Epic Real Estate Investing - EREI 072: Physical Inspections - Friend or Foe?

Episode Date: October 28, 2013

Getting a physical inspection performed is never a bad idea when buying real estate, but should you always do it? On this episode, Matt shares where he makes an exception and why. Additionally, he lifts the veil on the inspection industry to reveal what you should know about inspections, the inspectors and their reports. Matt will walk you through his thought process when reading a report and how he uses it to get price reductions, but most importantly you'll learn how to stop a physical inspection from costing you a great deal. --------- Matt Theriault shows people how to invest real estate at EpicProAcademy.com, or he does the investing for them at CashflowSavvy.com. Download his free real estate investing course at FreeRealEstateInvestingCourse.com Learn more about your ad choices. Visit megaphone.fm/adchoices

Broadcasting from Terrio Studios in Glendale, California, it's time for Epic Real Estate Investing with Matt Terrio. Yeah. Hello, everybody. Welcome. Welcome to you. Welcome to another episode of Epic Real Estate Investing. If this is your first time listening to this show, welcome. I'm extremely happy that you're here.

This is the place where I show people how to get out of the rat race using real estate. And it all begins with just a simple shift in mindset, a shift in focus. Simply stop focusing on creating piles of cash and start focusing on creating streams of cash. What we like to call in the real estate world, we call that cash flow. And by doing just that, making that shift in mindset, I escaped the rat race in less than four years. What literally 99% of our population is unable to do in 40 years. And I don't share that with you to brag, not by any means. I don't consider myself special anyway.

meaning anyone can do this. Yes, even you. If someone would only show you how. And someone was gracious enough to let me in on this particular life secret. And now I'm letting you in on it. I'm paying it forward, so to speak. And if you think that's good news, it gets even better. Because, you know, it took me just under four years to do this, to escape that rat race.

And that was with making a ton of dumb, stupid mistakes. And the great news about that is that you don't have. have to make all of those mistakes. Meaning if you, if you hang out here for a while, if you and I, we just hang out, get to know each other, and we have this conversation back and forth, you should be able to travel that road much quicker than I did. And to help you get started, I created a free step-by-step course to show you exactly how to do it, to show you exactly how I would do if I had to start all over again. And you can download that free course at free real estate investing course.com, free real estate investing course.com. Okay, so let's get right into it. I received an email

from Corey Stinson of South Carolina, and Corey asked me, should he always get a physical inspection done? So, in honor of your question, Corey, today we're talking physical inspections. We're going to talk about what they are, when do you need one, or even do you need one? And if you should get one, once you get one, what do you do with it? You see, they can be very useful tools and they can be counterproductive in some scenarios as well. And in some cases, they, you know, they are your friend and sometimes, sometimes they can be your foe. And I'll explain all of that, what I mean by that. You see, using a physical inspector to perform a physical inspection, it's a personal decision, meaning sometimes I use them and sometimes I don't.

And I used to use them all the time. And as I look back, there are some scenarios where I feel it was maybe a waste of money, a little redundant, overkill, maybe. And other times, absolutely worth their weight in gold. So we'll cover all of that today. And, you know, you can make the decision based off of your certain situations because you certainly know your situation better than I do. So I'm going to explain it from my perspective.

First, what is a physical inspection? Well, it's an inspection performed by a licensed inspector. The inspector is licensed by HUD, the Housing of Urban Development. And the official name of the license is a uniform physical condition standards license, which means they are licensed to confirm whether or not a property's physical condition meets the housing of urban HUDs. Excuse me, the housing of urban development standards. They are not licensed contractors. They are not qualified to provide any sort of repair or rehab advice or any sort of quotes.

They can't provide a bid. Keep in mind that they are generalists. And the extent of their duty is to tell you where a property fails to meet HUD standards. That's what their duty is. To tell you whoever's paying for the inspection to inform that person whether or not a property fails to meet the HUD standards. And I say that because physical inspectors, they come in all shapes and sizes from all walks of life with varying degrees of personalities with a wide variety of career backgrounds and

experience. They're not all created equal. Some take their jobs very seriously and they're professional about it. Some take their jobs too seriously. And sometimes you have others that just kind of go through the motions and just don't really like what they do and don't want to be there and they just want to get the paycheck. Unfortunately, that's just how it is. That's the reality of it.

Their primary job is to inspect a property and inform the client, the client being the person who is paying for the inspection. They don't have to disclose this to everybody involved in the transaction. They're only required to disclose this information to the client. And they are there to inform the client where the property fails to meet HUD standards. So a good inspector might say, I noticed moisture under the sink. This is where I'm kind of going with this of what their duty is. A good inspector might say, I noticed moisture under the sink.

And you might want to have an expert come out and take a look. They may be really thinking, hey, that looks like mold. But by saying the word mold, that takes them beyond their scope of expertise. And if they're wrong in that assessment, there could be some liability for them or there likely could be some liability for them. And that brings me to a very, very important point. Physical inspectors perform a duty of which can carry a significant amount of liability. They're in a very important position where they're in a position where people make very expensive decisions based off of their report.

They're in a position where they can easily be sued. And, you know, real estate can be a very litigious industry. I mean, just imagine if they fail to enforce. you about the moisture under the sink because it was just a little bit of moisture so they didn't think it was that big of a deal. And then you go ahead and purchase that property and indeed behind the walls where that moisture was noticed where just that itsy bitsy little piece of moisture was noticed behind the walls there does turn out to be mold.

You would absolutely have a case against that inspector because to rid a property of mold typically isn't cheap. So the nature of inspectors, because they know the vulnerable position that they're in, they will typically disclose everything that they see. Because their report, it has to prove that they actually did the inspection. And like if they have to go into a court to defend themselves, they have to prove that they actually did the inspection. And here's what I mean.

So say after you purchase the property, you find mold in the basement. And you go back to the physical inspection report and you see no notes in the basement section of the report. Well, how do you know if the inspector even looked in the basement? Or I should say, how does the inspector prove in court that he or she looked in the basement? Well, the only way that he or she can prove it in court is to actually make a note of something in the basement. to prove that they were there. So with that in mind, a physical inspector will make a note essentially of everything everywhere, whether it's a problem or not.

They do that. They make a note of everything on the property that they see to cover his or her ass if they happen to end up in court. So that's what a physical inspection report is, a general report confirming a property meeting HUD's physical standards. and that's the nature of the report and how most inspectors perform, how they act. I don't know if the act is the right word, but that's the manner of which they conduct their business. They have to keep everything in the mind. They have an obligation to the client, but they also have an obligation to keep in their own ass out of high water. Now, when do you need a physical inspection performed?

Well, I think it's a good idea to always get one performed. but it might not always be practical. It might be an overkill or redundant. And if you're doing a high volume of transactions of buying and selling property, it can get a little expensive. You know, in most cases, a physical inspection is going to run you anywhere from $200 to $400 for an average middle of the house, or excuse me, the middle of the road house. The more you go up in square footage, the fee will increase accordingly. So the answer to when do you need a physical inspection, I'd say every time, but I still don't perform one every time. It's a good idea to do it every time, but I still don't do it.

And I'll tell you why. I'll tell you where I make an exception. I make an exception when I'm doing rehabs, when I'm doing fix and flips. I have found that my contractor or contractors, when they go into a property and they assess what needs to be fixed, I find that to be sufficient. Now, I have a relationship with my contractors. We do a lot of work together. And, you know, it hasn't turned out to be anything significant a couple times maybe, but that's

going to happen. I mean, they certainly, they can miss something. That's not uncommon. But so can the physical inspector. So I actually find more value in my contractor's reports because I know from their report how serious it is. They're the contractor. They're going to be the ones be doing the fixing or the repairing. So I know how much it's going to take to repair something or if it needs to be repaired or actually replaced. I just get that information a little quicker. And I'm actually hearing it from the

person that's going to be doing the work. A physical inspector not qualified to elaborate on the seriousness of what they find, nor are they qualified to provide estimates. They have no idea what repairs or labor. Some may think they have that experience. Some will give you a ballpark figure, but that's not what they do. That's not why they're there. That's not what they're there for. And that's not where their expertise lies. Now, you can ask a physical inspector for their opinion. I've certainly done that before. And some will give it to you, and some will be very frank. Depends on what the relationship is you have with them. Again, they're keeping their liability in mind. But keep in mind, whether they give you their opinion or not, it's the opinion of someone

not qualified to give a professional opinion to the answer or to the question that you're asking. The good inspectors, this is what they'll do. They will recommend that you have an expert look deeper into whatever issue it is that has you concerned. So you see, you know, hey, the crack over there in the corner of that foundation, you know, is that a big deal? Well, sir, air, ma'am, if you think that's a big deal, then it could. be a big deal, and I would recommend you have a professional come out and look at it and assess

the situation. That's what a good, that's what a good inspector would say, okay? One that's maintaining or walking the line of being responsible to the client and also being responsible to their, to their own issues, their own business. So that's where I make an exception. If I'm going to be rehabbing the property anyway, I don't use a physical inspector because my contractor he's going to fix it all anyway, even if the physical inspector found it. And I would like to get the bid, and I'd rather get the bid sooner or later, because, you know, this is a speedy business where you've got to move quick, right? But in just about every other case, however, I do.

I do use a physical inspector, especially if I'm going to be living in the property myself. Not only do I want to avoid problems and repair costs, I don't want any surprises if it's my primary residence, but I'd also like to avoid the inconvenience just as much. because I'm living there and I got to make room for whatever has to come and be repaired. But that's the situation or the scenario where I don't hire a physical inspector. Now, what do you do with the report once you have had an inspection performed? How do you read it? How do you look at it?

What are you supposed to do with it? And the answer to that question comes with a big, capital B-I-G, a big fat. It depends. And I'm going to try to give you, or I'm going to try to answer this in a way. way that it can be as general of an answer as possible, but that, hopefully I can address as many scenarios as possible, but I doubt I'd ever be able to cover all of them. But I'll just go ahead. I'll share with you my thought process and my experience and how I use the physical inspection reports that I have performed. So when I get a report, I first look at the major components

of the property. There's four major components. You got the foundation, you got the roof, you got the electrical, and you got the plumbing. I want to make sure that the foundation is consistent with the foundations of surrounding properties. And why I say it that way, what I mean by that is for houses that have been standing for any length of time, there's likely to be a crack or two in foundations. There's always settling of the construction, and the earth shifts. You know, in some places, parts of the country more than others, I think in my St. Louis market, the whole city is built on clay.

So there's some shifting going on there. But that's normal. People still live there. They've lived there for hundreds of years and everybody's fine. It just depends on the area. So that's why I want to make sure that the shift is consistent with other houses in the area. Just so everything is moving. And when it does concrete, it tends to crack.

So I'm not alarmed by cracks. I'm alarmed by houses falling off their foundations. That for sure. But just because there's a crack doesn't mean that's what's happening. So I look at the report to make sure that the property is likely to be relatively level and hopefully it'll be sitting in the same place 30 years from now. That's what I'm really looking for on the foundation. That's what I mostly care about.

There. The next thing I look for is the roof. And I look for just the basics, not rocket science. Are there any leaks, any signs of leaks? And if not, how much life does it have? Okay, how long before I'm going to have to replace it? You're going to have to replace roofs. It's just part of the owning property.

You're going to have to do it. I just like to know when I'm going to have to do it. Then I look at the electrical and I look at the plumbing. And if long there are any major issues there, if those four components aren't in any major disrepair, the foundation, the roof, the electrical, and the plumbing, there's typically nothing else on the report that's going to alarm me or scare me away from the property.

And I say typically. Okay, there's always exceptions. But that's how I look at a report and that's how I assess it. And here's why I don't give a bunch of weight to the rest of the report. First, it's a used house. I mean, unless you're buying brand new from the contractor that built it, it's a used house.

Someone lived there before. Maybe more than one person or family. Maybe several people or families have lived there before. It's not going to be in perfect condition. So I'm not going to freak out if it's not. I'm expecting it not to be. Second, I know the inspector because of the potential liability he carries, the, the the liability that I explained earlier, is going to make a note of everything.

He has to. He has to protect himself or herself. When you add all of that stuff up, a physical inspection report can be very thick. It can have a lot of information. There can be very scary, especially when you're looking at one for the first time. Or if you get an inspector that just goes overboard with disclosures, because that happens too. And you're going to think, wow, my last report wasn't nearly this thick. this house must just be a pile, a piece of junk.

Not necessarily. Okay, not necessarily. And I share all that to say, keep in mind, keep it all in perspective that the physical inspection is a general report. It's going to give you a general assessment of the property. And as you're going through it, and if anything causes you concern, just have an expert come out and take a look. Get an expert's opinion before you do anything rash or before you get all excited and overwhelmed and frantic.

Just be cool. It's just a house. House is break and houses can be fixed. Just keep it all in perspective. At the end of the day, it's just a part of the math equation that you're doing when you assess your investments. And that brings me to the last thing that I want to cover because a physical inspection report, like I mentioned in the beginning, it can be your friend or it can be your foe. and here's what I mean. It can be your friend in the sense that you can take that physical inspection report

during the escrow period and you can show it to the seller, this is during your due diligence period, you can show it to the seller in the interest of maybe getting a concession or two or getting a price reduction or getting a maintenance credit or maybe you can request for the seller to share in the newly found liabilities. The report is your friend is it can open up the doors to further negotiation on the property. I do this frequently. If there's things wrong with it, is it?

Well, you told me what was wrong with the property. I walked around and saw what the property was and that's what I based my offer on. But now that we have the physical inspection report, we have a bunch of new information here. Maybe we have to renegotiate. I do that all the time. And you're totally justified in doing that. So that's where the report can be your friend. Now, here's where it can be your foe.

And I alluded to it just a minute ago. It can be your foe if you give the report more weight than is necessary. Meaning if you found a great deal and the seller is motivated and you stand to make a good chunk of money by whether wholesaling the property or fixing it up and then flipping it or you stand to make a nice double digit cash on cash return by holding on to it and renting it out. and in the physical inspection report, it's noted that the electrical panel is burned out and it needs to be replaced. And because you listen to this podcast, and you know that that's one of the four major components

that you have to watch out for, and you know that you can use this report as a negotiating tool. So like a diligent investor, you ask the seller for a price reduction so you can go and fix that electrical panel because this is serious. It's part of the electrical.

The report right here says so. and if that and you do all that and the seller says no they're not going to replace it they're not going to provide you a discount so you can repair it keep calm before you do anything crazy keep calm first keep here's what you have to really understand yes you have the right to ask for repairs in fact it's your duty as an investor is to get the lowest price that you can especially if it's justified by a report. You have the right to do that. The second thing to consider is, although you have the right to ask for it,

the seller is under no obligation to comply. They are under no obligation to fix it. So if the seller chooses not to budge with a price reduction or perform the repairs themselves on that electrical panel, before you get all twisted up and emotional about it, just keep calm and do the math. is this newly found expense, this newly found liability, is this a deal killer? Will the cost to replace the electrical panel ruin the deal financially, mathematically?

We're not concerned about your emotions. We're not concerned about your principles. You've got to keep everything in perspective. It's an investment. Is it going to make money or is it not? Run your investing like a business. Don't throw the baby out with the bathwater. Don't cut off your nose to spite your face.

I mean, keep in mind everything that was involved for you to get this far in the process. You're almost home. You got a good deal under contract. You generated a lead. You took the time to meet with the seller and build your rapport. You took the time to negotiate a good deal and you got the contract signed. And then you put out the expense and the effort and the time to get the physical inspection done. And now that you've done the math,

the electrical panel turns out not to be a deal breaker. It's still a good deal even if you have to replace it yourself. You don't want to start all over just because you feel the seller should replace it. Or you don't want to start all over just because they might have snubbed you or laughed when you asked them to replace it. They might feel like they already gave you a good enough deal and their arm has been twisted enough. And they just laughed at you because you asked for it. Again, some more. You crazy?

No. Just because you ask doesn't mean they have to comply. They are under no obligation to make any repairs. It's not your right to get that repaired. It's your right to ask, but it's not your right to get repaired. Got it? So the report, it makes for a good negotiating tool as its documentation from a licensed professional that justifies your requests.

But if you give it too much weight to where you fail to see the forest through the trees, you could lose a deal. Makes sense. So that's what it is. That's how it works. That's when you should use it. Well, you should use it probably every time. But I'll let you know when I don't use it.

And once you've got it, that's how you assess it. That's how you read it. And then that's what you can do with it. You can use it as a negotiating tool. And I like to use it for that purpose. But just because you do doesn't mean the seller has to comply. and if they don't comply, don't get your feelings hurt and cancel the deal. Especially if it's still a deal.

You went through a lot of work, a lot of effort to find the deal. That's the hard part is done. Now is the fun part, the easy part. You get to start building your wealth. You get to flip it and make a bunch of money, or you get to hold it and experience a bunch of cash flow. Got it? So it's your friend.

And it can be your foe if you give it too much weight or if you take anything out of perspective where you get emotionally involved. sense? All right. So that's it for today. Until next time, to your success, I'm Matt Terrio, living the dream. You've been listening to Epic Real Estate Investing, the world's foremost authority on separating the facts from the BS in real estate investing education. If you enjoyed this show, please take a minute to visit iTunes and share your thoughts. Thanks for listening. We'll see you next time here at Epic Real Estate Investing with Matt Terrio. This podcast, is a part of the C-suite radio network.

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