The Inspection Contingency

As investors living through the excessively lopsided seller’s market of the last number of years, we’ve become accustomed to being forced to forego inspections as we’re buying rehab properties.  There has been so much demand among other investors in the market that to even stand a chance at getting your offer accepted, we’ve often times had to write the MOST attractive offer possible: no appraisal contingency, no financing contingency, quick close, and—often most importantly—no inspection contingency.  While we’re still very much in a seller’s market, it has clearly eased up a bit over the last 12 months, which has finally opened the door (at least a bit) for investors to start utilizing some of those contingencies again.  In my opinion, the most important of these contingencies is the inspection contingency.  We’re going to discuss the most important inspections that investors can utilize to ensure they’re not buying a lemon or at least can renegotiate terms with sellers after discovering material defects.

The Sewer Scope

As both a real estate investor and a real estate broker, I can’t begin to tell you the amount of money that my buyers and I have saved over the years by doing sewer scopes as part of the inspection process when purchasing a house.  It is, in my opinion, the best $100-$175 you will ever spend in the real estate buying process.  Sewer lines are big ticket items that can have a significant effect on your bottom line as an investor, and just like everything else, they’re not getting any cheaper.

I remember, the very first investment property that I bought, I paid $99 for a sewer scope, and the scope revealed that the house was serviced by a sewer line made out of Orangeburg piping.  Without getting into the technical details of Orangeburg, suffice it to say that the sewer technician told me that if I ever tried to do regular maintenance on the sewer to clean out roots or a blockage, the entire sewer line would essentially disintegrate.

Herein lies the beauty of having this information before closing on the house: this wasn’t my problem; it was the seller’s problem.  While we had already agreed on a contract price, I was no longer willing to purchase the house at that price with this knowledge.  On top of that, since I disclosed to the seller that there was Orangeburg piping, they would have to disclose that to any subsequent buyer if our contract terminated.  So, we ended up renegotiating the purchase price to be decreased by the cost of a new sewer line.  I have since told this story to all of my buyers that I’ve worked with and saved them, as well as myself in my own investments, countless thousands of dollars over the years.  If you’re able to work in even a limited inspection allowance in a contract, the sewer scope should be #1 on your list.

The Structural Inspection

While structural issues are obviously far easier to spot on a walkthrough of the house than a sewer line issue, unless you’re a structural engineer, you probably have no idea just how serious the structural problem is or how expensive it will be to remedy.  This is where having a structural engineer come out to inspect the property and give you a written report stating what the issue is and what is needed to fix the problem can save you tens of thousands of dollars.

These structural engineer reports are certainly not as cheap as a sewer scope, but they can also save you significantly more money in the long run.  The engineer will come out to do a visual inspection of the issue and write a report for you.  Typically, they will charge you another fee to add in a stamped drawing of plans needed to fix the issue that is causing the structural damage.  Then you can take this drawing to a contractor that specializes in structural repairs, and they can give you a price to do the work.  Then, same as with the sewer scope, you can determine whether you want to proceed with the contract, renegotiate with the seller, or walk away from the deal altogether.

You’re An Investor Not An Engineer

While nobody likes spending the amount of money that licensed engineers charge to inspect a property that you may end up not buying based on what their report reveals to you, it is far better to know what you’re getting yourself into before making that final decision.  I also have learned better than to just use my own judgement when I suspect structural damage to a property.  I’ve seen issues that looked minor to me, and an engineer’s report revealed that I was looking at a $40,000 repair; conversely, I’ve seen issues that looked like they were incredibly serious that could be fixed with just a couple thousand dollars of repair.  Bottom line: I don’t know.  I’m an investor, not an engineer.  For that reason, if you are trying to buy a house that looks like it may need structural repair, spend the money to get a structural engineer’s written opinion.

Inspect For “Major Health And Safety Items”

As noted earlier, we are still very much in a seller’s market; however, there is indeed more flexibility to be able to include inspection contingencies in your offers when buying in today’s market.  I often see in contracts that inspections will be limited to “major health and safety items.”  I would say that sewer and structural certainly fall in that bucket, so you can likely protect yourself by adding that verbiage into offers without sellers being concerned that you are going to nitpick them on other, more cosmetic items.  In the end, it is always best to know as much as possible about the rehab project that you’re undertaking before committing yourself to it, so get inspections for those large ticket items.

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