Posted over 6 years ago

A Guide for Fixer Upper Inspections

Everyone is probably familiar with the term fixer upper, and there are many different types of them. A majority of fixer uppers are older buildings, and there are plenty of them in the Chicago area. Personally, I would say that anything older than 1950 is in this category, especially if major components such as the foundation, HVAC, electricity or plumbing has never been renovated.

Yes, you can purchase many of these older buildings at a very low cost but there’s plenty of risk involved. For example, you may run across components that need updating such as cast- iron pipes, old cloth wiring or outdated floor plans. This is a huge hassle if these things aren’t up to code. Even the most experienced investors hate to deal with these things.

But don’t let this stop you from investing in fixer uppers. Even beginners can handle these types of problems if you become knowledgeable about fixer uppers. Numerous articles explain how to finance purchases, estimate rents and purchase in the best locations. This article focuses on the inspection side of purchasing fixer uppers. It shows how to purchase the right kind of property for your particular investment strategy.

Use this article as a “to do” as opposed to a “how to do” guide. Since there is so much information on fixer uppers, the topic may seem too overwhelming to tackle. However, learn to persevere and get over the shock of it all. Realize that you’ll probably go through some rough patches, but it will be worth it. Start your journey with the following info.

1.Submit FOIA Requests

FOIA is short for the Freedom of Information Act. If you live in a big city like Chicago, most info about permit data and code violations is available on the internet. However, in smaller cities, it may be harder to find this type of info due to municipal restrictions. In order to gain additional access, submit your FOIA to the city’s designated contact. The city has 5 business days to respond to your request. Unfortunately, this could take longer if your request is problematic. Be patient because the process is rather slow.

Why make such a request? You might gain access to permits, inspection reports, past due bills and other information. Use this info for future negotiations and to avoid other problems down the road. There’s nothing worst than having to deal with surprise electrical violations a few days before closing. In an ideal world, this info should have been disclosed with the other general violations.

2. Estimate Repair Costs

There are plenty of good books and online sites on this subject. They can help gauge these types of costs. However, the best way to gauge estimate repair costs is to pay someone to provide a good estimate. Your estimates don’t have be completely on the money, but you want to make sure you’re dealing with experts when repairs are needed.

The first person I’d talk to is a general contractor. Ask for a detailed project estimate. This should provide necessary costs of everything from drywall repairs to disposal costs. But don’t be shocked if the cost is around $500.

Make sure this is done before the first offer is made. This is the best way to avoid wasting both your time and the seller’s time. You shouldn’t have to pay someone each time an offer is made, but do it until you can make an informed estimate on your own.

3. Conduct Multiple Inspections

This is when you’ll need a licensed home inspector. This person needs to inspect the plumbing, electrical, foundation, roof, HVAC and every other important component. Especially pay attention to areas that could potentially be expensive to fix in the future.

Unfortunately, not all home inspectors can be as detailed as you’d like them to be. For example, they can tell you the wiring is faulty, but they can’t tell you how much it’ll cost to repair it. Maybe, the inspector fails to catch something that goes against a city code. This is when you’ll need to get answers from professionals in specific areas. Yes, this may be expensive. Be prepared because you may have to spend thousands of dollars.

Save money by scheduling inspections in a certain order. Why? If something is caught in one inspection that you don’t agree with or don’t want to pay for, then renegotiate or walk away from it. Save money on the remaining inspections. For instance, one time I did a multiple inspection where I and the general contractor arrived first. When I was okay with our results, I scheduled a time for the general home inspector to inspect the property as well. Then I did the same with the electrician.

During that inspection, we found a damaged roof, damaged floor joists and outdated electrical service to building. I used this info to renegotiate and decrease the property purchase price by $15,000. I used the savings to pay for repairs.

However, since this is your first rehab, I think you should still bring others with you such as contractors for the foundation, plumbing, roof, electrical and HVAC. Although everything might look okay, you might not have enough experience and knowledge to tell where the real problems are.

I experienced a setback my first time out. I found a few items that I didn’t like, but I thought the electric system looked okay. I later found out that 80 percent of the building had cloth wiring, and it went against city code. I had to bring everything up to code. This meant I had to add additional outlets, hardwire the smoke detectors and add three-way switches. This was an additional $45,000 added to the budget, and I hadn’t accounted for it.

What did I learn in the process? Always create an inspection budget. Unless you’re made of money or know everything about fixer uppers, be prepared to spend extra money or be prepared to walk away from the project altogether. If you can’t do these things, then you shouldn’t be in the fixer upper business. Keep in mind, it’s possible to go broke, even on good deals.

4. City Inspections

A city inspection could be your last line of defense. The bad thing is that they aren’t as good as professional ones most of the time, but use them to scope out blatant problems. They are the best way to find out if something violates building codes. Also, by going through the process, you’ll know exactly what needs to be corrected.

Another bad thing about city inspections is that many of them are not user friendly. Get around this by working closely with the local building department. Before the inspection period ends, make sure the inspector meets with you on the property to explain in detail what needs to be repaired and why. If a physical meeting is impossible, get this detailed information directly from the inspector via the phone.

5. Margin of Safety

Be honest with yourself. Investing in properties is a risky business. Things go wrong all of the time. For instance, it may take longer to rehab the property, or surprise repairs creep up. Or you may have underestimated the rent or overstated market value.

To avoid this, make sure you purchase 10 to 20 percent less than the after-repair value minus the number of estimated repairs. Depending on what you’re trying to accomplish and what is needed, this number could possibly change. But this is still a good place to begin.

For repair estimates, take the final number and increase it by 20 to 30 percent. If this is your first rehab, you may want to increase it 50 percent or more. If you don’t plan on selling this property for a while, then have a Cash on Cash return of 10 percent and a $200 per door in before tax cash flow.

This will make things easier if you make a mistake. You’ll have the necessary cash flow to correct the mistake. Finally, make sure you have enough capital to cover budget overflows up to a minimum of 30 percent. In the long run, you’ll have to choose a margin of safety based upon your comfort level and various scenarios.

In Summary

You can make money by investing in fixer uppers. It’s possible to get better than average returns. However, you have to have a plan. Most of these properties have hidden risks that can drain your pockets. To avoid this, make sure you have specific criteria in place. For instance, I will not invest in a building that isn’t habitable. The building may need a lot of repairs, but it must have all of the necessary components.

Understand that you may need different types of inspections done by specific inspectors. You’ve probably noticed that I don’t try to handle these things all on my own. I don’t mind paying extra money for professionals to get the job done. Not only does this reduce my risk, but it helps me save money in the long run. One more piece of advice is to get past the filth of each project. Be strong enough to see the potential and know that you can make each fixer upper very valuable again.

A Guide for Fixer Upper Inspections

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