Appraisals and building inspections are both needed as part of the pre-purchase due diligence process, but for different reasons. However, many people incorrectly assume that their building appraisal includes an inspection, it does not.
The appraisal will only quantify the market value of the building and/or its associated business; but will not (and cannot realistically) define the true physical condition of the building.
The physical condition of the building has a direct impact on a buildings value and usability, so why rely solely on the appraisal process to provide you with the buildings condition?
The appraisal qualifies the loan amount – but the inspection justifies the purchase of the building, for the loan amount, or any other amount, based on the actual condition of the property.
A building inspection helps you determine whether the buildings condition meets your needs and that you are not moving forward on a poor investment.
The easiest way to remember this is that the appraisal is for the bank and the inspection is for you – the buyer.
Building Condition Affects Value
Let’s say you have just purchased a 30 year old building for $2,000,000 with a collaborating appraisal. You chose to skip the inspection because the building was represented to you as being in average condition, properly maintained, and just had a new roof installed last fall. Everything seems good doesn’t it?
But what is that $2,000,000 building really worth when it has $40,000 worth of dilapidated heating and cooling systems that need replaced? Now, let’s add $30,000 worth of various minor deferred maintenance conditions and repairs that need done before they further affect the properties condition.
Don’t forget the $25,000 that it is going to take to correct the poor workmanship issues on the brand new roof that was installed improperly, and is leaking.
These conditions have affected the property, and your finances, by almost 5% of the purchase price. The conditions may also compromise your needs for the building.
Deferred Maintenance Costs
Research by the Geaslin Group has shown that the real penalty for deferring building repairs and maintenance averages 15 times the cost of timely repairs. Those $30,000 worth of deferred maintenance conditions, left unknown and un-repaired, are going to escalate and cost up to $450,000 to repair by the time they are discovered.
Now think to the future and try and answer these questions:
- Where will the money come from for the $450,000 needed to correct the conditions caused because you weren’t aware of them until too late? (The same repairs would have cost $30,000 if found and repaired at the time of property acquisition.)
- What other issues are present now because the building has not been properly maintained for a number of years?
- What is the building truly worth now?
Unnecessary Risks
The examples listed are not that extreme and no matter how one looks at it…who wants to buy a building and find out shortly after possession that they have to come up with large sums of unbudgeted money to fix issues.
Property condition is a critical factor in the success of the deal and your investment. So why would you take the risk of not actually knowing the condition of the property?
After you’ve purchased a property is definitely too late to find the issues that affect finances and your business.
Points to Consider
In our example, if you had a professional building inspection prior to purchase you could have answered important questions…
- Do you move forward knowing that the building has costly issues to correct?
- How do you come out on top in this transaction?
- Do you have the financial capability to make the building usable for your needs?
And depending on the results of the inspections you also could have…
- Negotiated the purchase price
- Worked a more advantageous deal
- Budgeted for repairs
- Prevented a bad investment
Risk Management
Stonegate Property Inspections LLC provides risk management services and protection from unknown risks. Building inspections and other services we provide are the means to that end. We are an independent building inspection company based out of Sioux Falls, SD.
We help people understand, and manage, the risks associated with building conditions. Whether you are buying, selling, maintaining, or problem solving; our professional inspection and investigation services can help you obtain the information needed to make informed decisions.
Call us today to help protect your real estate investment dollars. Toll Free: 888-260-6832
Toll Free: 888-260-6832