As a private investor, I am constantly listening to reasons why renovators claim they do not need home inspections. More often than not it's because their purchase price, along with rehab amounts alone put the project over budget. Then you start to add in closing cost, inspection cost, insurance (both title and builders risk), holding cost.... and then they quickly see their profit fly off into the wind. So they look at all these costs and they try and rationalize which cost can be circumvented. Normally the inspections are the cost that renovators will opt out of if given a choice. Why the inspections? I have seen time and time again how renovators, especially your more seasoned experts, believe that there is nothing new under the sun that could surprise them. This can be a fatal flaw.
For instance, a recent deal a colleague of mine funded, the borrower insisted that he had the experience to know what could possibly go wrong on any project. My friend then proceeded to agree that the borrowers 25+ years of experience precluded him from being surprised by anything. There was this small issue of the corner of the property having settled but the GC assured my friend all would be taken care of. They closed the loan and as permits were pulled there was an insurance claim that had been filed almost 10 years ago. This claim stated that part of the house was built over a "sink hole". The insurance company dropped the claim after conducting their reports and finding there was no "sink hole" issue. However, un unbeknownst to everyone involved the county permitting department had kept a record of this claim. When my friends GC went to pull permits the claim recorded popped up and now the GC had to show proof that the issue had been fixed. Fast forward a few weeks and $10,000 later, this GC was looking at a significant reduction in their profit, they had assumed all the risk, by having money into the deal, and signing for my friend's loan docs. My friend, bless his heart, was worried and stressed until the remediation was complete, for fear of the property falling into the abyss. The engineer, that performed the foundation remediation was able to provide a stamped Engineer Letter, thus cover my friend and the GC from any lawsuit and more importantly to give the house a "Clean Bill of Health".
Point of this story, should you choose to pursue becoming a private investor, and fund renovations, create your underwriting criteria and STICK TO IT! Always require a Home inspection, and proof of Insurance coverage well in advance of the loan closing. A GC does not have your best interest at heart when it comes to protecting your capital, only you do. Also had the insurance agent that underwrote the property had checked they would have found the claim, and it would have stopped the process before moving forward.
- Obtain an insurance quote as soon as you have a property under contract
- Pay for a home inspection, and not just a 4 point inspection but the WHOLE house inspection, as soon as you have the property under contract. This will catch things such as a settled house and alert you to the fact there may be bigger problems lurking in the midst