People who flip distressed properties generally enjoy the process. They enjoy making a profit at the end, but just as much, they enjoy knowing that they are building homes for people who will love living there, and improving the community at the same time. Many of our flipper clients start with just one or two projects and go on to develop dozens of properties as they gain experience and build up their own capital. As a company that is in the business of funding real estate flips, our borrowers’ success is literally our success and we love to see it happen.
Unfortunately, some people get too excited in the beginning and cut short what could become a career in real estate development through a lack of knowledge, experience, and caution. Distressed properties come with no guarantees and they are discounted because the average buyer is afraid of them – sometimes rightfully, sometimes not.
As a flipper, you need to correctly determine when to strike. If you don’t thoroughly evaluate what’s wrong with a property and how much it will cost to fix, the numbers may not align. This can easily send you over budget, causing you to lose money on a particular property.
We will share here some of the most common ways that flippers get in over their heads so you can hopefully avoid them.
It’s important to remember that not all damage will be easily visible and even a seasoned home inspector may miss the warning signs, which legally will be your problem, not his. That means it may be up to you to spot the damage on your own. Here are some less-than-obvious issues to look for when considering a distressed property for a fix and flip.
#1 Water Damage
Water damage can be caused by a steady drip over several years, a flood, malfunctioning appliances, HVAC problems, and more. The bathroom, kitchen, and floorboards are common areas where water damage occurs. Be sure to check for mold all over the house, as mold is often a red flag for leaks and drips. Look for springy floorboards in the bathroom around toilets, tubs, and sinks. Open cabinets under sinks and look for water stains that can indicate leaks down to the underflooring. Crawl under the house with a flashlight, check all crawl spaces, and thoroughly examine the basement. Look up into the sub-flooring for water stains, mold, and evidence of damage.
One home flipper found the home inspector they hired had missed some water damage from a small hole in the roof that leaked into a closet on the top floor of the house. Rain and water damage kept the closet ceiling wet even though it wasn’t enough to cause a noticeable drip. Home inspectors generally don’t go up on the roof or into attics and closets, particularly if the home is occupied, which is how this critical damage was missed. It is absolutely essential to have a roofer inspect the roof unless you can do it yourself. All kinds of games are played on the roof, including fixing the roof only in the spots that can be seen from the ground while there is massive damage not visible.
#2 Sewer Issues
If the water is on at the property, sewer and plumbing problems are easier to evaluate, but this will not likely be the case. However, there are still ways to look for potential sewer problems. Sniff around the house looking for unnatural odors caused by moisture pockets. Many distressed properties will have an aroma of dust and disuse, but sewer odors are much more pungent. Check the lawn for squishy spots and indentations, as these can indicate leakage. You should also look for any areas of the lawn that are inexplicably greener than the rest – these can indicate a crack in a sewer line that’s essentially fertilizing that patch of grass. Check all points where pipes enter the house for signs of moisture, as well.
Termites and carpenter ants can do major damage if they’re allowed to roam unchecked. You may not know about damage from an infestation until you try to work with the sheetrock and find it crumbling. Carpenter ants are especially fond of moist wood in structural areas. Look for the insects themselves, but also check for piles of wood shavings, winged ants coming out of walls or ceilings, and rustling noises in the walls.
For termites, keep an eye out for mud-like materials in basements, attics, and crawl spaces in irregular patterns. Look for working tubes outside the house, as well. Check all load-bearing wood structures for damage or weakness and for the presence of the insects in wood, as well as any spots where concrete meets wood.
Mold can be a hassle to clean up and if it’s not properly addressed, it can even result in a lawsuit against you by the purchaser of your flipped property. Some mold growth is obvious, but other growth can be lurking out of sight. You may think mold is indicated simply by black and greenish spots, but mold can also appear as white and thready, gray and brown, gray and green, orange, pink, or purple, depending on where it’s growing. If there is vinyl wallpaper in the house, pull up a bit to check for signs of mold. Sniff around looking for the tell-tale odor and get a flashlight and look in every nook and cranny, particularly in the kitchen, the bath, and all other areas prone to moisture.
In another case, a buyer had a property inspected and the home received a clean bill of health, so they made the purchase. But what they found later was shocking. There was internal water damage that caused mold but was not visible to the naked eye. A broken water pipe had spilled into the subflooring of the hallway and two bedrooms and encouraged mold growth. Mold inside the walls cannot be seen but can ruin the resale value of a property. A certified mold test costs a few hundred dollars and can protect you from thousands of dollars of repair expense that can bust your rehab budget.
#5 Foundation Problems
Problems with the foundation can be very costly to rehabilitate and, if not addressed, can cause resale problems. Look for the following as signs of foundation issues:
- Uneven floors
- Cracks in bricks on the interior or exterior of the home
- Gaps between walls and ceilings or floors
- Walls pulling away from the house
- Moldings that are cracked or pulled out of place
- Walls rotating
- Cracks in walls
- Bowed walls
- Cracks in flooring materials or foundations
Another house flipper trusted their home inspector and was devastated by additional costs when a lazy look around missed critical foundation damage. The inspector missed a crack in the foundation that would have been noticed if they had looked behind a piece of damp paneling. The inspector wrote off the dampness to a bathroom leak from above even though the presence of water bugs in the basement indicated wet foundation issues. Be sure to remove floor coverings, piles of garbage, and other obstacles to inspection, which are oftentimes far less innocent than they look.
While minor foundation problems may be affordable to fix, this is one issue that can get out of hand quickly. You’ll likely want to bring in a professional to estimate the cost to repair before you decide to purchase a house with this problem.
The bottom line is that it’s your hard work and money on the line when you purchase a property to rehab and flip, but the home inspector’s job is done when they cash your check. You shouldn’t take a home inspector’s word that the property is solid, but should also do a detailed inspection yourself.
Socotra Capital Has Your Back
When working up a budget to buy a distressed property, it’s wise to build in a buffer of 10-20% of your anticipated costs for unexpected problems that may arise as you’re rehabbing for resale. A hard money loan from Socotra Capital can give you the buffer you need to ensure your fix and flip project goes off without a hitch. We can loan up to 75% of the cost of your home purchase and rehab expenses to pull off the perfect project.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.