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How Do I Know that Things Won’t Break After I Buy a Property?
Joe: Hey, it’s Joe Crump. How do I know that things at a property won’t break after I buy it? Well, you don’t. But there are some things that you can do to hedge your bets. You can get a contractor out there if you’re not one yourself or if you don’t have experience with you know, home repairs. You can get somebody out there who can go over the property and do a full inspection of that property. Inspections can cost you $300 or $400 so they’re not particularly cheap. But one of the ways that we’ve been able to make it work is to have the person who does the work on our properties for us go out and give us the price on what it’s going to cost to do the rehab. And as long as we don’t overburden them with a bunch of you know, having them look at a bunch of properties that they don’t work on, they have no problem going out there and doing that for us.
Joe: So we have a pretty good idea based on what they’re telling us it’s going to cost to understand what needs to be replaced and how that all comes together. One of the things also over time you start learning how much is it going to cost to put a furnace in this particular size property. How much is it going to cost to put this much carpet in this particular size property, or put a roof on this particular size property. So we have ballpark figures in our heads about how much those repairs, especially major repairs, cost and then we add some money on there for incidental things that also need to get to done on that property.
Joe: Many of the properties that I purchase I never go look at. So I want them to send me pictures of it before I buy. So I’ll get pictures and I’ll ask them to go through and take pictures of the ceiling because I want to see if there’s water leaking through. I want to see you know, the picture of the breaker box, not just the realtor pictures, the Home Beautiful pictures. I want to have pictures of the basement, I want to see what’s going on down there. I want to see what’s happening on the outside of the house, you know, above the eaves. I want to see what’s going on with that stuff. And I’ll get pictures of that and all I have to do is scroll through those pictures and then I’ll ask the person who takes the pictures for me, which is usually a contractor or an inspector of some kind, I’ll say, what do you think? How much to you think it’s going to cost to do this work? Give me a ballpark figure.
Joe: And then I’ll do my own figure in my head and I’ll also pay attention to what they’re telling me and then based on that, then I’ll make an offer on the property.
Joe: One of the things you have to always keep in mind whenever you’re buying a property especially long term properties, is that things are going to break. Your furnaces are eventually going to have to be replaced. Sewage systems are going to have to be fixed, will have roots that get down into the sewage systems and we’ll have to have it dug up, put new sewage lines in. And that stuff’s expensive. Sometimes we’ll have electrical problems, sometimes we’ll have windows that break. Those things have to be taken care of by somebody. And we try to have lease option tenants who take care of the repairs on the properties, but many times, less than one-third of the time, somebody will actually exercise a lease option.
Joe: So that means that we get most of those properties back. And when we get them back they’re not always in the best condition. So we typically will have to go back in and spend a few thousand dollars cleaning the property up and getting it back into shape so that we can put it back on the market again and get it sold. But we’re going to get a new lease option fee to help us cover those costs and still keep us cash flow positive. Plus we’re going to get a property that’s in better condition. You always want to try to keep your properties in good condition. Don’t be a slum lord. It’s not a good practice, it’s not good for the neighborhood, it’s not good for the values and it’s not very much fun to have terrible properties that people have to live in.
Joe: The other thing that I ask from my contractors or from the person who’s helping me buy the property, who’s my boots on the ground, is I have them fill out an inspection form. And on that inspection form it has all the different functions of the house. It’ll have furnace and I want them to check mark next to it saying it’s okay, it’s in good shape, I checked it, it works. You know, I’m going to have electrical, I’m going to have bathroom 1, bathroom 2, bathroom 3, I’m going to have you know, all the roof condition, all that stuff is laid out in a standard inspection form and you can get those online. They’re easy to get that has all the different functions of the house.
Joe: It also makes it possible for your contractors to go in and say that we’re going to need to put a new furnace in, that furnace is going to cost $3,000. We’re going to need to put a new roof on this. We’re just going to put another layer on and it’s going to cost $2,000. We’re going to need to put a new front door on. It’s going to cost you know, $400. So we can go through this list and they can give us prices and we can attach that list to our contract that we have with our contractors to make sure that they do their job properly.
Joe: The other thing that you can get, and I don’t do this personally, but I’ve seen a lot of people that do, is get a home warranty on your property. You can pay for around $400 a year, you can get a warranty on a property that has a deductible. So if your furnace goes out they’ll replace your furnace but you have to pay, you know, fifty bucks or a hundred bucks deductible on that replacement. Now I’ve heard an awful lot of stories from people where they’re not able to actually collect that money. I think that there are some legitimate companies out there. But does it really make sense to spend $400 on that repair or does it makes sense to amortize the cost of your repairs over time? You know, if you have to hold that property for ten years it’s cost you $4,000, how much work needs to be done on that property over that ten-year period if you’ve gotten it in good shape before you started?
Joe: So with that in mind, properties are always going to need repairs. They’re always going to have things that break, there’s always going to be a headache with those thing. But when you look at the profit on these deals over time it makes so much sense. Hold on to your properties. Don’t sell your properties. If you can build your portfolio it’s going to make you wealthy over time.
Joe: All right. Good luck. If you like this channel, make sure to subscribe. Also hit the like button if you will and I appreciate your support.