Problems surfaced after inspection. What to do?

[Ciro LoCascio]

Hey guys, I had a 3 bedroom 2 bath 1400 square foot SFH across the street from a pretty decent college. Tuition is approx. $27k per year. Rental rates would be between $1300-$1600. I was able to get the property under contract for $87500. After inspection, termites were found through out the home and since the house sits on bricks, there's issue with no mortar on most of the bricks, slight water in the basement. The home is pretty even besides the front porch. The basement has some make shift columns for support. The property would need at least $15k in rehab. No insulation in basement or attic. What should I do? I was going to offer the seller $61k to just walk away from the property as is or I will just walk away from the deal. It would be an all cash deal. They can never sell this property through finance.

[Ric McGuire]

In my experience, termite damage is often not as serious as most people fear. I have rehabbed and sold close to 100 single family houses. I have seen visible evidence of termites in maybe 10 of them. Not a single one required "significant" repair (over $1000). I'm not saying that your house does not have 15 k worth of termite damage, but I will tell you that would be extremely rare and hard for me to imagine in a 1400 square foot house. You have stated that the damage appears to be confined to two area's of the sill plate. I would suggest a little more inspection to try and determine the full extent of damage. You also stated that the house is on a basement and that there is no insulation in the floor. This should make it much easier to inspect the framing for termite damage. I assume that the seller did not disclose any termite damage? The fact that the interior is freshly painted makes it much harder to see evidence of prior termite activity (same with the "new" floors). A close interior inspection of baseboards, trim mouldings and even drywall will often expose termite damage if it is extensive. Simply pressing your fingers firmly on the baseboard or lightly tapping with the back end of a screwdriver will sometimes cause the wood to "cave in" if termites have been active. In my opinion, it is pointless to call in a structural engineer unless/until you have exposed "structural damage" and need a suggestion as to what to do about it. An engineer can't tell you if there is termite damage behind drywall........ He can only tell you what to do once an inspection has confirmed the extent of the termite damage. Again, it is very rare for termites to cause significant structural damage to a house (Despite the pest control companies brochures that often suggest otherwise).
Go ahead and give the sellers a copy of your initial inspection report. Let them know there are some serious issues which need to be resolved. If necessary, get an extension on the time frame for you both to work out a solution. Let the contractor know that you want a thorough inspection and a "worse case senario" repair proposal Of course the water in the basement needs to be addressed too. In my opinion, this could be a bigger issue that the termite damage.

Lastly, I will throw this in as an observation. The lack of insulation in the house is not a "defect". I'm only throwing this out there for the benefit of an inexperienced real estate investor who may be reading this. The home inspection has several different puposes which are often misunderstood. The inspector will often "point out" general observations about the house to the buyer. That is fine. But, from the standpoint of the typical real estate contract, the inspection is being done to insure that everything is in "good working order". The fact that there is no insulation in the floors is really do different than saying there is no dishwasher in the kitchen. I'm not trying to ramble on here, but as I said, this is often misunderstood. The water in the basement is a "defect", the termite damage is a "defect", the lack of insulation is not a "defect"......... they did not put insulation in floors or attics 80 years ago. I'm not saying you don't need insulation. I'm only pointing out that if the house had no termite issue and no water in the basement issue - but you went back to the seller and said - hey we have a problem, there is no insulation in the attic - that would not be a defect and the seller would not be obligated to address it. Make sense???? I know that some folks will be confused by this statement or disagree with it. Many Realtors don't understand this.

It's simple math. Get a good estimate of what it should cost to make all the repairs, deduct that figure plus maybe 10 -15% more as a "buffer" in case you discover it's worse than you thought and present this to the seller.

If your seller is intelligent and motivated to sell, and you present them with the facts, and a well written proposal detailing the costs involved to get the house into the condition that you thought it was in when you made your offer, chances are they will understand. And if they don't, then you move on my friend.

I can tell you this. Because that house is located right next to a good college, the rents are considerably higher than they would otherwise be. And, you will always have a good supply of eager tenants. Couple that with the fact that you feel that the school is likely to be expanding in the future and it sounds like a really good deal to me. I will take a $1,300 per month return on my 90 K under those conditions any day of the week.

Good luck & I hope it works out great for you.