Being a newbie, I thought i might pose this question to the community. I am considering investing in a very small starter house. It was 2 bedrooms, but renovations turned the 2 small bedrooms into a large one bedroom, the idea was to add an addition of a second bedroom. However the owner didn't finish and bought another property. The tax assessed value is 40k, he is asking 55K. His explanation is the tax assessors have not been out to the home since he started the renovations. It appears the ARV for the area will be around 133-148K. I believe it to be a good buy, however the tax assessed value is low. Any suggestions??? Should I be concerned??
My main concern wouldn't be about the assessed value. My main concern would be, were the renovations he did and left unfinished permitted? That could prove to be a disaster!
As far as the assessment, most likely the first year the assessed value will be what you bought the property for. Going forward it may well go up if the ARV is what you are stating. You'll need to run the numbers at the ARV value to see if they still make sense. If they do then you should be fine. (Assuming point #1 is not an issue)
Best of luck!
Could you explain more about how that will be a disaster and how I can avoid that? Also should I add a second bedroom or will flipping a one bedroom be almost impossible??
If the remodel was done without a permit then when you go to sell the property it's going to show on the records that it's a 2 BR. It may not come up, however if the city/county find out that it was done without a permit then you could be required to pay fines, bring the property up to code or both. This can get very expensive.
I'm not trying to scare you because un-permitted work is done all the time. The problem is, the current owner is always potentially liable. It doesn't matter who did the work without the permit. If you're the current owner and the city finds out, you're liable. My recommendation would be to go to the city and find out what, if any, permits have been pulled in the last few years. If permits were pulled and inspections were completed and signed off then you shouldn't have anything to worry about.
As far as the 1 BR issue, I think that's going to be a tough sell as a flip or a rental. That being said, in some markets there is a demand for that but usually that's in a metropolitan area. Try doing a search on your local MLS or Realtor.com to see how many other 1 BR properties have sold in the area. That will give you an idea of how much demand there is for them. Before you go through the expense of adding a second bedroom, check those recent sales as well. Is there a market for those? If not then this might not be the best property to invest in.
This is all part of the due diligence process. I know you're excited to get started, we have all been there. But it's better to pass on a potential good deal than get stuck with a bad deal. Do some more research and if you have more questions be sure to post them here. Again, I'm not trying to discourage you from doing this deal, I just want to make sure it's a good deal so your investing career doesn't start off on a bad foot.
Good advice @Eric Black . If permits were pulled, they will still have to pass final inspection. This should be done and the permits closed before selling the property. If they did the work themselves, I would recommend bringing in a qualified inspector (i.e. a contractor or electrician friend) to make sure the work was quality.
Also, I do not recommend ever buying homes based on the tax value. Tax assessors do not value a home on an individual basis but rather in bulk. Additionally, it is not market adjusted each year. It may or may not reflect market value. The best advice is to always go off other recent comparable sales.
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