Monday, October 4, 2010

What Inspections to Perform On the Flip Property

Once you have selected a property to flip and your offer has been accepted, the next step is to perform all the inspections you need to do to confirm the condition of the property. The final purchase contract will specify exactly how many calendar days you have to remove all inspection contingencies. The default period is usually seventeen days, but often this period will be shortened to as little as seven days in an REO transaction.  The inspection period starts the date the contract is accepted by both parties.

What inspections should you do?  Before paying for any inspections, read all the disclosures that the seller has provided including the Natural Hazard Report.  REO and probate transactions usually don't provide any seller disclosures for obvious reasons. If they exist, the disclosures divulge any known deficiencies in the property the seller is aware of, such as non-functioning utilities, noise problems, or any other problems that would materially affect the value of the property.

Also, before ordering inspections visit the city or county permit department to check on violations and unpermitted work. Open violations may take a lot of extra time to clear. Unpermitted work may require partial or complete tear down of improvements.  It's a good idea to check this out before making an offer.

The minimum inspections to perform are pest, home and roof for properties on public water and sewer. The prices for these inspections vary depending on the square footage of the home.  For properties on well and/or septic, inspections on them need to be done.

The pest inspection reveals evidence of termites and other wood boring insects and what treatments are necessary. This inspection also points out areas of rotten wood that needs to be replaced. Pest inspections divide findings into two parts: 1) Section One issues where there is existing damage; and 2) Section Two issues that point out problems that, if not fixed, will cause damage in the future. An example of a section two issue would be a leak under the kitchen sink that might soften and rot wood soon. Typically, a pest inspection will give estimates for repairing the damage. A pest inspection can cost from $100 to $300 depending on the company and size of the property.

The home inspection covers the furnace (including crawl space ducting), water heater, kitchen appliances, plumbing, electrical system and other minor features such as door and draw fit, condition of flooring and walls.  This inspection can easily take several hours and can cost from $300 to $600 depending on the size of the home.

The roof inspection is pretty straightforward and should reveal problems with the roof and the expected remaining life of the roof. Have this inspection even if it appears to be a brand new roof. I have seen many, many instances of poorly installed or illegally installed roofs. This inspection should cost less than $150.

I will cover the well and septic inspections in the next blog.

Remember, you may only have seven calendar days to complete and review your inspections, so retain inspectors that not only can get the inspection done quickly (and completely), but who also can get the results back to you within 24-48 hours. 

After all your inspections have been completed and reviewed, you have to then decide whether to walk away, remove your inspection contingencies, or to negotiate a credit or price reduction based upon the inspection findings.  Before, you remove your inspection contingency, your EMD (earnest money deposit) is not at risk, but when you remove your contingencies, possibly increase your deposit and sign the liquidated damages form, you can walk, but your deposit stays with the seller. 

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