Surprise! Here’s how the ROI on Your Real Estate Investment Can Crumble AFTER You Buy It

by Darwin on November 30, 2011


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.

Options?  None

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?

{ 19 comments… read them below or add one }

JT December 1, 2011 at 12:14 am

Wow, this is nuts.

You know, nothing surprises me any more, but this still seems kind of sketch. If it weren’t for similar nitpicking by our insurance company (they complained about one loose brick on a front step – seriously?) I’d be in shock.

Obviously it sucks that insurance companies can do something like this, especially since you prepaid. Then again, the second someone falls slips in the front lawn of your yard they’d probably sue because it was the roof’s fault. Just curious – are the individual “problems” part of local building codes?


Darwin December 1, 2011 at 12:18 am

I’m not sure if it’s local code or just generally expected stuff. Some of it is subjective. “fix roof”. Even their descriptions suck. I guess that gives us license to do the bare minimum? Kind of annoying nonetheless. Some of the repairs like the deck and sidewalks are costly though.


JT December 1, 2011 at 12:50 pm

I think it gives you license to nail the inspector to the roof by his/her clothing. It’s almost like they just knew you couldn’t do anything about it, so they gave you poor rationale for their inspection.

Only reason I asked about code is because I’ve known some people to have sales rejected because of basic stuff like which way doors open or whatever. My grandpa had to rig a door to open another direction for an inspection, then just switched it back after.


Moneycone December 1, 2011 at 12:50 am

Wow! I didn’t realize they could do this! Did you try a different insurer?

Having bought a house recently, this is quite an eye opener. Sorry you have to go through this. I agree, the system is stacked against the homeowner.


Darwin December 1, 2011 at 10:58 pm

Apparently, all the insurers use the same inspector so we should anticipate the same outcome. there are only a few outfits that play in this college housing space. Not exactly the lowest risk proposition for insurers…


Amateur Hour December 1, 2011 at 1:08 am

That’s terrible. I am planning on buying a rental property this year, so am very glad you posted this. Good luck.


Darwin December 1, 2011 at 10:58 pm

I hope this heads up helps out – try to get that insurance inspection prior to close!


101 Centavos December 1, 2011 at 1:23 am

Even getting an appraisal/inspection before the sale can turn sour. On our second attempt to finance our second house, we lined up an appraiser to visit the property. All it took was for this clown to literally do a drive-by and write down “poor condition” in his report, and the deal fell through. We ended up self-financing, but I wouldn’t have minded having a 10-year note. We found out later that this particular appraiser had a reputation for doing drive-bys, but was only of of two working appraisers in the county.
I guess what I’m saying is that’s it’s good to not only have an inspection, but also *know* the inspector (although that’s not always possible).


Darwin December 1, 2011 at 10:59 pm

In this case, it’s a weird “inspector of the insurer”, not even the inspector we hired ourselves (who did ID some of this stuff, but we let it pass initially). Who knew?


KaD December 1, 2011 at 12:41 pm

I wonder if the insurance company and repair outfits are in bed?


Darwin December 1, 2011 at 11:01 pm

I’m thinking probably unlikely since the insurers are national, they call a local inspector and the findings are there after all. It’s more like the timing and unexpected nature of the whole situation. If they did the inspection at the time we initially engaged them, this whole mess could have been sorted out/somewhat borne by the seller.


krantcents December 1, 2011 at 3:55 pm

Welcome to the rental property world!
I do not have any insurance stories, but I had a tenant from hell story. This guy moves in with a tenant (female) and proceeds to trash the place and said we rented it to them like that. They stopping paying rent, so I started the eviction process. Most evictions take 60-90 days. This guy answers the complaint and went to court. He files bankruptcy and it took 9 months to get them out. This was the only tenant that was that bad! Considering how long (abut 14 years) I had rentals and how many buildings (43 units), this is not that bad.


Darwin December 1, 2011 at 11:01 pm

Every landlord seems to have horror stories. I guess it’s fair to say none of them just sit back and collect the checks – we earn our money!


retirebyforty December 1, 2011 at 5:34 pm

Yeap, I found that the bank wants quite a bit of information from the insurance company. Also if you let the insurance lapse, you wouldn’t have liability insurance and who knows what can happen with college kids.
My rental is not doing too well either. There have been repair after repairs and I’m still waiting for a positive month. 🙁


Darwin December 1, 2011 at 11:02 pm

Sorry to hear that; how long’s it been? And are the repairs routine or tenant damage?


retirebyforty December 2, 2011 at 12:46 pm

It’s been 3 months. I posted a 3 months update today.

Most of the repairs were deferred from the previous owner… We knew going in that there were a lot of repairs, but it is still a pain to pay for them.


Sandy @ December 2, 2011 at 5:24 am

I got one for you. My brother pre-paid his insurance on his rental property for the year. Two months later he got a refund saying that his insurance was being cancelled because the house didn’t exist…the same house that the inspector called him from when he was standing next to the house telling my brother the results of the inspection. Yep, that house didn’t exist. 🙂


cashflowmantra December 2, 2011 at 5:29 pm

Being a landlord is often managing one problem after another. You can only hope that the problems are mild and the interval is long.


Paula @ Afford Anything December 5, 2011 at 1:54 pm

This exact same thing happened to me … the insurance company cancelled the policy on my triplex rental property, even after we paid in advance, because they deemed it to be a “commercial” property (since it’s multi-unit) rather than residential. Bear in mind, this happened AFTER the same company approved us.

Oh, and then a tree fell on our house. Which is how I learned the lesson: NEVER be without property insurance, not even for one hour.

Here’s the gruesome story, if you’re interested:


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