Originally posted by Alex K.:
A question for J. Scott:
An offer with no inspection contingency means you have either spent a lot of time inspecting the property yourself or you are taking a big risk. If you spent a lot of time, that will add up to a big waste of time with a lot of unaccepted offers. If you don't take the time to inspect each property in the pre-offer stage, you could get stuck with major hidden problems. How do you avoid the risk and/or time wasting?
First and foremost, remember that you always have a day or two (or potentially many more if the listing agent is slow) between the time you get verbal acceptance and the time you have to sign the addendum and turn in your earnest money. You can always use that time to do more detailed inspections and if you find something you don't like, you can back out.
Not a good practice to back out of deals after they've been accepted with no contingencies, but if you use this option very sparingly, it gives you a big advantage.
That said, you still need to be able to do basic inspections and ballpark repairs costs.
A few things that help me:
- Most of my rehabs tend to be at-least full cosmetic, so I'm replacing all flooring, all light fixtures, all plumbing fixtures, all appliances, cabinets, etc. Therefore, I don't much care about whether these things are working or not. I know that for a typical property I do, a full interior cosmetic rehab runs about $15K, so I budget that -- if it turns out I can save some stuff in the house, I save some money, but I don't expect it.
- In terms of rough electrical, plumbing and HVAC, I tend to use some general rules of thumb with respect to age and building materials:
o For electrical, all my houses are less than 30 years old, so unless I see evidence of major electric issues, I assume there are none (and there never have been).
o For plumbing, assuming the plumbing pipes are not made from a substandard material (like Polybutylene) and assuming I don't see anything that indicates a major plumbing issue, I assume there are none. If there is Poly, I will budget to replace it, regardless of whether there appears to be an existing issue. And as for finding surprises with plumbing, this is going to happen sometimes. In fact, in the past 3 houses I've done, there were burst pipes that I didn't know about. But, even if you have to run a whole new main line or repair a major burst pipe, you're probably not looking at more than $1000, so it's really not too big of an issue (especially since I always assume an extra couple thousand to be conservative.
o For HVAC, if the unit appears to be older than 15 years, I assume it needs to be replaced. If the condenser is gone, I assume the system needs to be replaced (since it can be tough to match coils from existing systems). If the condenser is there, looks clean, the furnace appears clean, and there are no obvious leaks from the furnace, I will assume a couple hundred dollars to clean and maintain the system. This is one of the bigger risk areas if you don't have an inspection, as a new HVAC system can run $3-4K. Worst case I'll bring in my HVAC guy to take a look *AFTER* the contract is accepted but before I sign it.
- For roofs, I've gotten pretty good at telling if they need to be replaced, and if it appears to be older than 15 years, I budget for it. If it turns out the roof can be saved, I just added to my profit.
- Obviously, structural issues are concerning, as they can be expensive. I've gotten good at identifying potential structural issues (cracks in foundation/sheetrock, doors that don't close, bowed walls, etc), and if I see a potential structural issue, I won't put in an offer without a due diligence period to get my engineer out.
Based on all that above, it's hard to get into too much trouble, assuming you are reasonably adept at estimating, can identify potential big issues (structural, specifically) and are conservative in your estimates.
The worst thing that will happen is that being conservative will tend to drive your offer price down, and you'll miss out on some deals that you might have offered more on had you gotten more inspections.
That said, I think the tradeoff is worth it. I can inspect and estimate a rehab in about 10 minutes these days, and am comfortable enough that I'll put in an offer with no contingencies just based on that.
But again, being conservative is key.
