From Ken Holmes, Fix and Flip Advisor…
When I first started rehabbing back in the 1990’s, we didn't have many home inspections. Back then the rule in real estate was “caveat emptor”, Latin for “let the buyer beware”. Buyers would often just buy the house with nothing but a termite inspection, which was required by the lender.
Ah, the good old days!
As the proclivity of suit-happy buyers increased, Realtors began advising their clients to get a home inspection, supposedly to protect the buyer. In reality, the agents wanted this so they would not be sued.
I know one agency that actually had a lawyer on retainer full time, due to so many post sale lawsuits dealing with the condition of the property. With the agent being the “professional that should have known”, they were inevitably drawn in to the lawsuit.
So the agents started recommending home inspections. And if you think about it, it’s basically the agent talking the buyer into paying for a home inspection, which was really an insurance policy so that the agent wouldn't get sued. Pretty sweet deal for the agent – free insurance. The home inspector has errors and omissions insurance, which is where the lawyer will go if a lawsuit comes from an unseen issue.
The number of home inspectors increased due to this demand, and prices have stayed very reasonable. They cost $250-$450 back in 2000 and are basically the same now.
These days, the home inspection is such an ingrained part of the system that standard contracts mention them and offer due-diligence periods. It is just part of the game now. So, as Rehabbers we have to expect them and deal with them.
How It Really Works
If a buyer pays a home inspector $350 to inspect a house, what are the chances the inspector will say “This house is great, go ahead and buy it”?
Well, in my experience none, zip, zero.
They always find a list of things that need attention. I once sold a house, the buyer got an inspection, I fixed the items, and then the buyer couldn't get the loan.
So the house goes back on market, gets a shiny new buyer, fresh inspection, and a new list, which is fixed – and again no loan.
We do it a third time, and yet again a new list. That time it closed, but I believe a 4th and 5th buyer would have again had new home inspection lists. And yes, I do a good job rehabbing the houses. The fact of the matter is, home inspectors just have to find things to put on their “list” in order to justify their fee.
Many of the items are small and require little work…
“Striker plat in hall bath door does not align well with knob. Adjust to have a positive latch”
Well, thank God he found that! What would we have done!
Others are bigger…
“Some mortar degradation between bricks on a pier below the kitchen”
Well, OK I can get some new mortar in there, but that pier has worked well for the last 60 years.
Bottom line, I’m telling you they will always find something (or more likely, several things) for you to have to fix. And we just have to deal with it.
3 Types of Home Inspector “Fix Its”
In my years of experience (and I do have some, believe me) these “fix its” typically come in three varieties:
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Real issues that matter
“Plumbing leaks, electric code violations etc.” These things have to be fixed no matter who buys the house.
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Minor issues
“The heat ducts could be strapped better to the joists. The heat/air unit is not caulked well to the house. The bath door doesn't latch well”. These are not a big deal but probably should be addressed.
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Things they just want
“It would be better if there was a gutter over the deck.” Well sure, but didn't you notice that when you looked at the house? I am not selling a house with a gutter.
The Way I Handle Home Inspector “Fix Its”
The way I choose to handle home inspections requests depends somewhat on the property.
If the house has been on the market for a longer than normal time and I am anxious to sell, I often don’t argue much. If I put up much of a fuss, and they don’t agree, they can get out of the contract and I don’t want that. So I’m pretty willing to play ball, even on the little stuff, in these cases.
If I have a hot property that was only listed for a week and had 12 showings before I got the contract, we’ll I’ll bargain harder. In these cases I try and get a back-up contract and let the buyer know. The threat of that will get them to back down on non-essential items.
I always fix those things that fall in the 1st category above (real issues that matter), as I truly do want the buyer to get a good house, and I want the agents to know that dealing with Ken is good business.
What I Typically Factor
Most of the time I factor in $1000 to $1500 for home inspection repairs when I run my numbers going into a deal. It’s a pretty safe number in my experience, and they rarely end up more than that in my experience. Anything with a higher price tag than that would most certainly have been covered in my rehab already. But even if I missed something big, I've got enough margin in my deal to cover it if I really had to.
But $1,000 to $1,500 for home inspection repairs has been a pretty good number for me to factor into each deal. That way, if they come out in that range, I am getting the profit I anticipated. And if they come out even less, then great!
Ignorance Is Not Bliss
You simply can’t act like you won’t have to spend money on this, and then feel as if your profit has been lowered and get mad when you do. Plan on it.
Speaking of getting mad, you should remember that this is just business – after your “first negotiation” (the contract), you’ll always have to contend with the “second negotiation” (inspection repairs).
It always comes.
No, they’re not saying you did sorry work or tried to trick them, so get over yourself. It’s just the way the game is played, and you’re in the game, aren't you? Don’t make it personal.
I spoke with an agent last night and told her, “You are not really saying I did something wrong. After all, I hired licensed people to do the work. So it’s really them your inspector is questioning.”
We agreed that my electrical contractor would meet the buyer and his home inspector at the house to discuss the supposed electrical issue. I mean, I really don’t know if it is wrong or right myself anyway – I’m not an electrician.
But there is no reason to let your feelings get hurt. They can ask for repairs, and you can say yes or no. It’s just business.
How you react is your business and will depend on the nature of the requests and how bad you want/need to sell. But years of experience has taught me that if I factor in money each deal for this, some will come out better and others worse – and it typically averages out pretty well over a year.
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Understand – That you will get home inspection requests – get ready and don’t get mad. It’s just how the game is played, and you’re in the game after all.
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Factor in – Money for this so you don’t feel like you are losing profit. Start with my $1,000 to $1,500 per project if you like, then figure out what works for you from there.
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Remember – When it comes to making the yes/no decisions on inspection repairs, just do whatever is in the best interest of your business for this particular house. Don’t make it personal and don’t fall on the sword over anything on principle. Bottom line, it’s all about the bottom line (and integrity, of course).
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Now – go rehab a house!