Hey everyone, I'm very new to REI and my partner and I are looking to do a house hack in Santa Cruz County which is super expensive but where we're from, have established careers, and want to stay. We found a 2 bedroom 1 bath that looks to be in great condition but is red tagged due to three additional un-permitted, detached structures. Our understanding is that if we remove those un-permitted structures, we will be able to lift the red tag.
I know that lending is near impossible with a red tag and we would want to do an FHA loan since this would be our first purchase. However, I was thinking about trying to approach the owner for seller financing - the price is so low they might just be trying to get it off their hands at this point.
My partner is a carpenter and can handle the demolition of the structures and any rehab on the house.
Really appreciate any thoughts and advice. Thanks!
This sounds like a tough first investment. Find out why it's red tagged and get that in writing that if you do xyz, the tag will be lifted. Why do an FHA loan? If it's a low down payment, will you have enough capital to complete a project of this size if more goes wrong, or more problems are found? Why have other flippers/investors in the area passed on this deal? In my experience, if there is one obvious violation of code or condition, there will be many more. People who neglect their properties rarely, if ever, neglect only one part, such as building unpermitted structures.
I would look for an easier duplex project with a 1980 or newer build that needs a heavy remodel for your first house hack.
Santa Cruz is definitely a tough market to break into, so it’s great you’re thinking creatively about ways to make a deal work.
You’re correct that traditional financing (including FHA) can be very difficult with a red-tagged property. Most lenders require the property to be safe, habitable, and compliant with local codes before they’ll fund the loan. A red tag usually signals a code or safety issue, which makes it hard to qualify until the issue is resolved.
Your understanding about removing the unpermitted structures may be the right path, but it’s worth confirming directly with the city or county building department first. Sometimes lifting a red tag involves inspections, permits for demolition, or additional corrections beyond just removing the structures.
Seller financing is one way some buyers approach situations like this, especially if the property has been sitting on the market and the seller wants a simpler exit. It can sometimes allow you to take control of the property, resolve the red tag, and then refinance later once the property is compliant and financeable.
A couple of practical things to think through before moving forward:
• Verify exactly what the county requires to clear the red tag
• Estimate demolition, permit, and inspection costs conservatively
• Confirm that the property will qualify for FHA or conventional financing once the issues are resolved
• Make sure the purchase price still makes sense after those costs
House hacking in high-cost areas like Santa Cruz often requires creative problem solving, but doing the homework on the local permitting and financing rules ahead of time can save a lot of headaches later.
Wishing you the best with the deal — sounds like you’re asking the right questions early in the process.
– Ridge Lending Group (Licensed in 49 states, excluding NY)
This sounds like a tough first investment. Find out why it's red tagged and get that in writing that if you do xyz, the tag will be lifted. Why do an FHA loan? If it's a low down payment, will you have enough capital to complete a project of this size if more goes wrong, or more problems are found? Why have other flippers/investors in the area passed on this deal? In my experience, if there is one obvious violation of code or condition, there will be many more. People who neglect their properties rarely, if ever, neglect only one part, such as building unpermitted structures.
I would look for an easier duplex project with a 1980 or newer build that needs a heavy remodel for your first house hack.
Hey everyone, I'm very new to REI and my partner and I are looking to do a house hack in Santa Cruz County which is super expensive but where we're from, have established careers, and want to stay. We found a 2 bedroom 1 bath that looks to be in great condition but is red tagged due to three additional un-permitted, detached structures. Our understanding is that if we remove those un-permitted structures, we will be able to lift the red tag.
I know that lending is near impossible with a red tag and we would want to do an FHA loan since this would be our first purchase. However, I was thinking about trying to approach the owner for seller financing - the price is so low they might just be trying to get it off their hands at this point.
My partner is a carpenter and can handle the demolition of the structures and any rehab on the house.
Really appreciate any thoughts and advice. Thanks!
Seller financing or hard money, although not cheap, may be possible depending on the price point. But as others have mentioned, I would advise to do more due diligence in this property because once the deed is passed on to you, you are liable for everything. Feel free to DM if you like to discuss this further.