As construction professionals, we tend to focus a lot of our time on new buildings. It can be easy to forget that they represent a very small segment of the overall industry. Most people live and work in structures that were built decades ago, benefiting from the legacy of past craftsmen.
For real estate developers and investors, there are many factors that make older houses and buildings appealing. They are usually lower priced, can have a unique “vintage” character, and are often located in desirable established communities. Due to California’s housing shortage, many personal homebuyers, as well as flippers, are increasingly turning their attention to older homes and apartments as well. While these aging properties can sometimes make for a smart investment, they can also pose a high degree of risk.
We’re all familiar with “money pit” horror stories, of the endless string of expensive repairs that can spell financial ruin. Whether a property has been recently renovated or sold “as is,” prudent buyers and investors will benefit greatly from more due diligence to ascertain the detailed state of an older building, ideally with a Property Condition Assessment (PCA). Here’s why:
Building Life Cycle
Whether it’s a single-family custom home or a multi-story apartment building, every man-made structure is comprised of many components and systems. Each of those elements has a cost and life expectancy, beginning with installation, continuing through ongoing operation and maintenance, and ending with removal, demolition, and/or waste treatment. The holistic view of all of this is what we call the building life cycle.
This term is most often heard in the sustainability field, where consultants perform whole building life cycle assessments (LCA) on new projects aiming to achieve LEED or other sustainability certifications.
For older buildings, building life cycle management can greatly impact the total cost. A Property Condition Assessment can help prospective buyers determine which major building components and systems are at (or near) the end of their life cycle, so replacement costs can be factored in for anything currently operating on borrowed time.
In residential real estate, roofing is one of the best known examples of a building system’s lifecycle. Most existing and prospective homeowners are aware that a roof has a certain life span, typically 15 to 30 years for asphalt shingles. Since those kinds of shingles have been used on homes since the 1920s, many older homes have gone through one or more roof replacements.
Renovation Scope & Quality
Most older buildings have been modified to some degree since the time they were originally built. The California real estate market is no stranger to house-flipping or property/asset repositioning. In many cases, the investor or buyer is purchasing a property that has undergone renovation recently.
If that is the case, the prospective buyer should ask the seller for the scope of the work that has been done. This ties in closely with the above-mentioned building life cycle. By reviewing the scope of the renovation and comparing it with the property condition report, the prospective buyer can learn if the building has been well cared for or if the seller simply put “fresh lipstick on a pig.”
Another item to check is whether or not a renovation contractor has a quality assurance program. This is especially important in this day and age when there is a shortage of skilled labor. Without a QA program, there is an increased risk of poor workmanship. Many reputable remodeling contractors have quality control processes in place.
It is important to understand the quality and scope of work performed during any renovations, because a poorly executed renovation can negatively impact surrounding building systems, creating new issues or failures that didn’t exist before.
Cconstruction expert Stephen Wilson explains with this example:
“Let’s say you are looking to replace windows in an old house. Depending on the age of the exterior plaster walls, it can be difficult to replace windows because the surrounding weather barrier underneath the lath could deteriorate if it gets disturbed. The windows may be properly waterproofed, but then the walls might develop leaks.”
Disclosures
A Property Condition Assessment can be an important fact-checking tool to verify some of the information in the seller’s real estate disclosure form. California happens to have some of the most stringent requirements for disclosing information, so it makes good sense to review the information before commissioning a residential or commercial building inspection.
While we would hope that sellers always operate in good faith, our construction and real estate experts have often been called in to resolve disputes involving failure to disclose. Unfortunately, in some cases, it appeared the sellers approached disclosures from a “see no evil” mindset.
A property condition report can give buyers a proper “heads up” about possible disclosure issues before they move forward with the purchase. It can also serve as a strong negotiating tool since any additional discoveries can be used by the buyer’s agent to achieve a better price to offset any immediate or upcoming replacement costs.
Managing Property Acquisition Risk
In a highly competitive and hot real estate market, it takes great discipline to perform proper due diligence before buying. When evaluating older homes and buildings on the market, physical due diligence becomes all the more important with the reasons stated above.
To help real estate owners and investors with their technical due diligence, Xpera Group’s consultants can perform Property Condition Assessments and other commercial building inspection services. Utilizing lessons learned from decades of experience in construction forensics, our inspectors can spot subtle—and potentially significant—issues related to the building’s condition that may otherwise go unnoticed, empowering buyers to make smarter, better informed purchasing decisions.
To learn more about VERTEX’s Due Diligence and Property Condition Assessment services or to speak with an Expert, call 888.298.5162 or submit an inquiry.
This article was originally published by Xpera Group which is now part of The Vertex Companies, LLC.