Okay, I remember my very first inspection on commercial property. It almost caused me to quit and be discouraged about real estate investing.
I was contacted about a new apartment building that was on the market. I liked what I saw: the apartments were large and well designed. But I didn’t know what I was doing and was nervous about making an offer on the building.
The asking price was $85,000. As far as I could make out, the seller was retiring and planning on moving out of state. He wanted to liquidate this asset, his only real estate investment, before moving from Chicago.
I told the agent I'd put in an offer. We drove to her office to draw it up. She agreed the building was a good deal and warned me that several other offers would be coming in from other people who were at the open house of this apartment building. She persuaded me to offer more than the asking price, to maximize the odds of my offer being accepted. I offered $85, 700 with $25,000 as a down payment.
As a first-time investor, I was very cautious. Perhaps scared.
I asked my agent to include certain conditions, known as contingencies, in the offer, so I would be protected against unseen problems, should the seller accept my proposal. These contingencies had to be met to my satisfaction before I would finalize the purchase. One of my conditions were:
* a professional building inspector would examine the overall condition of the property and give me a report of his findings
My First Serious Inspection
The inspection proved very enlightening. The electrical system was ancient, installed around the turn of the last century, before hair dryers, microwaves, and air conditioners existed. The whole building could handle only thirty amperes of electricity, which meant that if three window air conditioners operated simultaneously, the electrical system would be overloaded. (If you are not mechanically inclined, you may want to bring along your handyman to this meeting)
We could find no storm windows in the basement, so I would have to purchase the energy-savers for the entire building. The paint protecting the wood window frames needed scraping and painting.
The plumbing was fine, except none of the apartments had shut-off valves. This meant if I had to do even the simplest repair – such as replace a leaking faucet – I would be forced to shut off the water supply to the entire building. Otherwise, when I removed the leaking faucet, a geyser of water would spew everywhere in the room. Obviously being able to turn off the water supply under every sink and commode is the way to go.
The steam boiler heating system was functional but according to the inspector, too small for a building with the square footage of mine. The building had a very thick stone foundation. The brick walls bowed inward. Fortunately, the owner had completed structural repairs to make sure this would not develop into a long-term problem. The last item on the inspection was the flat roof; it would need replacement in about three years.
The inspector estimated the cost of repairs, then said, “The building would work out if you follow my suggestions for improvements.” He handed me his invoice. “I’ve owned some buildings myself, and to be honest, management is the dregs.”
As I wrote out his check, I chuckled and asked, “Are you trying to scare me off?”
“Nah. It just wasn’t for me. You might like it fine.”
At this point I had three choices: I could back out of the purchase agreement because of the cost of the repairs; I could request, through our agent, that the seller look over the inspection report and the repair estimates and adjust his asking price down; or I could approve the inspection contingency.
I chose option three. Here’s why: 1) Everything was cosmetic repairs, except for upgrading the electrical service. 2) My agent had been right about other offers coming in. Three were presented three days before Christmas, and the seller chose ours because of the extra $700. Three offers in a lousy market indicated that I was getting a good property at a good price. I did not want to risk losing this apartment building to one of the other prospective buyers by giving the owner an opportunity to back out by asking him to lower the purchase price.
Time proved buying this apartment building and investing in commercial property was one of the best choices I ever made.
Don't let inspections scare you away from great deals. Approach each real estate opportunity with a open mind and the cash and success will follow.