Epic Real Estate Investing - What No One Is Telling You About Inspections | 617

Episode Date: March 26, 2019

Inspectors can be your friends or foes, either way, it is important to go through the process of inspection. We know that those long reports can be scary, which is why, today, we are examining what no one is telling you about inspections and giving you the answers you need to smoothly complete that phase. Learn what an inspector actually does, why reports get so lengthy, and how to use them to negotiate a better deal for yourself. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. So you want to be a real estate investor, but you don't want to do the work. If there were only a way where someone else could do it for you, now there is. Tune in here each and every Tuesday on the Epic Real Estate Investing Show for Turnkey Tuesdays, with your host, Mercedes Torres. Hello and welcome, welcome to another episode of Turnkey Tuesday, brought to you by Epic Real Estate Investing, My name is Mercedes Torres, and I am lucky enough to be partners in crime with Mr. Matt Terrio, the guy who created the epic real estate empire. If this is your first time listening to this show, welcome. Make yourself at home. So happy you're here with us.

Now, this is the place where I show people how to get out of the rat race using real estate. And while I say this often, you know, I say that it's simple to do. And it all begins with just a simple shift of mindset, a shift in your focused. I mean, it's simple. Stop focusing on creating piles of cash and start focusing on creating streams of income. You know, we like to call that in the world of real estate investing cash flow. So by just, with that, making that shift of mindset, Matt and I were able to escape the rat race in less than four years. I mean, what literally 99% of the population is unable to do in 40 years, Matt and I were able to do it in just about four years. Now, I don't share this to brag by any means. I don't consider myself special in any way. I mean, anybody can do this. Yes. Yes. I don't share this. I even if you're someone that just listens to the show, I mean, you can absolutely do this too. Now, someone was gracious enough to let me into the secrets and the trades, you know,

and so now I'm letting you in on it. I'm paying it forward, so to speak. So no need to reinvent the wheel. If you think this is, you know, good news and you can actually even consider. consider getting out of the rat race, you're able to do it in four years as well. And without making a ton of stupid mistakes, the great news about this is I've made all the mistakes for you, meaning if you hang out for a while, I'll be more than happy to share all the mistakes that Matt and I have done throughout the years. And, you know, you want to just hang out and we can go back and forth in conversation. You should be. You should be able to travel the same road that I did much quicker and with a lot less mistakes.

Now, I can help you get out of the rat race because I created a free step-by-step-step-plan. I call it the frustrated investors' guides to passive income. That's it. It's how Matt and I were able to do it. And the goal is to show you exactly how to do it, to show you how Matt and I did it so you don't have to reinvent the wheel, so you don't have to start over again, you yourself can do it. I mean, just go to our website, cashflow savvy.com, that's savvy with two Vs. And, you know, it's all there, download it. It'll answer all of your questions. It's

a step by step. Now, it's not literal. It's a scenario where you are able to plug in your own numbers, but you were absolutely able to do what Matt and I did. in a portion of the time. All right. So let's get right into it. So as you know, if you hear the show, I interview a lot of our cash flow savvy clients. And I interview them just because I want you to know that what I've done is very doable in your life. And I've created this entire system, kind of replicating what I was doing for myself. And then I kind of just opened the door so I can create the possibilities for you as well. Now, I'm really big on, you know, attempting to get out of the rat race. So, you know, let's go right into it. And as I've shared before,

there are several clients that are purchasing turnkey properties. And one of the things that I stress, while we do it all for you, and I really do mean we do all of the heavy lifting, We buy the properties for you. We fix them up. We place tenants in each of the properties. And the most important aspect of what I do is I manage the property with an awesome, solid team in each of our markets that collect rents and forward them to your accounts by generally the 15th of the month. I used to call it mailbox money, but I no longer call it mailbox money because it no longer shows up in your mailbox. We now do transfers, whether it's It's an ACH transfer or a wire. Your rents are collected on the first of the month, and they're forwarded to you by the 15th of the month. So I do all that heavy lifting, but I do make you do some work yourself, and that's mostly during the due diligence period. I make you do a lot of it as a matter of fact. And one thing I'm at a bit about is the inspections, your physical inspections.

And man, can I talk about inspections? I mean, I've read over, you know, 3,000 inspections in my lifetime. And we're going to talk about, I mean, really talk about what inspections are. And I'm going to remind you who and what inspections are for. So who's doing the inspections and what purpose they serve? Cool. Okay. So what you need to know about inspections, you see, an inspection can be a very useful tool,

and they can be counterproductive in some scenarios as well. In some cases, they're your friends. Inspections by all means can be your friends. And in other cases, they can be your fault. I'll explain that. I'll explain what I mean by that. So using a physical inspector to perform an inspection it's a personal decision, to be quite honest. For my turnkey clients, well, it's kind of mandatory, so much so that in many cases I will provide the inspection for our clients. But whether I do the inspection or not, I allow each of our clients full access to any of our properties during our due diligence period so that they can conduct their own inspection at any time, and that's any inspection that they choose to hire, or any inspector that they choose to hire. Whether it's someone I suggest to

them or whether they go out and find one on the web, I give all of our clients full access to our property, whether I conducted an inspection or not. Because for me, it's really important that my buyer feels comfortable with the asset that they're about to inquire. I want you to know everything about the property, the good, the bad, and the ugly. So for me, sometimes I use them and sometimes I don't, but I'm a little bit of a different investor, so you speak. My tolerance level and my risk level is a little bit different. So I don't kind of like to compare when and why I use inspections personally and compare that to why my clients should use inspections. But I do, believe it or not, use them more times than not.

Now, as I look back, there are some scenarios where I feel that maybe the inspection was a waste of money. It's a little redundant, overkill, if you will, because, you know, I do have an entire team walking a property several times during the ownership before we resell a property. we'll cover that in great detail today but you know sometimes it's overkill i have to say so you can make the decision based off of your criteria and your situation because you certainly know your own situation better than i do so i'm going to explain it from my perspective okay first let's dive into what is a physical inspection because there is actually a full uh definition of a

physical inspection. And what it is is the inspector is licensed by HUD, the housing of urban development. I mean, 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 authority or urban development standards. the housing of urban development standards. They are not licensed contractors. They are not qualified to provide any sort of repair or rehab suggestion, rehab advice, or any sort of quotes.

They cannot even provide a bid for you. Now, keep in mind, this inspector that you're hiring is a general list. And to their extent of their duty is to take. tell you where the property fails to meet HUD standards. That's their duty. It's to tell the person who's paying for the inspection whether the property fails to meet HUD standards. That's it. Now, I say that because physical inspectors, they come in all shapes and sizes from all walks of life with varying degrees of personalities, of expertise, a variety of background and experience. So I want you to keep that in mind. All inspectors are not created equal. And some inspectors,

to be quite honest, I mean, based off of thousands of reports that I've read, they have no business inspecting. I mean, it's a way to make a living for some of them. And some of them, to put but it bluntly, totally suck. You know, on the other hand, some inspectors take their job very seriously and they're professional about it. Some take their job way too seriously and provide overkill on their inspection reports.

And sometimes you have inspectors that go through the motions of what they should be saying and what they shouldn't be saying and some of them just need a paycheck. You know, unfortunately, that's how it is. And the reality of it, their primary job is to inspect a property and to inform the client. And the client is the person who is paying for the inspection. They don't have to disclose this on the report of their expertise. They don't have to disclose how many inspections they've done or how often they do inspections.

They're only required to disclose this information to the client that is paying for, the inspection and they need to ensure and inform the client whether the property fails to meet HUD standards. A good inspector might say, for example, I notice moisture under the sink. That's where I'm going with this. Their duty is to report. So a good inspector might say, I noticed moisture under the sink and you might want to have an expert come out and look at the moisture or evaluate the moisture. Now, they could be really thinking, hey, this looks like mold, but in saying the word mold, that takes them beyond their scope of their expertise. If they're wrong in their assessment, they could be putting some liability for themselves and causing or

opening a can of worms that doesn't necessarily need to be open. That brings me to a very, very important point. Physical inspectors perform a duty of which they can carry significant amount of liability for them. 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 could be sued easily. So this is why I often say consider the source of your information because oftentimes an inspector will over disclose a scenario to cover himself from liability and honestly, because he's so completely exposed as a licensed inspector. So always consider the source of what the inspector is saying and why they're saying what they're saying. Real estate is a very

litigious industry. I mean, just imagine if they fail to inform you about more, moisture under the sink, for example, because it's just too little bit of moisture to common time. So they don't think it's a big deal, right? Then you go ahead and purchase the property. And indeed, after about a year or so behind the wall, there's moisture. Where that little itsy-bitsy moisture behind the wall does turn into mold, you would probably have cause to pull up the inspection report and go against the inspector because if he would have actually said there's potential mold and you looked into it with an

expertise and it could have been eliminated then keep that in mind the nature of the inspector is because they know their vulnerable position that they're in. they will typically disclose everything that they see because if they have to go to court for some reason to defend themselves, they have to prove that they actually did the inspection. Here's what I mean. Say after you purchased a house and you did find mold in the basement and you go back to the physical inspection report and see notes that in the basement section there was potential mold. Well, how do you know if the inspector even looked at the basement or I would say, how does the inspector prove in court that he or she looted at the basement? Well, the only way he could actually prove in court is to actually make a note that there's something in the basement to prove that he was there. With that in mind, a physical inspector will make a note essentially every time, everywhere, whether it's a problem or not, about something that he saw.

That's important because if for whatever reason it came up later, he could say, on this day, on this page, I went to that property and I noted on page 17 that I saw something. This is why oftentimes an inspector produces a 50 to 60 page report on a property because he over discloses everything that he potentially saw. They make a note of everything on a property so they can cover their ass from liability. And, you know, if they would happen to end up in court for whatever reason, that written statement is what proves that they informed the client of a said situation. I mean, at the end of the day, that's what in its physical inspection really is. It's to report, you know, a general report confirming that the property is meeting HUD's physical standards.

And that's the nature of the report and how inspectors perform and how they act. I don't know if act is the right word, but that's the manner in which they condemn. their business. They have to keep everything in mind, considering they are fully exposing themselves to liability. You know, they have an obligation to the client. They also have an obligation, you know, to cover themselves from this liability and to keep themselves out of high water if that potentially is to ever happen. Now, when do you need an inspection report to be performed? Well, I happen to think it's a good idea to perform an inspection all the time, but it might not always be practical. It might be overkill and redundant, especially if an inspection has already been performed and

shared with you. Now, you're more than welcome to double verify the situation, like contact the inspector and ask questions if you're provided with the inspection report, perfectly acceptable during your due diligence. And, you know, in most cases, it saves you money. I mean, a physical inspection report can run anywhere from $300 to like $600 on average for a house, or excuse me, a middle of the road house, you know, specifically a turnkey property that we sell. But the idea is you're always able to speak to the inspector that conducted the inspection report. You know, the more you go into square footage, the higher the fee will increase according to the square footage of the property. So just keep that in mind. So long story short, I'd say every time is a good time to do an inspection of the property.

But keep in mind everything that I just said about who's conducting the inspector and what they have at stake. Now, I've lived it. My clients have lived it. And I get freaked out when I get a 50-page report on a property. And it's like, I just walked the property two weeks ago. I know that in this 50-year, page report, there's going to be a few things on there that I'm going to have to address or consider. But in 50 to 60 pages, it's overwhelming, especially if it's a full, you know, first time investor. I mean, the written word is usually overkill to what the reality of the situation really is. So keep that in mind. You know, on a side note, I find that, you know, our contractors, and my contract,

contractors, when they go into a property, they fully assess what needs to be fixed. And I find that sufficient because not only do they walk the property on the pre-inspection, they tear down the property and then go into fixing everything that needs to be fixed. Now, I find that to be sufficient, but I have a relationship with my contractors and our team. And we do a lot of work together. And to this day, knock on wood, you know, it's been, you know, 10 years, nothing significant has ever come up it. But that's not uncommon. I really like the idea of having a physical inspector after we've completed the rehab on our property. But I truly have found more value from our contractors walking the properties because they become so familiar with our property than an inspector

walking into a property for the first time and reporting on every single little thing. I mean, oftentimes, not oftentimes, every time we rehab a property, I have full knowledge of the property, at least my team does, where the contractor, or excuse me, where the inspector is just walking in and doing a physical inspection. Now, having said that, the good inspectors, you know, this is what they'll do. You know, they will recommend an item. And then they'll say you should have an expert look deep into whatever the issue is. But keep in mind, just because they make a recommendation to something doesn't necessarily mean that there's a problem. He's just disclosing a situation and advising you, I saw it.

Remember, he's covering himself in event of a potential liability. could be a leaky cosette, could be a leaky faucet, or could be a little speck of potential moisture that seep through the wall. I mean, he's reporting while he's covering himself and disclosing everything that he can. He can say, hey, there's a crack in the corner of the foundation. You know, is that a big deal? Well, sir, madam, if you feel it's a big deal, then I would recommend a professional to come and assess the situation. Now, that's what a good inspector would say. One that's maintaining or walking the line of being responsible and reporting what he sees and then advising you to take it a step further. Note. Okay. Side note. Very important.

So when I get a report, I look at four major components of every report that I get. Number one, the foundation. Number two, the roof. Number three, the election. The elect. and number four, the plumbing. I want to make sure that the foundation is consistent with the foundation of the surrounding properties. Now, I say it that way because for the most part, the properties have been standing for a length of time. And it's normal to see cracks in the driveway. It's normal to see cracks on some kind of cement while you're walking to the property. That's normal. you know, there's settling foundation everywhere because the earth shifts. Shocker, right? So it's normal that there is settling foundation in most places. And I want to almost say in every place. But unless the property is brand new, which I don't often come across, you know,

there isn't going to be settling foundation there because they just built on it. But if the property has been standing for quite some time, it's normal to have cracks in driveway, cracks in, you know, as you walk up towards the property. And in some places, for example, some parts of the country, like, for example, our St. Louis Missouri market, that entire city is built on clay. There is no way in the world that we're not going to see a shift in a foundation, so to speak. But that's normal for there. So if that's something that comes up in the report, I take that into consideration. The reality is, whether it's, you know, are St. Louis built on a clay foundation, people still live there. They've lived there for hundreds

of years and everyone's fine. Really just depends on the area. And that's why I want to make sure that if there's a shift in the foundation or a crack in the cement, that it's consistent with the other houses in the area, just so that everything is moving, so to speak. When it comes to concretes or cracks, you know, don't be alarmed. Consider the other properties on the block. Consider how long the property has been standing when it's been built. And really, how deep the foundation cracks are. They say cracks in the driveway. Are they truly foundation cracks? So I'm alarmed that with all of the reports that I've seen, not one house has reported back to me that it's fallen because of the cracks in the cement. or the cracks in the foundation. Just because you see cracks doesn't necessarily mean that it's happening. So I look at the report in that manner, and I have been doing it for the last 20 years. And so, you know, once I see, okay, it's consistent with everything else, I move on.

You know, the next thing I look at is a roof. I look just for the basics because these are the four major and most expensive items to a property. It's not rocket science. So the roof, are there any leaks? Are there any signs of leaks or active leaks? If not, you know, how much life does the roof have left? How long is it going to go before I have to replace it? Now, let's be real. If you own a property for 30 years and you bought the property not brand new, you are probably going to have to replace the roof. Now, I can't tell you how many reports I've read that says, the roof is at the end of its life.

And they give it three to five years. I still have properties where roofs had when I purchased them 10 years ago, three to five years. And many times the roof laughs an additional 12 years. So just because a license inspector states the life capacity doesn't necessarily mean that the lifespan cannot be surpassed. Now, the inspector is just reporting what he sees. There's a lot more to that. So oftentimes, just keep in mind, in your lifetime,

you're likely going to have to replace the roof. That's just how it is. Then I look at the electrical and the plumbing as well. Now, I look for major issues. And in those four components, if I can't find anything major, then I move forward. I say typically those are main expectations, and that's kind of what I teach our turnkey clients. Look at those four components, and if they all seem to be on point, then, you know, the rest of the report is good information to have.

When you're buying a turnkey property, 99% of the time you are buying a used home. I mean, unless you're buying a brand new home from a new construction company, but most of my clients are buying homes that have already been built and have already been lived in. So someone's lived there before, maybe one person, maybe a family. But for the most part, it's a property that has previously been used, maybe by several people. So property is not going to be in perfect condition. So I'm not going to freak out if it's not. And I'm expecting that you don't do the same.

Keep in mind, these products are rent-ready properties. They're not rehabbed so that you and I can move into them. They're rehabbed to rent-ready conditions, which I wouldn't have a problem moving into my properties, but for the most part, they don't always have, you know, hardwood floors, granite countertops, and marble counters. I just doesn't make a whole lot of sense to do that, but we do make the properties rent-ready. And when you're going through the report, keep that in mind. Okay. Second. I know the inspector's liability. Second, I know the inspector's liability that he carries, and I take that to heart while I'm reading the inspection report. He has to protect himself or herself. And when you add up all the stuff on the physical inspection report, it could be thick. I mean, very thick, 50 to 60 pages. So there's a lot of information there. And it could be very scary, especially.

if this is the first time that you're looking at an inspection report. It's overwhelming. Wow. And a lot of times when you get a 60-page report and you read it, you're like, wow, that report is so thick and I'm buying a piece of junk of a house. Not necessarily. Not necessarily. As I shared, and I'm going to keep repeating, keep in mind the inspector's role and keep in mind perspective and how he's reporting to you, the information. that you paid him to report.

It's going to give you a general assessment of the property. And, you know, there's going to be concerns for sure. I mean, in 50 to 60 pages, you better find something that's going to concern you. But, you know, you're getting an expert's opinion. And it's just an opinion. And before you rush into anything drastic and get overwhelmed or frantic, just consider the source. But call me, you know, we can have a conversation.

about your inspection. You know, just be cool about it. You know, it's just a house that you're purchasing. Houses break down. Houses have been lived in. Houses could be fixed. You know, keep that perspective in mind and don't get all nervous about it. At the end of the day, to be very real, it's just a math equation.

You're going to assess your investment. We're going to consider the plus and minuses, and that's it. So that brings me to the last thing that I want to cover because physical inspections, like I mentioned in the beginning, they could be your friend and they could be a foe. Friends, because they fully disclose everything about the property you're acquiring, especially a turnkey property. And sometimes it's really good because when my buyers get a second appraisal, or excuse me, a second inspection. It allows us to triple check all the work that we've done. And trust me, there will be things on that report because every inspector is looking through their own lenses. So what one inspector deems to be perfectly acceptable, another inspector might not feel the same way.

And surely will come up with their own 50 to 60 page report, I promise you. You know, I often have this conversation with our clients when I say, if I were to send three different inspectors to the same property at the same time, each inspection report will be drastically different, I promise you. So I want you to keep that in mind because that's just something that happens every single time. Now, I talked about the front and foe, and here's where it could be a fun. And I alluded to it just a minute ago. But your report might have more weight than necessary. Meaning if you found a great deal and it stands to make you a chunk of money, whether it's fixing and flipping it,

or whether you're just going to hold it because you're going to make an awesome double-digit cash-on-cash return by holding it and renting it out, if the inspection report notes something like the electrical panel is burnt out and needs to be replaced. Because you listen to this podcast, you know it's one of the four major components that you need to watch out for. And you know that you can use this to your advantage. Now you need to understand that you need to fix the electrical panel because that's super serious. it's part of the electrical, and let's face it, somebody cannot work, somebody cannot move into a property if the electricity is not on. So the report is right. You do need to replace the electrical panel. And all you need to do is say to the seller, no, I need to have the electrical panel replaced. Now, if we're the sellers, we're automatically going to do that. You probably wouldn't find that on our reports. But if you were buying your own property and that's what came up, then that's what you. That's what you. You're you need to say. Are you going to fix the electrical panel? Or are they going to discount it for you?

Now, the seller, it's their right to fix the electrical panel or not. Keep that in mind. Dispensions are a biggie. So, keep calm first. Here's what you need to really understand. Yes, you have the right to ask for repairs. And in fact, it's your duty. as an investor to get the lowest price that you can, especially if you have a report to justify it. Now, the report could be challenged because, of course, the inspector has their opinion, and then an electrician will probably have his inspection, but you do have that right regardless. The second thing, consider that you can ask the seller for a discount, or you can ask the seller to replace the electrical panel, but the seller is under no obligation to comply.

No obligation to fix it whatsoever. So if the seller chooses not to budge on the price reduction or to perform the repairs on the electrical panel, before you get all twisted up and bent out of shape, do the math. You know, let's say it cost you a couple hundred bucks to fix it. it might be in your best interest. Is this a newly found expense or a newly found liability to the deal? Of course it is, but is it a deal killer? Are you getting such a sensational deal that it wouldn't be worth walking away and losing the deal? You know, how much will it cost you to replace the electrical panel if the seller

chose not to do a darn thing about it? It's a mathematical equation. We're not concerned about the emotions. We're not concerned about the principle. You've got to keep everything in perspective. It's an investment. Is it going to make you money or is it not going to make you money? Run your investing like a business.

Don't throw in the towel before you have all the facts. Don't throw the baby out with the bathwater. Just seriously, don't cut your nose in spite of your face. I mean, keep everything into perspective through the entire process. So at the end of the day, your inspection report, whether it's a 50-page report with a line item that's overkill on every page, it's a great tool to have. It's a great tool for negotiating. And it's really a great tool to understand what you're getting at hand. you know, after all, it's documentation from a licensed professional that justifies your request

that helps you understand what you're acquiring. So if you give it too much weight and, you know, you fail to see the forest through the trees, if you will, you could potentially lose a deal if you put all your weight into a written inspection without doing more digging with your team, your seller, whoever's helping you with this. Okay. Make sense? That's what it is. That's how it works. That's when you should use your inspection report and that's how you should use it. Well, you should probably use it every time. And once you've got it, that's how you assess it. That's how you read it. Now, the fun part is easy. You can start building your portfolio and start creating your wealth with cash flow. It's that simple. Got it? It's your friend. Got it? The inspection is your

friend and it can be a full. So give it as much weight as you need to. And if you're taking everything out of perspective when you've got emotionally involved, then probably real estate investing is not for you. Does that make sense? I think it does, right? All right. So that's it for my friends, take inspections with a grain of salt when necessary, but use them as a friend and use them to your advantage, considering the source every single time. I hope that does make sense for you. All right, my friends, so that's it for now. I suggest that you start making your rat race escape plan, ASAP. So go to cashflow savvy.com. That's savvy with two V's as in Victor. download the frustrated investors guide to passive income or shoot me an email.

Reach out to me. I will get back to you or someone from my team will get back to you. Mercedes at Epicrealestate.com may take us a few days to get back to you, but indeed we will and know that we are truly here to help you create passive income in your life. Remember, it's about creating streams of income. of piles of cash. That's it for this turnkey Tuesday. I'll catch you next week on our next episode. Have an epic day. Do you have doubts about your current plan for retirement actually panning out?

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