When to walk away from a property

You are examining potential properties for investment. You have analyzed all the numbers and determine it would be a good investment on paper. But when you have the inspection done on the property you find everything is not what it appears.
If these repair items come up in the home inspection report be wary-The cost of correcting these conditions may be too costly and turn your financial plan into a black hole.

Termites
The home inspection reports says there is an infestation of termites.
Termites can do a lot of damage that is not always seen. Termite treatments are costly. Even if the seller pays for the treatment, the damage to the structure of property could be permanent.

Water damage from Plumbing or Roofs
Next to termites this is the second most costly damage to correct. Chronic long term damage from leaks causes dry rot in floors wall and ceiling and can even extend to rot in within structure walls. What will this cost and is it allowed for in the budget? Unless you know for sure what the cost of the damage is likely to be, it’s better to walk away it could be more extensive and costly that you can safely estimate.

Structural Defects
If the inspector finds unusually large cracks in the foundation, walls, floors or ceilings, this could be a sign of serious structural defects. The causes could have something to do with the how the home sits on the site and may be affected by grade or topography of the property. Unfavorable site factors may or may not be correctable.

Evidence of other foundation problems like evidence of site flooding which cause foundation blocks to sink into the ground causing them to shift possibly causing permanent settlement issues.

Or, if there has been previous damage due to an earthquake or tornado. This is the most extensive damage and the most costly to fix. In some causes it may not be feasible or worth the investment.

If you think you can determine the cost of repairs and reduce the purchase price to compensate for the repairs, it might be worth it. But if you suspect any hidden damage to the home than walk away from the property and find another one.

An Objective Approach to Value

 Buying with an objective eye when purchasing income property is essential. You cannot afford to fall in love with a property if it does not benefit you after you buy it. Always use a financial analysis on the property to determine whether you can afford to own the property you are interested in.  

The one method of analysis income property is to utilize a Gross Operating Income Statement.  This is a statement that will help determine a property’s net income after all expenses are paid.  If the property you are analyzing does not generate enough net income to pay the mortgage payments and generate some extra available cash flow than you should not buy it.

Be realistic when structuring and analyzing any debt.  Develop a debt service structure that can be satisfied by the property’s cash flow.  Determine a monthly mortgage payments with an amortization calculator or mortgage factor chart. Remember if the net operating  income does not cover the total debt service than you have a negative cash flow.  Negative cash flow means you will have to come up with the extra cash out of your pocket.  If this is the case, than you  must ask yourself as an investor  ”is it worth it” for me or more importantly, can I afford to supplement the investment each month  until  the property produces an income.

By taking a hard look at the gross operating income  statement and analyzing the property to see if it can service the debt, you can buy according to your individual needs and assets and know objectively if you can afford it!