When flipping real estate, you can assume repairs will be needed, and in some cases properties may even require complete renovations. As a precautionary measure, a home inspection is always advised, although you don’t always need to pay for it.
The new investor
If you are a new investor, hire a licensed home inspector. You need to know all the things that are wrong with the property, and that is exactly what the inspector will do. As part of the learning process, be present for the inspection and ask questions.
It does not matter if the property is new or old, a home inspector will still come up with a list of recommendations and repairs. Do not be alarmed by the number of items in the report — a good inspector will let you know everything that is wrong with the property. Many of the items will be minor. Review the list, determine which repairs are serious or safety issues, and analyze the repair costs.
The experienced investor
Experienced investors and their general contractors should be able to spot troubled areas. A home inspector will point out the same items and recommend an expert for a further analysis, so is it necessary to hire a home inspector to tell you what you already know?
Save yourself time and money and go directly to hiring experts that specialize in specific areas. (foundation experts, mold experts, roofers, electricians, plumbers, and so forth). Often times these estimates are offered free of charge by the subcontractors and more informative than a home inspectors evaluation. If you are planning on remodeling the home, and you know you will be replacing items, than an inspection of those items may not be necessary.
When requesting repairs, a seller will not accept the opinion of your friend or general contractor. In addition, the seller may require receipt of the home inspection. Although you are not obligated to provide a copy of the inspection report, do not be reluctant to make it available. The seller will be more agreeable to the repairs if they see other items on the report that you did not request.
For a property that needs numerous repairs, ask the home inspector to inspect a few select items at a reduced price. If the seller agrees to the repairs, the sellers repair cost may outweigh the $400 +/- you spent on your inspection, saving you money in the long run.
REO home inspections
When purchasing a REO property, you are purchasing it “as is”. On a standard Florida “as is” contract the buyer has the right to perform an inspection and based on the results, terminate the contract, and receive their escrow deposit back in full. What many investors, and even some realtors do not realize is sellers of REO properties will not return an earnest money deposit if the buyer cancels based on inspection results.
In addition to the standard Florida “as is” contract, banks require buyers to sign a bank addendum which supersedes the state contract. This bank addendum allows for an inspection but does not allow the buyer to terminate the contract based on the inspection results. The buyer must provide written notice to the seller of any problems or items they disapprove with the condition of the property along with complete copies of all inspection reports. If the seller elects not to repair or correct these problems, then the buyer may terminate the contract and receive their earnest money deposit back in full.
It is important to review and understand the bank addendum inspection timeline prior to signing. The Florida “as is” contract states inspection dates begin on the effective date, but with many bank addendum’s, inspection periods begin at the date of acknowledgement, which is the date of verbal acceptance.
Lastly, check the number of calendar days they are allowing for an inspection on the bank addendum. It may differ from the number of days in your original “as is” offer. I have heard of cases where the “as is” contract stated 15 days, but the bank addendum was changed to 7 days and neither the agent nor the buyer realized it. Silence from the buyer is recognized as acceptance by the bank, so this could potentially put your buyer at risk.
Keep an eye out for my upcoming blog on REO Quagmires, in which I will discuss in further detail the”as is” contract vs. the bank addendum’s.