Lessons Learned in Home Buying
I am sure this is going to be the first of many articles that talk about lessons learned when buying real estate. This article focuses on the buying process, from offer accepted to closing. Here are some things that have bit me in the backside that experienced investors may have seen coming. I hope this helps you when you are going through the closing phase. A strong Core Four can get you far, but you need to stay vigilant.
Lessons Learned #1: Read the Disclosures
Lets be honest with one another, neither of us has ever read the terms and conditions before checking the box. And that is ok, but this is not the same. The Seller’s Disclosure will tell you, to the best of their knowledge, what is wrong with the house. Or, you might learn things you were not expecting, like the house is on a septic system. You should keep track of the big ticket items, like the roof, foundation, and mechanical systems. Make sure to look at all of the check boxes. This is where they can be legally liable if lying, so information should not be hidden.
Horror Story
Ok, the heading makes it seem worse than it is, but it has proven to be more of a headache than anything else. I purchased a house as a primary residence. The inspection said the roof was fine. When I moved into the house, the neighbors asked when we were getting our roof repaired because a bad storm damaged every single roof in the neighborhood, but somehow mine was fine? Something wasn’t right.
I tried to file a claim with the insurance, but they said they couldn’t because there was a previous claim on the roof that wasn’t completed. The previous owners had started a claim, got paid out for the depreciation of the roof, then let it go unrepaired. In the seller disclosure, they checked there was an open claim, but did not explain the claim like it required. The remainder of the roof checkboxes, which there is plenty, all stated the roof was fine.
Needless to say, this is resulting in a law suit. If I file a claim, I have to pay a large deductible and there is a mark on my insurance. If I would have read closer, I would have raised that flag. Lesson learned!
Lessons Learned #2: Verify Square Footage
Like many of us, we rely on the square footage when we calculate the after repair value (ARV). This is critical when you use the BRRRR strategy. Usually, a good realtor would identify the discrepancy. However, I learned the hard way that it can easily be misconstrued. Review the county assessors information that tells you the square footage.
Horror Story
The first property we purchased in our LLC looked great in the numbers. We invested in the Midwest where the cash flow is huge. The property was listed at 1,750 square feet. With this square footage and the comps, the ARV was going to allow us to cash out refinance and get all of our initial investment back. Unfortunately, there were hiccups with the closing because the appraiser had taken a bad fall (on another property), causing a 3 week delay in closing. Everyone was eager to get the project closed and the appraisal came in over what we were paying. Everything was good right? Well the appraisal said the square footage was 1,450 square feet. This didn’t make sense, but hell, the error would help us during the refinance.
The problem came after we closed where I did more research to verify numbers. The assessors office also matched the 1,450 square feet. Our realtor pulled up the original listing that said it was 1,450 square feet above ground and 300 square feet below ground. They probably misspoke and meant 1,450 square feet with 300 of that below ground (split level). Either way, the disclosure states the buyer must verify the square footage and the seller cannot be held liable.
Lessons Learned #3: Check Mechanical Systems
I want to clarify a bit on this lessoned learned. When I say to check the mechanical system, I don’t mean run the HVAC. I am actually talking about the secondary parts of the systems. Look how the water drains in the shower. How do you access the maintenance points, like filter changes. These are items that wont be checked by the home inspector. They turn on the systems and say “yes they work.” Draining and maintenance are not their concern. Also, inspectors aren’t held liable for most things, but that is another story (read horror story 1).
Horror Story
My very first house I purchased went surprisingly well. I was lucky the previous owner took amazing care of the house and there were minimal hiccups. This is good because I definitely didn’t read all of the terms and conditions. Anyway, the master bathroom on the second floor was recently remodeled. It was beautiful. The staple was the tiled standing shower. It was spacious and had a waterfall shower head. We loved it. There was only problem, it did not drain right.
The previous owner was a handy man, and he did the remodel himself. For the most part, he did a great job. But, for unknown reasons, he moved the shower drain from the center to the corner. This wouldn’t have been an issue except he did not slope the floor accordingly. The water pooled in the center of the shower. Temp solution, squeegee. This did nothing but annoy us. We knew renters may not do the same, and continual ponding would eventually destroy the grout and cause lasting damage.
We ended up spending $3,000 to rip out the beautiful tile and put in a shower pan. It didn’t look nearly as pretty, but we knew it would save us thousands in the future from water damage. This cautionary tale saved many friends who bought houses in the area. A couple of them had similar situations and demanded mitigation before purchase.
Lesson Does Not Equal Bad Decision
There are any number of things that can go wrong when purchasing a property. Arming yourself with lessons learned can help you navigate around these obstacles. Or, better yet, give you courses of action if similar situations came to fruition. Even with all of these life lessons, I still believe I made great investment decisions.
Disclaimer
Once again, I am not a financial advisor. These tips are some things I have validated with my own personal experiences. If you feel you need more personal advice, please consult a professional financial advisor. Dont forget to check out the Book List for published authors on this topic!
