Real Estate Investing Guide: What to Look Out For
It might seem like finding the right property and making an offer are the most difficult parts of an income property investment project. However, there’s a lot that goes on before and after the offer gets accepted that requires a lot of focus and attention.
Today I wanted to focus on the things you should look out for when purchasing your first income property, primarily when it comes to selecting a property and doing a walkthrough and the final inspection before the purchase. After all, this would be your last opportunity to discover if there is something wrong with the property that might cause you to reconsider your final decision.
The Final Inspection of the Property
After the offer gets accepted, your next step in purchasing a property would be going through the home inspection process. As I mentioned, this is going to be your last opportunity to discover what’s wrong with the property before purchasing. Finding these red flags could prevent you from investing in a property that is going to cost you way too much money and time in the long-run. Here’s what you can expect during a property inspection.
The inspector is going to look for serious issues that could be deal breakers when purchasing a property. They are going to look into things such as the home’s foundation, structural components, the roof, HVAC, plumbing, and electrical system. The entire home inspection procedure usually lasts two to three hours, depending on the size of the property and the complexity of issues.
After the inspection, you will receive a written report with clearly outlined results. It is important that you as a buyer attend the inspection to explore the property and learn about potential issues you might come across later on. Being there will give you a lot more information than just reading the written report.
Here’s a full list of areas the inspector is going to look into:
Heating system
Central air conditioning system (temperature permitting)
Interior plumbing and electrical systems
Roof
Attic, including visible insulation
Walls
Ceilings
Floors
Windows and doors
Foundation
Basement
Structural components
Here’s What You Should Look Out For
While a home inspection can help you spot certain red flags, keep in mind that there are some things the inspectors cannot find. These could be serious issues but, due to their complexity, inspectors might not be able to look into them. For instance, inspectors in most cases cannot assess potential insulation or wiring issues because these things are usually located between walls.
Property inspection is usually done on a surface level, meaning the inspector is not allowed to tear down the walls to look at what's behind them. This is a visual inspection where they go over the major factors and make sure all the major systems and appliances are running properly.
With that said, although the home inspection would shed some light on potential concerns with the property, there are things inspectors cannot find and you still might have to deal with them after the purchase. In other words, inspectors won’t move furniture or appliances, or look into things beyond the surface level.
Potential Red Flags When Purchasing a Property
A Dishonest Seller
In some cases, sellers don’t want to disclose the issues that are going on within the property because they want to sell it at a higher price point. There are certain red flags that can point toward a dishonest seller, such as them saying things like “I didn’t know, I haven’t lived here that long,” or them refusing to offer a real estate disclosure form. What you can do here is be persistent in asking for more details. Pay attention to the inspection report and the areas the inspector couldn’t access. Try to negotiate a disclosure form to be safe.
Cosmetic Cover-Ups
Keep in mind that sellers are going to prepare for the inspection process. It is in their best interest to pass the test with flying colors so they can sell the property for more money. In many cases, sellers use cosmetic cover-ups to temporarily fix potential issues and make the home look more presentable. While this might give them a higher inspection score, it only means more issues for you after the purchase. Warning signs in this case could be fresh paint and flooring done here and there, since these cosmetic fixes could be hiding cracks, mold, or water stains. Ask the seller why they decided to renovate those sections and whether they have any relevant documentation to present as evidence that there was nothing wrong with that part of the house.
Downplaying Problems
You will often come across sellers who persistently downplay problems and try to convince you that the issues you come across are not that big of a deal. This is an obvious red flag and you shouldn’t fall for it. If the seller is trying to reassure you with words such as “it’s always been that way,” or “show me a house that doesn’t have this problem,” you have the right to be concerned. What you can do in this situation is be more careful when inspecting the property. Look for signs of irregular maintenance that could point to more issues (such as dust in the vent, old filters in the AC system, etc.) Politely ask for documentation and proof where necessary.
Camouflaging Decor
An inexperienced eye would see a decorative rug in the corner and think it’s nothing but decor. To an experienced real estate investor, this looks like a red flag. Sellers often use decor to cover up issues during inspection. If you see any furniture that’s out of place, strategically placed rugs, or minor decor items that don’t really make sense, ask to move them and look around. You might be surprised by your findings.