Real estate investors run the gamut from those that are risk averse to those that are risk tolerant. For those who are not averse to risk, it is a slippery slope in terms of simply being risk tolerant to being a risk seeker. On real estate investor forums, online commentators are always posting questions to gauge the reactions of their peers (perhaps for a sanity check), such as,
- “Would you invest in a property with an unpermitted addition?”
- “Would you invest in a property with asbestos siding?”
- “Would you invest in a property where you would be inheriting a tenant?”
- “Would you invest in a property that had sustained substantial fire damage?”
- “Would you invest in a property that has a foundation crack?”
The answers to these questions will likely be driven by a multitude of factors beyond just the risk tolerance of the individual. In some cases, the answer will also be impacted by how tenant friendly versus landlord friendly the geography is, or how intense the scrutiny by local building inspectors is believed to be.
Unpermitted addition
As with many of these questions, the answer is likely to be “It depends.” In the case of an unpermitted addition, some of the follow up questions to consider are:
- What is the prospective buyer’s exit strategy? If he intends to hold the property long-term, it might not matter to him whether having to disclose the unpermitted addition at the time of a future sale will be necessary.
- Does the work appear to have been done by a professional? If so, it might not be much of a hurdle to have the situation remedied (addition inspected and a permit issued).
- Will the prospective buyer’s homeowner’s insurance cover the unpermitted addition?
- Does the prospective buyer intend to rent out the unpermitted addition? This could pose liability issues.
Asbestos siding
Whether or not to purchase property known to have asbestos siding seemed to have an equal number of supporters and detractors amongst real estate investors if the siding is in good shape. Many commentators stated that there is no reason to remove asbestos siding in good shape—that there is nothing inherently unsafe about it unless it becomes airborne. These commentators added that asbestos siding is very resilient (lasts longer than other siding types) and can be safely encapsulated by siding installed over it when it is time to replace it.
Others stated many reasons not to pursue a house with asbestos siding: (1) if you encapsulate it, you cannot be assured that nothing will break during the encapsulation process and send particles airborne; (2) if it needs to removed, safe removal really requires a professional asbestos abatement contractor; and (3) disclosure of the existence of asbestos at the time of a future sale will cause the seller to take a hit on the sales price.
One commentator added that in some local jurisdictions in his area, it is illegal to cover asbestos siding with vinyl siding. In Maryland specifically, the homeowner is allowed to place vinyl siding over asbestos siding but a non-licensed contractor is not allowed to do so.
In Maryland, only certain landfills are permitted to accept asbestos waste.
Inherited tenant
An inherited tenant can be either a positive or a negative—the critical strategy is to evaluate how reliable the tenant is before making a purchase. The prospective buyer must inquire as to whether or not there is a written lease, whether or not the existing tenant has a consistent record of making full, timely payments, and whether or not the existing tenant has posed any challenges for the current homeowner. The prospective buyer will need to carefully review the existing lease and make sure to confirm the payment history of the tenant—not simply take the seller at his word that the tenant has made timely and complete payments.
If the current tenant is non-paying, then the prospective buyer can (1) make the purchase contingent on the successful eviction of the nonpaying tenant before the closing, or (2) factor into the offer the legal costs of having to evict the tenant, the estimated number of months it will take to evict the tenant, and the estimated number of months before the property can be re-rented (if the tenant has caused any habitability issues).
If the prospective buyer opts to go forward with a paying inherited tenant, he should explain that he will honor the existing lease agreement until such time as that lease agreement expires (assuming that is his intention). After that time, there may be an increase in rent, different policies regarding what is considered “on time” for payment, different policies for regular inspection/maintenance of the property, different pet policies, etc.
Fire damage
An informed decision about whether to purchase a fire-damaged property cannot be made without having a fire restoration company/contractor walk the property in question and giving an informed opinion as to the cost of the restoration work.
The prospective buyer can also ask the seller for a copy of the decision rendered by their insurance carrier.
It is important to note that fire damage often is accompanied by water damage (assuming there was an effort to distinguish the blaze). They may also be extensive smoke damage. Whoever walks the property should be credentialed in fire restoration. The certifying body is the Institute of Inspection Cleaning and Restoration Certification (IICRC). IICRC’s website provides a search tool for locating a certified professional.
Foundation crack
Not all foundation cracks are the same. Cracks can range from hairline cracks with no movement to cracks with movement on the walls and/or floors. The general consensus seems to be that if the crack is a hairline crack with no movement, the real estate investor need not be scared off. If the house is older and has not had any history of structural repair work and the interior of the house is free of visible cracks, it is more likely that the foundation is in decent shape.
If the crack is more substantial and movement can be seen on the walls and/or floor, then it would be prudent to arrange for an inspection and report by a third party structural engineer (not a foundation company) with guidance for remediation, which would then be given to a foundation company for a bid. This is especially true for a newer home, where one would not expect to see cracks emerging. Depending on the cost of the work involved, the real estate investor may choose to pursue the project or not.
One developer posted online in response to a question as to how one can determine the difference between a house simply “settling” versus a true issue with the foundation. The developer mentioned that the “usual” signs of “normal” setting are minor cracks in the walls, miter joints of doors, window trim crown molding, etc. In his estimation, more significant issues are identified by heaving slabs, major cracks in slab/foundation walls/interior walls, uneven floors, and doors that are “out of square.”
Conclusion
Every prospective property is going to have its warts. It is ultimately up to the buyer to decide whether the property’s downsides will impact the advisability of the investment.
