times.  Check underneath them with your moisture meter after about 30 minutes to make sure they aren't leaking.  Also, check for polybutylene piping.  This is a plastic piping used from 1978-1995, and is easily identified by looking for PB2110 on the labeling.  If you find it, have it replaced.

Decks.  Again, this is one that could occupy a whole post.  Every year I see multiple stories about deck collapses.  If you follow the story past the initial coverage, you will often find that the cause was found to be either that it was unpermitted or unmaintained.  If you have a deck in decent condition, still have it checked to make sure it was constructed properly and is in good material condition.  If you need a new one, make sure it's built right, and to code.  I regularly see new decks that are just one house-warming party away from disaster.

Roofs.  Take a moment to look up.  Along with the whole water issue, roofs scare buyers (probably because the roof keeps the water out).  Buyers also tend to think roofs are super expensive.  If the roof is nearing (or beyond) the end of its serviceable life, get it replaced.  Some signs of a failing roof are curling, broken, or missing shingles, moss growth, water stains on the interior ceilings, and depressions between the roof trusses.  When you have a roof replaced, make sure the roofer replaces the flashing, plumbing boots, and any deteriorated sheathing.  I recently had an inspection where the flipper put new shingles on, but didn't replace the multiple areas of rotted sheathing.  Now he's paying for another new roof.

So, by now you're probably having visions of an empty checking account and wondering how doing all of this is going to make you more money.  Here's how: the home inspector can be an ally instead of the enemy.

When you are looking to purchase a property, have it inspected.  This will give you a very good idea of what needs to be repaired, and help you build your budget.  Then you can get the property at the right price.  If you can't get an inspection contingency, hire a home inspector to go look at houses with you.  While not ideal, we can still give you a very good idea of the major issues.  If you get an inspection done, you can then use that inspection report to help you negotiate a price that accurately reflects the condition of the property.  A hint, if you're buying an REO, put a summary of the issues in the body of the email.  REO agents will not open an inspection report, since then they would have to disclose those issues to the next buyer.  If they're in the body, they have now been informed.

Once you are done with the renovations, have the inspector come back and do a MoveInCertified™ inspection and use that as a marketing tool.  The last house I personally flipped, the buyer's agent admitted he tried to steer his clients away from a flipper house.  After the buyer's inspection, I had to replace one 50¢ outlet that had broken.  The buyer's agent actually went out of his way to compliment us on the quality of work and lack of issues on a 115-year old home.  The other benefit of a MoveInCertified™ inspection is that you don't have to worry about failing to disclose a material defect.  You can include the inspection report in your disclosure to buyers.  The worst case scenario is, you can go back to your licensed contractor and have them fix it (hopefully for free if they screwed up to begin with).  Not only do buyers now see the condition of the house, they also see that you are trying to be as open and honest as possible.

If you follow this plan, you won't have to worry about the buyer's inspection anymore.  You will already know what the condition of the house is from a home inspection standpoint.  You've already fixed or disclosed any issues, and you're ready for them to inspect it.  No more last minute surprises.  Now the buyer's inspection is just confirmation of your quality product instead of an impending nightmare.

It may seem that I've just presented a way for you to spend more money and put more in my pocket.  Well, chances are, the house is going to get inspected.  How many times have you seen a house you were interested in go under contract and then come back on the market within 10 days?  Have you ever lost a contract after the inspection found several issues?  When this happens, you now have to fix or disclose those issues, and you keep accruing your holding costs until you find a new buyer.  You also may be forced into dropping the price.  Wouldn't it be cheaper to just do things right the first time and sell it faster?

If you're in the San Antonio, TX area, call us to help you at 210-202-1974, or email mike@vhillc.com.  You can also book online at www.vhillc.com. If you're somewhere else, go to www.certifiedmasterinspector.org to find a certified inspector that can offer you a MoveInCertified™ inspection.

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