What Every Real Estate Buyer Should Know About Property Condition Assessments
Maximizing Savings with a Quality PCA
If you're in the market for a new property, a key task is conducting a property conditions assessment (PCA). Buyers often consider PCAs an afterthought, something to quickly check off the list of requirements from the lender. This leads the buyer to find the least expensive and fastest PCA. But that’s a limited way of viewing this essential step.
Whether it's an office, retail space, hotel, healthcare facility, multifamily building, or another type of commercial property, a quality PCA can provide the buyer with potential savings at the closing table. A PCA imparts crucial insights into the building’s current state, identifies vulnerabilities, and estimates potential repair costs.
Watch our short video to see why scheduling a PCA in advance is critical for every buyer.
Trends in the Field
In the years before the 2008 real estate crash, there was a frenzy of developers constructing, renovating, and flipping properties. The rush to maximize profits led to a surge in poorly built or renovated buildings, with unqualified workers often prioritizing speed over quality. A PCA tells you if your structure was subject to this trend.
Even if a building from this period was well-built or renovated, you also need to consider maintenance. Many costly repairs such as mechanical systems, roofs, windows, and exterior coatings often have a life expectancy of 15-20 years. That means building repairs made just prior to the real estate crash are nearing the end of their lifespan.
A PCA can help warn you of upcoming repairs. Buildings upgraded during 2005-2008 are beginning to exhibit signs of aging, as their mechanical equipment and exterior envelope systems approach two decades of operation. Nobody wants to buy a new commercial building and then unexpectedly spend $150,000 just 18 months later replacing old systems. A thorough PCA can prove crucial in identifying potential pitfalls before finalizing a deal.
When Do You Need a Property Condition Assessment?
Pre-Purchase Assessments:
The most common time for a PCA is before finalizing the purchase of a property. A careful evaluation gives the buyer detailed insight into the potential liabilities, upcoming repair costs, and any major deficiencies of the property's systems, such as HVAC, elevator, electric, plumbing, building envelope, and roof.
Periodic Maintenance Checks:
A PCA is a valuable ongoing tool for property managers and building owners. They shed light on the physical condition and potential value of their assets. Regular PCAs can help guide maintenance planning and budgeting by providing up-to-date information on the current condition of all building systems and components. For property owners, a PCA is not a one-time activity but a continuous process, helping them regularly assess their properties and make informed decisions.
Property Condition Assessment Scope of Work
A PCA encompasses a holistic inspection of the major components and systems of a building. It typically involves a couple of days on-site, followed by a period of compiling findings, forming opinions, and identifying possible causes of any physical deficiencies discovered. Key elements of a good PCA include:
Preliminary Architectural Analysis: Evaluate the envelope, interiors, and potentially bring in civil expertise for exteriors. The condition and necessity of renovations or upgrades should be thoroughly investigated.
Examination of the Building Exterior: Identify any visible deficiencies related to grading or drainage, as well as examine the general state of the building's façade.
Roof Inspection: Identify any potential issues, such as leaks or structural damage, that could lead to substantial repair costs.
Interior Assessment: Look at interior finishes and any visible signs of wear and tear that may require refurbishment or replacement.
Accessibility: Evaluate the building for Americans with Disabilities Act (ADA) compliance. Sometimes an optional service, this includes an overall assessment of accessible path, from arriving on-site to moving into and around the building.
Inspection of Mechanical, Plumbing, and Electrical Systems: Examine all crucial building systems. Particular attention should be given to the mechanical system as it may potentially involve the highest repair or replacement costs. It’s also important to assess the age, condition, and setup of the HVAC units, especially as replacing multiple units can be expensive.
Estimate of Probable Cost: Calculate the probable cost to remedy any deficiencies and/or perform recommended repairs. This cost estimate is crucial for the buyer to understand the true value of the property they are considering.
Plan and execute the PCA well in advance of the property sale closure. Rushing through this procedure or opting for lower-cost assessors might lead to overlooked details that could result in future costly repairs.
A good PCA is a form of due diligence. It analyzes every aspect of a property to ensure potential buyers are fully informed and can make a confident investment decision. It aids in negotiating price and identifying potential renovation or maintenance issues before they lead to bigger problems.
A comprehensive PCA doesn't just look at the visible aspects of the property. It digs deeper to understand the building's status and potential risks beneath the surface. This is fundamental in ensuring buyers are making a safe property investment.
How to Handle Asbestos During a PCA
Typically, PCAs don’t include detailed asbestos surveys due to the associated costs and specific expertise required. But if you're planning extensive renovation or demolition, procuring an asbestos survey could be a gamechanger. It sheds light on the potential risks lying beneath your building materials, enabling appropriate planning for safe asbestos management and removal.
Asbestos abatement can significantly increase renovation or demolition costs, so having an awareness of potential asbestos-containing materials in the building can prevent future unexpected costs.
Once asbestos is discovered, engage a specialized asbestos abatement contractor such as GHP. Professionals have the training and experience to remove asbestos materials with minimal risk of exposure. They can design a proper abatement strategy, ensuring code compliance with local and federal asbestos regulations, to protect the health of occupants and workers.
Further negotiation with the seller may be possible upon discovering asbestos. Removal costs can be substantial, and it's reasonable to use these findings as leverage in price negotiation or request the seller to undertake removal before closing the sale.
Top 3 Benefits for Buyers Who Plan PCAs in Advance
Diving headfirst into a real estate transaction without adequate planning can result in costly, low-quality PCAs. Here's why it's wise to schedule one early:
Avoid Unexpected Failures and Expenditures:
Initiating a hurried PCA shortly before closing could result in missed elements and inflated costs. Planning early ensures a detailed investigation that reveals any significant and possibly expensive deficiencies. Recognizing these issues upfront gives you room to negotiate the price or ask the seller to undertake the required repairs before finalizing the transaction.
Boost Confidence in Your Investment:
An all-inclusive PCA provides a detailed understanding of the current status of the property, allowing you to identify and plan for potential issues early on. This reduces investment risks and provides insights into the building's structural robustness, mechanical integrity, and ADA compliance.
Mitigate Financial Risks:
Carrying out a PCA early on can reveal hidden problems, thus reducing the likelihood of unexpected costs post-purchase. This comprehensive evaluation enables the buyer to budget for required maintenance work and prevents expensive compliance issues. For example, spending $15,000-$25,000 on a PCA might save you from a surprise $100,000 cost just a few years into ownership.
The Right Building Expert Makes a Difference
Just as a quality PCA is important, so is the individual or company conducting it. Seek out professionals with a proven track record in the field. The right expert should have knowledge of construction, health and safety regulations, building codes, and local real estate market conditions.
Having the right expert handle your PCA can significantly enhance the quality of the property condition report. At GHP, our team includes design and forensic architects, MEP consultants, and building science experts. This blend of expertise allows us to dig deeper into potential issues and provide a comprehensive understanding of the building.
Key Takeaways
A PCA is a vital part of any real estate transaction. It provides the buyer with an in-depth understanding of the condition of the property and pinpoints any potential deficiencies that may lead to substantial repair costs down the line, especially in sectors like hospitality and healthcare. Planning for a PCA in advance and ensuring it's of high quality can save buyers a significant amount of trouble and costs in the long run. By thoroughly scrutinizing various aspects of the property, from structural elements to mechanical systems, an early-stage PCA safeguards your investment and secures your financial future.