With literally thousands of foreclosed homes still on the market, real estate investors are snatching these homes up at record pace. Unfortunately, the vast majority of these foreclosed homes are in pretty rough condition and need extensive work. That is primarily why they are being sold at such bargain prices. Real estate investors typically purchase these homes at rock bottom prices (many times sight unseen), “rehab” them and turn around and sell it for profit to you the unsuspecting homebuyer.
So what exactly are you getting when you purchase a “flipped” home?
It is very important for you to remember that the entire purpose for investing in real estate is to make money. Investors are typically not concerned with the safety and well being of you and your family. They are most concerned with how much profit they can make on their investment. They will typically cut corners any way they can to make that profit, even if it is at your expense. In many cases, unlicensed contractors are used to complete the rehab. What that typically means for you are multiple safety and code violations that you would ultimately have to deal with at some point in time.
As a home inspector, I have inspected hundreds of homes that have been flipped by investors. There is a very common scenario I see that plays out in almost every one of them. Investors are very smart and know exactly what the majority of people are looking for when purchasing a home. Fresh paint, new carpet, tile, countertops, cabinets and sometimes even appliances. Can you see the common denominator? If you guessed aesthetics, you are correct. It is very easy and relatively inexpensive to make a home “look good”. Sadly, most homebuyers write up an offer on a home based strictly off of their first impression of the home. That is where the common investor has your number.
You have no doubt heard the expression “Lipstick on a pig”. This is a very common phrase used in the real estate industry, and for good reason. Most homebuyers spend approximately twenty minutes or so walking through a home prior to making an offer. At best, this provides a general impression of the overall cosmetic condition of the home. The most common thought that occurs in most peoples mind when looking at a flipped home is that the home looks so nice and brand new, what could possibly be wrong with it?
Even real estate agents unknowingly add to this perception when writing up their description of these properties in their listing. The listing description will say something to the effect “Simply gorgeous turn of the century home. Completely remodeled inside and out. Ready for you to move in and make your own. Everything is brand new. The only thing this home needs is you.” That was taken from an actual listing here in town. It is no wonder that a home buyer would naturally assume that the home is in perfect condition. Unfortunately, this is not the case with the vast majority of flipped homes. The reality here in Indianapolis as well as other parts of the country is nothing like the house flipping shows you have seen on HGTV. Far from it.
While every homebuyer wants the home they are looking at purchasing to “look nice”, it is FAR more important that the major systems and components of the home be in newer and good working condition. Most investors will not, and do not pay any attention to these big ticket items, as they are the most expensive items to repair or replace in a home. They will always cosmetically improve the home and then list it. I have literally inspected hundreds of homes that were falling apart amidst the new carpet, tile and countertops, brand new light fixtures and ceiling fans installed on ceilings that were ready to collapse, freshly painted walls that were a feeble attempt to cover up moisture stains, mold and termite damage, brand new kitchen cabinets installed right over wet and moldy drywall, brand new carpet and tile installed right over rotted subflooring, additions added without a permit. The list goes on and on and on and on.
So what are some of the things you should really be looking for when searching for a potential home?
Very simple, do not concern yourself with walls that need paint or flooring that is out of date or stained. Cosmetic items should be the least of your worries. Look instead to the big ticket items. The grading around the home, the electrical system, plumbing, A/C unit, furnace, water heater, roof (shingles and decking), gutters and downspouts, foundation, windows, attic structure, insulation, ventilation, joists, subflooring, supports etc. These are just a few of the many considerations to take into account when looking at a potential home. It is important to keep in mind that cosmetic items such as carpet and paint cost only a fraction of what the major systems and components in a home do.
So what can you do to protect yourself from purchasing a potential “flipped” money pit?
The most important thing is to be realistic in your expectations when looking for a home. No matter what the description says or how cosmetically pleasing the home may appear, no home is perfect. In the past 5 years of inspecting homes, only TWO of them have made the entire length of our report satisfactory. The number one way to protect yourself is to hire a professional independent licensed home inspector to inspect the home prior to closing. When making the initial offer on the home, make sure you add an inspection contingency in the agreement so that in the event that major deficiencies are found, you can turn and run. Do not assume for one second that just because everything looks good cosmetically that the home is in good condition and doesn’t need to be inspected. Real estate investors and sellers alike can be very clever in the ways they hide major flaws and deficiencies. It is a sad reality that in today’s economy, people will do almost anything for the almighty dollar without a conscious. A home inspection is the #1 consumer protection service available. A $300 home inspection could save you thousands of dollars in the long run. We live this every day.