A few months back, I’d shared the details on a real estate investment I made with a partner where the overall deal seemed quite favorable. The cash on cash return was estimated at ~15-20% conservatively, we had a good property manager staying on from the prior seller, the prospects in the area looked good for continued capital appreciation and low vacancy, and there didn’t appear to be any imminent repairs/upkeep required outside of routine maintenance. The first month and a half was fine and we were cruising right along. The property manager hadn’t flaked out, the college kids hadn’t destroyed the properties entirely (they do have this thing about kicking in doors which is annoying, but if they want to piss away their security deposits, more power to them), and no major repairs crept up. Then came the email last week.
The email came from a completely unexpected source and wasn’t something we’d even contemplated when purchasing the property – but perhaps you can learn from this story about how to avoid a similar outcome.
Boom! The insurance broker that basically re-upped the same insurance company that was insuring the same homes under the prior seller sent us an email stating that our insurance was cancelled if we didn’t make tons of repairs in 30 days. We were like, “WTF”! Apparently, even though we lined up insurance well ahead of the closing, had paid a full year’s premium in advance, had the documents of insurability, etc. at closing, the way these insurance companies work is they go inspect the properties AFTER you buy them! That’s right, because that’s SO logical. So, a month after our closing, they sent an inspector out to check out the properties and they wrote up stupid stuff (which already existed under the prior owner, but he dodged this bullet somehow) like a cracked sidewalk, roof repairs needed (thanks for the granular detail!), retaining wall repairs, and you’ll love this one – the horizontal railing on a deck has to be vertical. Granted, some of this stuff came up on our home inspection we paid for ourselves, and we had the seller repair things that seemed like imminent hazards like electrical and leaks, but this stuff seemed more cosmetic and we’d already negotiated down on price considerably, so this was it – he wasn’t budging on seemingly cosmetic items because the sale price was representative of “as-is” condition.
We figured we might be best off just finding a new insurance company but the insurance broker said they all use the same inspection contractor in the area, so we’d end up with the same outcome. Then I asked, “What happens if it just lapses and we get to it when we get to it?” (figuring the odds of a fire burning down the house that very week would be quite low). Apparently, the insurers are then obliged to notify your bank, who will in turn then cancel your loan.
So, in essence, we have no choice but to immediately repair all these things even though they have nothing to do with fire insurance (which is what we’re covered for) and ask for an extension for the long-lead sidewalk repair. Pretty annoying.
At the end of the day, if the quotes come in at a couple grand, it’s not the end of the world. We have the quarterly rents coming in this week, which will pretty much cover the repairs, but there goes the profit for the quarter.
I had no idea this could happen, nor did my partner who owns several other properties. So, beware! In order to avoid a similar situation, you might be able to demand that the insurance company conducts the inspection PRIOR to closing, so you could in turn make the seller handle those repairs as part of the deal. Makes sense that an insurer would first inspect your property, THEN agree to insure you, but maybe it’s just me.
Any Crazy Real Estate Stories We Can Learn From?