Physical real estate is my second favorite asset class to build wealth. Online real estate is my first. Unfortunately, owning physical real estate can be a royal pain due to never-ending maintenance issues. You can buy new construction and I guarantee you there will be problems that need addressing within several years.
After inspecting hundreds of houses and buying and selling multiple properties over the years, let me share with you some sneaky tricks sellers deploy to make a house look better than it really is as well as some warning signs to be aware of.
With the coronavirus pandemic raging on and a very dismal economic outlook when record-high unemployment, buyers need to be more careful than ever. There are opportunities to be had, despite the big decline in inventory. You just have to patiently search.
Warning Signs When Buying Property
Selling a property is stressful. Your goal as the seller is to make your property look as good as possible in as cost efficient manner as possible. Therefore, the cheapest and easiest things to do are paint, change light fixtures, clean, and redo the floors. As a buyer, you need to look beyond the cosmetics to see what’s really going on.
1) Exterior cracks and tilts. The inside can smell fresh from that wonderful floor varnish and paint, but the exterior could cost you a fortune if you don’t pay attention. Here’s an example of a Victorian house in San Francisco that was purchased for $1.45 million. It looks OK, right? But when the owner went to get a permit to remove some decayed siding and a rotted door, he found more serious foundation issues.
Below is what the house looks like a year later. What went from fixing up some siding ended up being a complete demolition of the entire structure! Why? Because very often when you start rehabbing a property, the deeper you dig, the more problems arise. Once you’re in there, you figure you might as well replace more and more stuff until you might decide to demolish the entire structure.
If you didn’t initially budget to spend six figures destroying the house as a buyer, your financial situation will be seriously compromised. On the other hand, if you did have plans to sneak a demolition in to save on permit fees to build a massive structure for a flip, then maybe you’ll be just fine. Just make sure to have a wad of cash to pay off the building department employee who has to approve your new structure!
Bring a leveler, preferably with a laser pointer. Make sure the cracks aren’t much more than 1/4 inch wide. If they are, you should get a structural engineer to inspect. A lot of sellers will attempt to mud over and paint the cracks, so look out for a paint or surface mismatch as well.
2) Ownership history. Just like when you see a resume which shows a new job every year, a home with high turnover is also a serious warning sign. I consider high turnover as any home with an average ownership length of three years or less per owner. For perspective, the average length of ownership for a home in America today is about nine years. You can easily check homeownership turnover online.
It’s really hard to truly know what it’s like to live in a home until after you’ve taken possession. My biggest fear about buying my old SF rental property was that it was on a busy street next to the busiest street in all of San Francisco. My then girlfriend and I camped out for hours during the day and evening before making the purchase.
Yet even then, once we took ownership, we discovered we had underestimated the constant honking, rattling manhole cover, and tremors from the traffic. I ended up spending $10,000 for sound deadening windows that were installed behind the original windows which I also replaced with dual panes for another $10,000.
3) Look for water damage concealed by paint. If you conceal water damaged areas with paint, you trap the moisture in the walls that will likely lead to mold. Black mold is unhealthy to breathe. Look carefully at the underside of drawers and sinks in the kitchen. Look at the base of the tubs and toilets. One of the biggest culprits is the sheetrock underneath window sills. If you see soft or warped sheetrock, you know there are leaks.
During my 10 years of ownership, twice I hired a handyman to cut out the sheetrock, replace with new sheetrock, mud, sand, and then paint. In preparation for my sale, I also did some of my own patching and sanding work as well. Nevertheless, I still had to disclose the leaks in my disclosure package so they couldn’t use the lack of information to back out.
4) Uneven or bouncy floors. Always bring a marble to an open house and place the marble around different areas of the floor of each room. The older the house, the more important it is to do the marble test to see how uneven the floors are. Sometimes a house will aggressively settle, creating a hump in the middle.
Deflections are costly to fix because you’ve got to rip out the existing floor, correct the support columns, find a matching floor, and finish it to match the original flooring. And if there are very uneven floors, foundation work might also be needed.
It is natural to have uneven floors for older homes that have settled over time. In fact, an older home where the foundation has settled may be safer than a new home where the earth has not yet had a chance to shift. Either way, you need to make sure during the ownership history, the owner has done something to bolster up the foundation. Concrete I-beams and steal-beams are always good. So is earthquake proofing the home.
5) Beware of room fresheners. Stinky people wear deodorant or perfume. Therefore, stinky houses are often sprayed or decorated with scented candles or potpourri. Your mission is to find out whether there is an insidious odor emanating somewhere in the house. It could be a leaky pipe, mold, sewage, cat and dog pee, etc.
6) Beware when music is playing in each room. The agent/seller is trying to mask the noisiness outside. I know, because this is exactly what I did when I had potential buyers come over. I turned on the central fan to create some white noise and played some music in the master bedroom. Insist that all music and AC be turned off so you can determine the noise level yourself.
7) Areas the seller won’t let you see. If a seller won’t allow access to the crawlspace or a room in the property until you are under contract, they probably have something to hide.
8) Sellers providing incentives to waive inspection. There is no reason to waive inspection unless there is something big to hide. Always have an inspection contingency because it is your leverage to get out of a deal or negotiate your price lower.
9) No permits for work done. You should always ask to see the Report of Residential Building Record aka 3R Report. The 3R report is like the report card for your property. If the seller says they added a new deck, the new deck should be in the 3R report. If it’s not, then there is a chance the deck was not built up to code, and may, therefore, be unsafe.
There are some things that really don’t need a permit, such as remodeling a bathroom or changing windows. You can easily tell whether the work has been done right or wrong. But for major structural and electrical work, a permit is very much preferred.
10) Spray painted hedges. Who the heck would spray paint their hedges? It looks so fake. Yet here I was, minding my own business on an afternoon stroll when I saw a realtor do just that. They also bought new grass for their once dead front lawn. Smart on the natural grass, but not so smart on the spray. Curb appeal is very important. But it must be done right. If they are taking this shortcut, what other shortcuts could they be taking?
Be Super Vigilant With Your Inspection
Each time you visit a property you want to buy, put your inspector’s hat on. Test the electricity and water. Inspect the foundation. Look at the electrical box and see if it is properly labeled. Bring a marble and a needle to inspect the floors and sheetrock. Look at the ceilings to see if there is any new paint spots. Don’t forget to bring a notepad too.
A good disclosure package will highlight all the problems of the property. But it’s up to you to verify the problems are what they say they are, and not something worse. You should make it your mission to find even more problems and use them as leverage when negotiating.
After coming up with a detailed list that needs fixing, you’ve also got to come up with a detailed remodeling budget if you plan to redo the bathrooms, kitchen, and so forth.
My kitchen and a couple bathrooms hadn’t been remodeled in 25 years. My HVAC unit was 20 years old. Further, my roof had a couple of weak points which after 12 years needed some professional maintenance beyond me getting up there and spraying everywhere with a roof patch. I didn’t want to spend $100,000 – $300,000 updating the house, especially because it was a rental.
Although home prices should continue to do well over the long run, I’m happy I sold to reduce my homeownership headaches. The sale proceeds have all been re-invested in completely passive investments.
Always take your time to properly inspect a home before buying. Find a professional inspector or someone who is at least knowledgeable about the home construction and remodeling industry. You should be able to go back multiple times to inspect the home, take pictures, and take videos.
Finally, carefully read all the disclosure documents. The seller and the selling agent is required by law to disclose as much history of the property and the work done as possible. If you want to understand more a particular disclosure statement, simply ask.
Take your time in carefully evaluating a property. A real estate purchase will be one of the largest purchases you will make in your life.
Real Estate Recommendations
Shop around for a mortgage: To take advantage of record-low interest rates, check out Credible, one of the leading mortgage lending marketplaces where qualified lenders compete for your business. It’s free and takes less than three minutes to get real quotes. I was able to refinance my mortgage to a 7/1 ARM at 2.625% with no fees.
Diversify your real estate investments: If you’re looking to invest in real estate, take a look at Fundrise, one of the leading real estate crowdfunding platforms today. They operate several private eREITs that allows you to diversify into various types of commercial and residential real estate opportunities across the country. It’s free to sign up and explore.
For individual commercial real estate opportunities, take a look at CrowdStreet. CrowdStreet primarily focuses in real estate investment opportunities in 18-hour cities, those cities with lower valuations and faster growth due to demographic shifts. With work from home now commonplace, it is likely more people will escape expensive and densely populated areas like NYC to lower cost areas of the country. CrowdStreet is also free to sign up and explore.
Updated for 2020 and beyond