Even though few people would think of signing a contract without first reading it carefully, many prospective landlords seem to have no hesitation in buying a property with little more than a cursory glance. I am often amazed at what we discover when we inspect a property with a client, and what follows is a list of the most common problems I've seen managing rental properties for the past 25 years.

DRY ROT

Western Oregon has a well-deserved reputation for rain; as such, dry rot should be the first thing a buyer looks for in a property inspection. You have to assume that every property in areas with a lot of moisture has some amount of dry rot: If you haven’t found any, you haven’t looked hard enough. Dry rot shows up in decks, bathroom floors, siding, sill plates, fence posts, or any place wood comes into contact with earth or water. Never believe an owner who tells you not to worry because “treated” wood was used in construction. Treated wood does not prevent dry rot, it only delays it. A thorough and professional structural inspection is absolutely essential; it's the only way to uncover dry rot.

Remember, too, that rain is not the only potential source of dry rot. Our maintenance department spends more time repairing bathroom floors than any other single part of a rental property. The reason is obvious: water from the tub and shower tends to run onto the floor. I inspected a duplex some years ago where the tenants had never used a shower curtain. Water eventually worked its way beneath the linoleum and by the time we inspected the property, the vinyl floor could be lifted up with bare hands…and that was just the beginning. We had to replace the floor, sub-floor, joists, and since the water ran under the tub to the outside wall, we had to replace the joists under the tub along with the siding and tub surround. The final tab was over $2500; ample financial reason to thoroughly inspect a property for dry rot before you purchase.

PEST INSPECTIONS

Carpenter ants, termites, cockroaches, rats, mice, and other vermin can create a nightmare for any owner. For this reason, inspecting for pest infestation is second only in importance to inspecting for dry rot. Imagine buying an investment property and later finding out that every unit had roaches. How long would you expect the tenants to stay with you?

We were approached several years ago to help sell a residence-to-office conversion that looked great from the outside, but the pest inspection uncovered termites. The owners never knew because the termites had nested underneath the front steps of the building, a place even experienced inspectors sometimes forget to look. As a result, we had to complete a full structural test of the floors to make sure that they were strong enough to carry the load of file cabinets and heavy office furniture. Fortunately, the floors passed the test, but the financial impact could have been ruinous.

ENVIRONMENTAL HAZARDS

Buying and selling property carries significantly more financial risk today than ever before, thanks in part to a spate of new federal and state environmental laws. Federal mandates such as CERCLA and RCRA have imposed a strict–and often severe–standard of liability on virtually everyone involved in the chain of property ownership. This is one reason why the search for oil tanks and hazardous materials is critical to every transaction.

As with any other type of inspection, your best bet in an environmental inspection is to assume nothing.

Recently we were involved in a transaction where an underground oil tank was uncovered, even though the property was heated by gas. In another case, we completed a Level One environmental survey and found five underground tanks at an industrial property, some containing jet fuel. As we were digging these up, we found two more. Worse yet, we also found that the tanks had rusted out and leaked into the ground. Our only option was to clean up the property and then plead our case with DEQ to give us a “no further action” letter. Had it not been for the inspection, we would not have found the problem, our client would have been brought into the chain of title, and that client would likely have had a cause of legal action against us.

Although underground storage tanks seem to get the most attention from the media, environmental considerations do not stop there. Another of our clients recently purchased a 20-year old building that was heated by roof-mounted gas packs. We encouraged him to get an environmental inspection and although we did not find underground tanks, we did find asbestos in the floor tiles. By law, the tiles had to be removed or encapsulated by a certified asbestos contractor.

LOOK ABOVE YOU

While you’re busy looking at the ground for potential hazards, don’t forget to look over your head. Next to bathroom floors, roofs have the potential for the most problems. All roofs need to be inspected, including gutters, downspouts, drain lines, and all areas surrounding the air conditioner condensation lines. Most roofs leak at scupper locations because the scuppers get filled with debris. We had one commercial building that leaked in the middle of the floor in the president’s office because the water ran over the clogged scuppers, down the siding, and along the joists into the carpeting.

Roofs also need to be installed properly, including any improvements or additions that are made to the roof. A building with Spanish-style roof tiles may look great from the outside, but you may seriously regret that choice if you later find out that the trusses can’t handle the weight of the tiles and the air conditioning units you’d like to add. Look ahead to your plans over the estimated life of the roof and make sure the infrastructure is sufficient to support your future needs.

Along with checking for proper cleaning and maintenance, you should also examine the quality of the materials used to construct the roof. If developers need to save money, the roof is usually one of the first places they’ll try to cut corners.

Carefully consider the quality as well as the condition of the roof before you buy. If cheap materials have been used in construction, that “25-year roof” might actually last about 15 years at best. If you need to re-roof a building, insist on the best materials possible. The extra cost on the front end will more than make up for itself in reduced maintenance fees, plus you’ll be able to command a higher asking price should you decide to sell later on.

AND DON’T FORGET…

The number of inspections you should consider for a building is directly proportional to the size of the transaction. For commercial buildings, always inspect the electrical, plumbing, air conditioning, and heating systems. Remember that older buildings only had to comply with the building codes that were in place at the time of construction. There is no guarantee that an older building will comply with current building codes. If you anticipate major remodeling to a building you are about to purchase, expect earthquake retrofits and accommodations under the Americans With Disabilities Act to be high on the list of city building code requirements.

Finally, don't forget to inspect the financial aspects of the building as well as the physical aspects. Ask to see statements of income and expenses for several years, and look over the types of leases and rental agreements the current owner uses. High water bills, for example, may indicate leaky pipes or problems somewhere in the sewer system. Look at the building's tenant turnover. Exceptionally high turnover may suggest poor maintenance practices. In any case, proceed cautiously on the purchase of any building in which the income-to-expense ratio seems abnormally low or high.

When it comes to commercial real estate, we live in an era of Caveat Emptor: Let the Buyer Beware. If you’re the buyer, realize that not all building owners have extensive involvement with their properties. Strange as it sounds, building owners often know little or nothing about the buildings they’re selling—and they may be shocked when they learn what you uncover with an inspection. Common sense, proper precautions, and thorough property inspections will help you and can avoid unpleasant surprises later on.

Published: January 24, 2001

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Clifford A. Hockley is the President of Bluestone & Hockley Real Estate Services, one of the larger brokerage and property management companies in Portland, Oregon. Mr. Hockley holds an MBA Willamette University and a B.S. in Political Science from Claremont McKenna College. He is a Certified Property Manager and Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM). Mr.Hockley serves as member at large on the Portland IREM board. He has twice been named Certified Property Manager of the Year (2001 and 2003) by the Institute of Real Estate Management and is a frequent contributor to industry newsletters.