Avoiding sunk costs

[Ryan Burg]

Hi all. A friend of mine recently had an offer accepted for his first multi-family property in the Boston area (~400k). For some background, he's planning on moving into the house, using an FHA loan for money down and taking advtange of a 203K loan for reapirs as well. Whether it was built in or not I'm unsure, but the contract does include a contingency clause for acceptable inspection. He is a new investor, like myself.

The inspection was completed the other day, and it uncovered a number of issues. To name a few: settling foundation (some floors are unlevel), knob and tube wiring in the basement, significant rodent problems, plumbing issues (not sure to what extent), and so on. He paid nearly $400 for the initial inspection, and has since called in an electrician, mason, plumber, and extermination company to receive quotes on the above issues. He's considering withdrawing his offer if the problems become too significant, and eating the inspection/contractor costs.

As a beginner investor and watching him pour money into these inspections before even "owning" anything, I have some concerns about experiencing the same with my first deal.

Is he going about this in the wrong fashion, and is there a way to avoid these types of sunk costs after submitting an offer? Should he have done more upfront research and educated himself on the "big" issues to lookout for?

Thanks for sharing your thoughts, and apologies if this seems like a very basic question. Just trying to avoid this for myself in the future, if possible.

Ryan

[Wayne Brooks]

If you're not qualified to do these inspections yourself, $400 is cheaper than the $10,000-$20,000 surprise later. Only way to avoid this would be buying newer properties, which still have some construction issue risks.