I just got an email from a reader David Luton and he offered me the copyright to story he wrote about a property inspection he did.
The Inspection- A True Real Estate Story For Halloween
It started off as a normal real estate investment opportunity. It was a commercial property in the country. It was along a main highway in eastern Ontario with a couple of acres of land. Additionally there was a rather old farm house that came with the property that dated from the time the property was originally settled.
We were informed of the opportunity by an alert real estate agent with whom we had occasional dealings. The agent had an exclusive listing on the property that had been originally sold to another investor. The other investor had done all of the normal purchase and sale work and had a signed conditional deal. The two conditions were financing; and subject to inspection.
Unfortunately for the agent the other investor had over extended himself and was unable to get financing. Thus the unlucky agent faced the prospect that the deal would fall through after his work. Like all good agents; however, he lived by the old philosophy; ‘When the going gets tough, the tough get going,” and he went out and found another buyer.
The terms were fair, there was a good tenant who was willing to sign a lease, and even the financials looked okay. (A 10 cap, after allowing for repairs, for the professionals). The property itself even had long term capital gains potential. It was located in a rural township, but right on the commercial outskirts of a growing town that was expanding toward the rural border. Several big box stores were coming in on that side of town and it was obvious that this was the side to be in. Income, capital gain potential and a good commercial tenant what more could an investor want.
The only facts we could not verify quickly were the residential tenants of the farm house. We were told that they traveled a lot, and usually slept during the day. Apparently they were usually around only after dark. A general comment was also made that they were a rather strange bunch. That should have given us a warning us of what was to come.
The previous purchaser had negotiated well. It was obvious that some maintenance had been deferred but that was to be expected. The owner who had retired was getting on in years and had moved several thousand miles away to warmer climates. I am sure that is why we were able to get the purchase price we did. The purchase price and 10 cap expected return was after the previous purchaser’s expected allowance for repairs.
Being old fashioned conservative can work for you. We just get our pound of flesh in a different way. The advantage is that the real estate community knows you have the horsepower to move when it is necessary. When you put down a third of your own equity into the property, you can get your financing okay fast and by phone. This was one of those cases where a quick phone call resulted in a fast yes.
We had to move quickly but a premade deal doesn’t come along very often. So we said yes, signed the paperwork and laid down our deposit and ended up with a conditional purchase.
For the seller we give a sweetener to seal the deal by removing the financing condition and give an increased large down payment.
I have a philosophy that money talks in real estate deals. Thus if I want a property, I often use a large deposit payment as a signal to the seller that we are serious.
In the overheated market of recent years its things like this that may make all the difference.
Now all that remained was the inspection. In buying country property I find sellers are funny when it comes to inspection. They sometimes seem to take offense to the fact that you want to carefully look at the property. I have had sellers walk away from a signed and agreed commercial deal because they refused to allow a proper inspection. They insisted that the property was sold “As is as is”. I walked. If I want to bet on the gambling table I will go to Las Vegas.
To inspect country property you often have to use different resources. In a case like the one the property was on well water and septic so the above ground inspection is performed separately from the below ground. Little did we expect what we would face coming from below the ground in this case?
For the below ground I often want to do the inspection before I bid. I find the inspection cost is very modest compared to what you may find particularly if the septic system has to be lifted and replaced. It often is classified as contaminated waste and we all know what the cost of handling this is. This leads to the funny request of a seller, that I offer to pump out his septic system for free, even before an offer is on the table.
I know most purchasers would not be caught dead with a septic pump out truck operator. My advice is swallow your pride. My paternal grandmother came from a long line of highland Scots. They have a saying that applies,” He who pays the piper, calls the tune”.
In the case at hand we decided to do the building inspection first. I use a specialist who can inspect both commercial and residential property. Our problem was the farmhouse. We were unable to contact the tenants, so in accordance with local law and practice we posted a notice on the door, waited 24 hours, and arrived for the inspection.
We did the commercial building first. Normal concerns; some roof work was needed but after 20 years with a tar and pea gravel built up roof, we had expected it and priced it in. A couple of plate glass windows were fogged but again already budgeted for.
Finally after a coffee break we went to the farm house. We knocked on the rear door which opened onto the kitchen. We got no response, and using the key supplied by the owner we went into the kitchen. Let us say we were surprised with the paint scheme.
We next proceeded to the main bathroom. Stranger and stranger. I have been in a lot of bathrooms over the year but this is the first one I have seen painted “BLACK”. Even the bathtub was tiled black. If I ever had to replace the tenants I knew where I would advertise for a new tenant. A goth would love the place.
At this point my inspector wanted to go to the basement. He had some concerns about the wiring and wanted to look at the electrical panel. He was right; knob and tube wiring which is a major concern as most insurers will not insure it. This was one factor we had not allowed for in our pricing as it is only possible to see during an inspection. Replacing the wiring in a house is expensive. I had a contingency fund for unexpected expenses but this would exhaust it.
While in the basement we decided to inspect the rest of the basement for leaks. The basement was old and musty. Everything was covered with cobwebs. While my inspector concentrated on the furnace, I looked over the rest of the basement. Over in a corner I saw it. Like all things you do not expect at first I did not believe my own eyes.
I called my inspector over. In thirty years in the inspection business he had never seen anything like it. “A coffin!!!!” It being daylight of course as was to be expected, it was closed.
In recounting the incident to my lawyer later, I asked him for a professional legal opinion. “Was the coffin a chattel or a fixture?” He replied that he considered it a fixture because it was unbolted to the floor, but that he understood that the rules may be different in Transylvania.
Normally we do the property management for our own buildings. In talking to the real estate agent who was enquiring how the inspection went, I asked if he knew of a building management company that worked after dark.
We never did buy that property. In a later inspection of the septic bed the nice row of cedars turned out to be growing right over the septic system. There were a couple of other issues that we decided were too expensive to fix for the price. The owner unfortunately would not budge.
Was the coffin occupied? Only two people know for sure; myself and the inspector. Was it part of the act of the two so called ‘musicians’ who were the supposed tenants? Or was there a more sinister secret?
Come to think of it though not long afterwards, my wife of 30 years started to complain, that she was having difficulty sleeping during the times when the moon was full.