Anyone ever start a rehab project BEFORE you closed on the property?

Question

I would love to hear any horror stories about this? I have a friend that routinely does this, he has been busted by the bank one time, they only gave him a slap on the wrist and told him to halt all work. I keep telling him its a terriable idea, but it seems to be working for him, and he has quite a large portfolio. The day he closes, the rehab is typically finished or almost finished and he drives over and puts his For Lease sign in the yard, directly after leaving the title office.

Thoughts?

Andrew Cordle · Answer

@Chris McDaniel

I am probably one of the few people that will admit to doing this in the past. I have not done it in a while though.

Is it risky yes, did the banks (when I got caught) ever really get mad at me NO, did I ever lose a deal over it NO.

Normally when someone is doing something like this it has to do with a volume buyer, meaning he is doing several of these a year and his profits will add up all the way to as if he did another entire flip that year for FREE.

If you could take your money and make another 30k that year by doing nothing extra but starting construction earlier. Hmmm.....

Now am I advising you to do this NO. I am just trying to explain the logic behind why someone who do this.

And I am NOT currently doing this now FYI

Andrew

Jay Hinrichs · Answer

@Chris McDaniel

depends how much money you have it could be a small risk and if you lose 10 or 15 K when a bank fubars you so what.. just the cost of doing business.

although really what is this guy saving if they are low value assets he is only saving what 30 to 90 days at most of interest carry tax and insurance that s what 2 to 3k maybe. But it does add up if he has done 8 to 10 of them.

IN the day when I used to buy Sherriff sales in Oregon with the 6 month right of redemption if the house was vacant and abaondoned I did the same thing I went in and rehabbed it during the 6 month period so when I got my sherrifs deed I could sell right away.

Now In our market with Redemption rights a hot commodity I would only risk it with a 20k rehab and under. something that we could lose and just chuckle about it.

Dee M. · Answer

Hard to believe as almost all banks employ field service companies to verify and enforce that the property is secure until closing. He wouldn't even legally or even in the vaguest sense own the property. Builders risk insurance wouldn't even apply as he doesn't own it. Horrific idea I would say. And no realtor who has this listing for a bank would allow it. It violates pages of ethics and legal issues.

James Wise · Answer

The upside seems so low to me that it just does not make any sense. Andrew did a pretty good job explaining the upside on why he did it in the past but I don't think it is worth it.

Jay Hinrichs · Answer

@Victor Menasce

I would agree with you that insurance is the greatest risk in this scenario.. IE if someone got seriously injured.. but I think you can insure for that.. just like any contractor that insures themselves when they work on homes they don't own..

and a seller could say thank you very much.. I am involved in a case right now in Oregon were this exact thing has happened.. the buyer at the sheriffs sale does not have the redemption rights its the MO to move right in and rehab... and wait out the 6 months.. guy that lost the house got an attorney, attorney contacted me there is big equity in this escpecially now that its all rehabbed and the process to redeem is under way.

the arugument from the buyer was hey I just spent 30k.. Well by law in OReogn you are only entitle to the amount spent to secure the asset from further waste.. Not he price of a new kitchen :)

Didi Siani · Answer

I don't think anything in real estate is "wrong" or "right". It's all depends on opportunity & obstacles with case by case.

I understand your friend - Time is money!
Seems like all the people that posts the notes above not a fan of "thinking outside the box" and doing their transaction by the book. I'm all about doing calculated decisions.

If there's hard money loan on the property the cost per day can exceed $200.
This is $6,000 a month! this amount might be equal to the total remodeling cost that seller wiling to risk in the transaction will fall through.

I'm definitely not against it and there are projects I start the remodeling on a property before official ownership been convey.
Staring construction before obtaining ownership is a risk but if seller aware of the list of risk bellow and be able to eliminate those - Ye, why not.

Here're the risks:- Risk to buyer: Closing agent found out title not clean - transaction canceled. Seller will loose the construction money he/she put into the property. - Risk to buyer: HOA balance is high and seller can not afford it (planing to rent the property in order to pay - transaction canceled. seller loose construction money- Risk to buyer: if finance and loan can't close or property didn't get appraised. - Risk to seller: contractor injure & will sue owner on record- Risk to seller: Contractor cause an error with plumbing or electric - can be costly to seller since until the deed not signed - property still belong to seller and buyer can just loose escrow. Hope my opinion helped.

Syed Kamal · Answer

To me answer is an obvious NO. But don't forget to look for a 203K lender. Lenders who can roll in the cost of rehab into the mortgage. Why sink your money into rehab if you can borrow, of course restrictions apply. Just do a google search for lenders in your area.

Chirag Parikh · Answer

I'm pretty sure thats not just a terrible idea but probably not legal either...

Anyone ever start a rehab project BEFORE you closed on the property?

Anyone ever start a rehab project BEFORE you closed on the property?

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