Why You Should Be Getting An Inspection, Especially On Rehab's

Getting an inspection doesn’t have to mean hiring a licensed inspector and waiting until they can schedule the inspection two weeks out. This article is more about making sure the role of an inspector is properly covered. It can be a licensed inspector, you with a checklist sheet doing the same inspection than an inspector would have done, or your contractor walking the house (read on to see why I advise you not to use this as your final inspection). The point is that a very detailed inspection needs to be done by someone. That work should also be done by someone other than the person who will likely be getting a large check for doing the work so that you have checks and balances in your process. While that may not always be possible, try to introduce checks and balances wherever you can in your business so that fox isn’t guarding the hen house!

Reasons you want to have a formal inspection

Regular consumers use an inspection primarily to determine whether they should buy the house or not. In the rehab game, your motivations are slightly different. Your primary motivation for the inspection should be to have as accurate an idea as circumstances will allow as to how much time and money the rehab will cost. It’s not just about how much work has to be done. It’s about how many different types of work have to be done. A perfect condition home that only needs a new HVAC Ducting run and a new unit will take far less time than having to call HVAC, and electrician, and a plumber. Worse, scheduling different skilled trades can be a nightmare when you have to cross coordinate. Add in permits and the migraines start.

Having a thorough inspection report makes it easier to know which trades will be involved as well as a checklist of items that may need to be addressed for an accurate quote from those trades. Giving a contractor an idea of the problems you need to have solved in detail will always yield a more accurate scope of work. That is half the battle. Whether you do it yourself or have a professional do it, it’s going to take several hours to properly build a thorough punch list of everything that needs to be addressed in a home remodel in detail.

Why you don’t want to rely on your contractor to do your home inspection

I am not saying that there aren’t contractors/GC’s out there that will do a home inspection as thorough as a home inspector, but I have not met or worked with one yet! After you have done 20 or 30 rehab’s, the odd’s are very low that the following story doesn’t make a lot of sense to you:

We had a motivated cash buyer interested in selling their house in a hurry. They explained that the home was in great condition and that they kept everything in pristine order. People will often outright lie in this scenario or just be oblivious to the mounting repairs that a home needs. This is especially common with elderly that haven’t done proper home maintenance. Being skeptical I had our GC who is an accomplished rehabber head over to check the home out. We will often buy homes out of market so we typically will have a local remodeler/partner and a 3rd party bpo/appraisal done as a double check. He called me back and assured me the home was in excellent condition and thought we would make a killing on the home at the price we were buying it at. He is also a realtor. At that time we did not get 3rd party appraisals/bpo’s or inspections. Fast forward 3 or 4 months and we still didn’t have any offers near what we thought the house would go for. Keep in mind this is a home I have never physically stepped foot in. After lowering the price several times we finally got an offer only to see the home fall out of contract after inspection. This happened twice. We finally ended up taking a lower cash offer at what amounts to break even after 4 months of having $100,000 tied up in a house. This time the buyer gets an inspection and shares it with us. I am horrified at the number of issues that appeared on this homes inspection. How could a GC and rehabber think that all of these issues would go unnoticed while trying to sell the house? Had I known about all these I would have never bought the house for anywhere near $100,000. I would have paid $80,000 tops or walked away. My desire to save $400 on inspection cost me a lot more in time aggravation and tied up capital that could have been used on another project. I thought my GC did a thorough review of the house. If you trust a G/C to do such an estimate/inspection, make sure you receive a details report and estimate where they took the time to mimic the job of an inspector. The result here was a $25,000 mistake, learn from it.

This contract/realtor isn’t the only experience we have had like this. It’s pretty common. You think the GC is doing the role of home inspector, and they think walking through the house looking for major issues for 15 minutes and then multiplying the sq/ft of the house times a number they have in their head, counts as an inspection/estimate. No such luck. This is guaranteed way to have your $10-15000 rehab budget soar to $25,000+ plus.

Here is a better way of doing it….

Keep you contractors honest by having someone else build the scope of work you need them do and then have them quote that scope of work specifically plus anything additional you intend to change in the house. When the quote does arrive, make sure it is broken down into trades and milestones. If you contractor simply says, we can do everything for $15,000, you are asking for trouble. Determining how much each step and phase will cost will help you identify whether they thought of everything. If he doesn’t have a line item for Electric and you know there are a few issues, you know your budget is going to be higher than anticipated.

Why is this so valuable?

In some cases, it will cause you to avoid and unprofitable project. You have to be ready to walk from a project with a bad inspection if you can’t get an adjustment. In other cases, you are using the inspection and the additional work as a bargaining token. In the case of the house above the buyer used the work brought out in the inspection to shave $7000 off an already low cash asking price.

In other cases, you will be in a take or it as is or leave it scenario. You know it is more costly than anticipated or maybe it isn’t, but the important thing is you have a list of everything that needs to be done to the home. Many would be rehabbers save this work for the end of the process after they have a contract hoping that it won’t be an issue. These little bumps and bruises are the very reason you aren’t getting top dollar for your flip. Taking care of them before the buyers see the house will not only get you a higher asking price, it will also save you valuable time. If you have financing for your flip, selling a home 45 faster is often worth more than selling it for 3% more. In many cases, you end up getting both by cutting these problems off at the pass. Working without an inspection will cause you not to have that luxury as your contractor will often get a project 98% of the way done only to come up short and not finish the last 2%. That 2% is the difference between getting a deal finding low-balling buyer and the buyer looking for “The Home Feeling” willing to pay a 5% premium. If you don’t provide that feeling, you leave a lot on the table. Working from an inspection report checklists helps keep your contractor honest with a finite beginning and end.

Tip: 98% finished is really 75% finished. The last 5% of a project often takes just as long as the first 95%. By paying your contractor before the minor details are done you are asking to be left with an unfinished project. Don’t make that mistake.

To save time, we will often have an inspector come back after we complete a rehab to see if there is anything that would cause concern. A clean inspection report saves us time and money while our contractors are still thinking about the project. Asking trades to come back to fix mistakes or things they missed can get pricey when they are already mentally done with the project. 

Questions investors have asked me on this topic I thought I would cover. Feel free to ask more in discussion

Q: In my market, getting a contract with an inspection contingency means I won't get any properties how do you deal with that? 

A: It's the same in my market. I recommend you pay for a thorough inspection even if you don't have an inspection contingency. It will get you more accurate quotes for repairs and if you find too much you weren't expecting, loose your deposit and walk!!! Spend the extra time and energy on a winning project and you will more than make up for the lost deposit. 

Q: You mentioned you get inspection after rehab's sometimes. Why? 

A: If a property is getting lots of showings but no offers, it's usually related to how the property is showing. Often times we become blind to our own projects. A fresh perspective may reveal things that scare other buyers. I do this most when we are doing out of market projects where i won't set foot in the house during the entire project.