So, you think you found the perfect investment property? The price may be right, and the building looks promising on paper. However, identifying potential contenders is only the beginning. Like any real estate dealings, investment is often a numbers game, and you will need to inspect many properties before finding the perfect fit carefully.
Many elements will not come to light until you do some in-depth research on the building, its condition, and any potential legal issue that may be attached to it. Sometimes, spending time and money on these extra steps could save you a lot of stress and heartache in the long run. So before celebrating, take a second look at these five elements before buying an investment property.
What is the scope of work?
Real estate investors love rundown properties. Often priced for a bargain, they are the perfect opportunity for a house flip or to turn into rental properties down the road. However, be careful not to take on more than you can chew.
In some rare cases, you will find a property that is in complete disrepair, and the best course of action is to tear it down to its foundations to redevelop. Most of the time, however, you will need to carefully examine the scope of work to be done to know if purchasing a property is worth it or not. You may potentially want to lower your offer or even walk out of the deal entirely.
Be particularly mindful of potential electrical and water piping problems. Those elements are critical to the proper functioning of the building but are usually hidden behind walls and other furniture fixtures. Repairing them can be expensive since you have to hack into the walls and redo the systems entirely if it is not salvageable.
Unless you have industry-specific knowledge, bring an electrical engineer along with you when you are doing some property inspection to give you an early evaluation of the situation.
What do the foundations of the building look like?
Structural issues will make the difference between a property that is salvageable and a teardown. Depending on your objective and your budget, it could make or break a deal. Unfortunately, foundation problems can be hard to spot for the untrained eye.
When walking around the property, look for cracks appearing on the sidings and foundations. You may find large unusual holes on the side of the property or cracks on the exterior paint of the building.
If you spot any of these issues during an initial inspection, you might want to bring in a civil engineer and a contractor. They will be able to give you an estimate regarding how much it will cost to fix the property if you suspect the repairs involved will be substantial. You can also bring this additional information to the table during negotiations with the house owner to bring down the cost of the property.
What is the condition of the roof?
Roofing problems can be a persistent nightmare for you and a potential tenant if you intend to rent the property. When inspecting the house, look around the ceiling, near the windows, and around the edges of the walls for new paint, yellow spots, or cracks. If the property has an attic, demand to access it and look for signs of mold
Most sellers will eliminate water bubbles after a heavy rain when trying to sell the property. However, you can usually spot signs of former water damages. Before making an offer, figure out if there is significant leakage in the roof, which would be expensive to repair.
A property that has been sitting with a leaking roof for a long time will likely have other issues related to this defect, such as mold, damaged floors, and ceilings, etc. Use this defect to negotiate the price of the property further if you are still considering buying it.
What is the legal status of the investment property?
A common reason for a discounted property might be because of legal problems associated with it. For example, multiple owners could be in disagreement about whether to sell or not. It is often the case if the property is an estate sale, or during a divorce.
In this case, litigation is often futile, and you should avoid such property once you learn about it. Check out the listing history of the property, especially if it has been sitting on the market for a long time. Don’t hesitate to ask your real estate agent if he or she is aware of the situation.
Another problem might be a lack of clean title. Did you know that the seller can sell the building without the land? Or that there might be existing tax liens on your property or some other liens that can prevent you from getting a clean title to the property?
Spending some time chatting with a reliable real estate attorney to learn about common real estate problems in your area can save you lots of legal issues later. Many liens are public record, so check with a title company as well as the local authorities.
Is the investment property bank-owned?
Many potential investment properties are cheap because the owner went bankrupt, and the bank repossessed the building. However, dealing with a bank-owned building (or REO) is very different than purchasing a building owned by an individual.
A bankrupt seller may affect your ability to transfer title quickly depending on the legal procedure in the state the property is located. However, most banks are willing to sell the property at a bargain to recover the bad debts quickly.
When evaluating a potential property investment, always check those five elements first and don’t hesitate to ask for help when needed. If the properties you are considering have any of the flaws mentioned, get detailed quotes of the cost it would take to remediate depending on your investment strategy. Wise investors must know when to reduce their offer, reevaluate their goals, and, most importantly, recognize when to walk away from a deal.