Property evaluation question

[RodneyPayne]

I`m currently evaluating a 2-apt property, renovated in 2008. It is currently rented, top and bottom, and will be cash flow positive from Day One. After all mandatory cash outflows (prop tax, mtg payment, insurance, property mgr), there is roughly $240 left each month. I plan to let this accumulate in the reserve fund for the first year.

Here`s my problem: the current landlord is a contractor who did all of the upgrades himself without getting permits. I know he changed electrical and plumbing, and some minor structure work.

On a cash flow basis, the property is a winner. How do I get around the lack of permits in the upgrades without exposing myself to potential liabilities is something wasn`t done properly?

Thanks,

Rod

 

[NeilUttamsingh]

QUOTE (RodneyPayne @ Jul 8 2009, 01:08 PM) I`m currently evaluating a 2-apt property, renovated in 2008. It is currently rented, top and bottom, and will be cash flow positive from Day One. After all mandatory cash outflows (prop tax, mtg payment, insurance, property mgr), there is roughly $240 left each month. I plan to let this accumulate in the reserve fund for the first year.

Here`s my problem: the current landlord is a contractor who did all of the upgrades himself without getting permits. I know he changed electrical and plumbing, and some minor structure work.

On a cash flow basis, the property is a winner. How do I get around the lack of permits in the upgrades without exposing myself to potential liabilities is something wasn`t done properly?

Thanks,

Rod

Rod,

One thought comes to mind...

If you can get the vendor to agree to a pre-listing inspection, you can have a home inspector look through (inspect) the entire property, prior to you putting in any offer on the property.

As a result, if there are any deficiencies with the property, the home inspector should be able to point this out to you.

Regards,
Neil

 

[JohnS]

QUOTE (NeilUttamsingh @ Jul 8 2009, 11:15 PM) Rod,

One thought comes to mind...

If you can get the vendor to agree to a pre-listing inspection, you can have a home inspector look through (inspect) the entire property, prior to you putting in any offer on the property.

As a result, if there are any deficiencies with the property, the property manager should be able to point this out to you.

Regards,
Neil

Really? I would have doubted that. I mean, the standard inspector doesn`t look at the wiring and plumbing inside the walls, so they wouldn`t be able to see if there were any problems there. They`d be able to see how things were set up at the box, but that`s about it. I thought the only way to CYA on this one would be to have one of the conditions be contingent on getting it inspected by the city`s electrical/ plumbing people, to make sure it`s done up to code. Of course, some sellers might balk at this, but I figured that that would be the price you`d have to pay to make sure everything was done properly.

Am I wrong here?

JohnS

 

[EdRenkema]

QUOTE (JohnS @ Jul 8 2009, 09:22 PM) Really? I would have doubted that. I mean, the standard inspector doesn`t look at the wiring and plumbing inside the walls, so they wouldn`t be able to see if there were any problems there. They`d be able to see how things were set up at the box, but that`s about it. I thought the only way to CYA on this one would be to have one of the conditions be contingent on getting it inspected by the city`s electrical/ plumbing people, to make sure it`s done up to code. Of course, some sellers might balk at this, but I figured that that would be the price you`d have to pay to make sure everything was done properly.

Am I wrong here?

JohnS


I agree, the standard inspection does not cover the intricacies such as furnace, wiring, and/or minute variances in code requirements which can differ according to municipalities.
Talk to the municpality or take your chances, bear in mind your insurance coverage could be potentially voided if renovations were not done to code by licensed contractors.

 

[jwilbrin]

QUOTE (JohnS @ Jul 8 2009, 09:22 PM) I thought the only way to CYA on this one would be to have one of the conditions be contingent on getting it inspected by the city`s electrical/ plumbing people, to make sure it`s done up to code. Of course, some sellers might balk at this, but I figured that that would be the price you`d have to pay to make sure everything was done properly.

Am I wrong here?

JohnS

I have to agree with John. Do not buy this property unless the seller is willing to get the proper city inspections and permits. Not only are you taking on an enormous amount of liability if the renovations were not done properly (particularly electrical & structural) but you are taking on financial risk. If the city ever catches wind of the renovations done without permits they can demand an inspection of all work. Inspectors are usually not to accommodating and understanding at this point; they can make any demands they deem necessary to ensure the safety of the property. This could include tearing down of drywall and ceilings to inspect the wiring. plumbing etc.

If the previous owner did not think it important to get the proper permits, that says alot about his level of professionalism and also could be a strong indicator of the quality of his work. That should send up some serious red flags for you.

I really hope you will insist on the property being inspected by the city and receiving the proper permits. Don`t buy someone elses problem. Positive cash flow is not worth the headache and cost of redoing possible sub-standard work.

 

[RodneyPayne]

Thanks for the replies. I opted not to offer on the property - I`m not willing to take on the risk. (An we all know accountants love risk.

)