How to Protect Your Real Estate Investment
Is a flipped house an unsafe house? Not necessarily. But you want to take a careful look at renovations, especially the DIY kind, before you ante up with your down payment.
Buying a new home, especially in a competitive market where you need your money to go as far as it can, leads to some pretty nerve-racking internal calculations. In an ideal world you would shop for your ideal home and negotiate a mutually acceptable price. But when homes are disappearing within 24 hours, cresting far over their asking prices, you start looking at phrases like "unwarranted," "needs TLC" and "buyer beware" as good things — because maybe, just maybe, these phrases will scare someone else off and allow you, the fearless homebuyer, an edge.
That's when you need to watch The Money Pit again and remember: What you don't know can hurt you.
Many home flippers are in a hurry to get their property back on the market in time to recoup their investment and make their profit, so they often skip the permits. Some homes have clearly benefited from knowledgeable, efficient contractors doing the work, but you can't tell just from looking — and a home inspection is not a magic panacea, either.
"We can't see through walls," says David Pace, president of the California Real Estate Inspection Association (CREIA). "We can't find something that is hidden; what we look for is evidence of problems." They can point out hazardous situations and find where something is not working, but they can't look behind the drywall to see if every electrical connection is perfect. They also don't do pest, mold or lead inspections. You've got to do due diligence on a lot of this stuff.
So what are some of the ways to ensure the renovations to your home are up to code (or reasonably close)?
- Invest in the right home inspector. "Ask how long your inspector has been in business, what he or she did before, what qualifications he or she has," says Pace. "This is not the area where you want to cut corners."
- Do your homework. The home disclosures will tell you when many upgrades were done; give this information to the inspector, so he or she knows where to pay particular attention.
- Ask around. "Each city has a home inspection division of their building department," says Pace. "If you're looking in an unincorporated area, the county will be responsible. You can find all the permits that were pulled on this property, and see who pulled them — the homeowner or a contractor."
- Accompany the home inspector. "There are people who object to them. Those aren't the ones I'd use," says Pace. "I mean, you don't want to micromanage or get in their way, but you want to see what they're seeing."
- Know your codes. It's not realistic to expect yourself to understand the confusing jumble of information that makes up most building codes. But there are certain things you'll want to watch out for: How wide are the railings? (Standards tightened up the distance since the '50s in response to kids crawling through and getting injured.) Do the floor tiles contain asbestos? Does the paint contain lead? Let the inspector know who will be living in the home.
- Get a home warranty. "Be aware of what your policy covers," says Pace. "If you move into a place where you know the refrigerator doesn't work, the warranty won't cover a new one." But depending on your policy, if something fails, it could be covered, even if it came with the house.
- Prioritize repairs. Some things will need to be fixed right away for safety reasons; others can wait. Make sure you understand which is what. Remember, you're in this home for the long haul — you have time to make repairs.
- It ain't over when it's over. "If something turns out to be wrong that fell under the home inspector's jurisdiction, call him or her and have them take a look. Even if it's not their fault, they will probably know how to steer you in the right direction to have it fixed."
In the end, if you buy a home that has been around for any number of years, a homeowner or flipper has probably cut corners and done a few renovations without a permit. That doesn't mean you can't buy the house. It means you need to look carefully at those adjustments. And if the sales history of the house tells you it was last sold just three months before, well, then you look really carefully.