For many investors, a structural health check on the way into a property deal – by way of a building and pest inspection – is an absolute must. But an inspection report can deliver more than simply peace of mind, according to our experts. It can also pave the way for substantial savings and hefty purchase discounts.
When purchasing a property, a building and pest inspection is generally a worthwhile investment. For the sake of a few hundred dollars, you gain peace of mind that the asset you’re about to buy – typically at a cost of several hundred thousand dollars – is not a termite-infested structure on the verge of collapse.
It’s an important part of your risk management strategy and skipping a building and pest inspection could leave you open to significant financial outlays down the track, confirms David Hallet, general manager of Archicentre.
“Building faults or termite damage can be expensive to fix – and by expensive, I mean tens of thousands of dollars,” he explains.
“Even when you set aside those horror stories you hear about, where a whole house has to be pulled down due to a termite infestation, you have to consider the fact that smaller problems may be evident. They can still cost tens of thousands to repair, and most people are not going to have several thousand dollars at the ready to fix structural damage.”
You then face the risk that problems left untreated can get worse – so an issue that was going to cost $2,000 to fix may escalate into a $5,000 job, or worse.
Protecting yourself against these risks is just one side of the property inspection coin. The other side, says investment expert and property owner Nathan Birch from invested.com.au, is the ability to use building and pest inspections to your financial advantage.
Negotiate big profits from building reports
Building inspections and pest reports are one of the most powerful bargaining chips you hold as an investor, according to Birch.
“It’s really important to understand what is in the report, as what I’ve found is that every inspector is slightly different,” he explains.
“Also, some reports are just so full of disclaimers and terminology that it’s useless getting the report done.”
For this reason, Birch always makes a point to call the inspector right after the inspection has been done, sometimes before the report has even been prepared.
This is when the inspection is fresh in the inspector’s mind, so Birch can ask questions about the overall condition of the property, what features are missing and what concerns have come to light.
“I get much more insight this way; when they’re talking to you, they’re a bit more open and honest than they’re willing to be in the report, because when it’s in writing they have to cover themselves legally,” Birch says.
“Every time I get the report, I always go back to the agent and ask for a discount on price. Without fail. Even if it’s just $2,000, $3,000 or $5,000, I always go back and ask. For the sake of a phone call or an email I can save a few thousand dollars, because the reality is, every report comes back with something to negotiate on. No property is perfect.”
Negotiating a small discount because there’s a little rot in the wood in the kitchen cupboards is one thing.
But confirmation that the property has active termites? Well, for most investors, this is the ultimate red card that signals it’s time to walk away from the deal.
Not so for Birch, who says “if the numbers stack up, they stack up”. “I love termites! I’ve bought properties that were severely termite damaged, including one I never even did an inspection on; it was in such bad shape I knew I had to tear it down and start again, so it didn’t matter anyway,” he says.
“Anything is an opportunity, as long as it’s cheap enough. Flood affected, rising damp, chemical spills, termites … these are all opportunities that make me really consider the deal, because I know there is so much opportunity to add value.”
In Birch’s view, if you’re planning to embark on a significant renovation anyway, then existing damage in the form of a burnt-out kitchen or a bedroom full of termites doesn’t add too much burden to your bottom line.
“You can do a sizeable renovation that includes replacing carpet, painting, and installing a kitchen and bathroom for around $25,000. If you’ve got termite damage, you’re pulling out timber and replacing it with new wood, so it adds an extra few thousand to your budget,” he explains.
“But on the upside, you could negotiate the price down by tens of thousands of dollars, for something that will cost less than $5,000 to fix.”
Negotiating discounts of 90%
Birch, who holds more than 70 properties in his personal portfolio, has bought houses that have been burnt out, kicked in, termite-infested and on the brink of collapse over the years, and he confides that he prefers it when a building and pest inspection reveals an unexpected problem.
“I like it because it’s a good negotiation tool, and I can see what I need to do to add value,” he says. “I don’t want to buy a house that has been completely destroyed. But if it has been damaged and I can easily see how, then I can work out how to rebuild the property in the most profitable and effective way possible.”
Case in point are the pair of properties that Birch secured for the ludicrously low price of just $8,500 each in Kempsey, NSW in 2010. Each house had been completely destroyed after the previous owner, who had paid $70,000 for each home and invested in renovations, went under.
“He had spent around $300,000 all up buying the homes and fully renovating them, but when the homes were repossessed by the banks, the tenants were evicted – it’s what the banks do so they can market the empty house to new buyers,” Birch explains.
“The problem was, they sat vacant for three months, so local vandals gained access and completely destroyed the properties – they had kicked in the walls in every room and there was graffiti everywhere. It was a mess.”
The land value was around $30,000 each side, but Birch argued to the bank that it would cost him at least $20,000 per property to knock down the existing structures and rebuild.
“I paid just $8,500 each because I knew that at the end of the day, the land value alone was worth four times that amount,” he says.
“When we rebuilt, I spent an extra $1,000 on wood to install beams inside every single wall. That way, the walls are reinforced and there are no gaps for vandals of the future to kick them in.”
The legal loophole
It’s important to note that property buyers as consumers have no legal protection if they purchase a ‘faulty’ property. Unlike the process of selling a car, where a roadworthy certificate is a condition of sale, there is no legal requirement for a property vendor to disclose building faults.
“When they say that we buy homes in a buyer beware market, that’s very much the truth,” Hallet explains.
“It’s all about disclosure – when you are selling a car, you don’t have to make it roadworthy, but you have to make sure the buyer is informed about the faults that exist.”
Hallet says this issue “has been talked about in NSW and vaguely mentioned in other states in the last couple of years, but nothing has changed. Nowhere other than the ACT is it a requirement to disclose.”
Newer properties offer some measure of protection, in the sense that homebuyers are protected by home warranty insurance regimes for six or seven years after construction.
“If a structural fault develops in a building that is under that age, there is some recourse through the builder and their insurer. But for a home that is 10 or 12 years old, which is still relatively young, there’s really no protection.”
Just as crucially, there is currently no legislation in regards to qualifications or training around property inspectors in any state or territory other than Queensland.
“It’s only in Queensland that there’s any requirement for anyone to be qualified and registered, so in other states anyone can call themselves a house inspector, which is another risk exposure,” Hallet says.
“The key message is, if you’re shopping around a number of different inspectors, make sure you ask them questions about their qualifications and experience, and be sure to check that they have insurance behind them.”