Flipper/Rehabber 路 Long Beach, CA 路 Member since 2017 路 155 posts 路 118 votes
Im about halfway through escrow period structural damage was found during the inspection. My inspection contingency window closes in two days. What should my next steps be?
FYI
This is a tri plex in downtown Riverside, CA
517k purchase price via FHA 5% down
+36k seller carry back. Balloon due in 5-7 years with $150/month payment.
B class neighborhood
Historic buildings all around. (This bld is not in historic registry to my knowledge)
Built in 1929. No estimate on cost to repair damage.
The floor on the second floor is not level due to the structural issue with the foundation.
Please advise. I want to ask for a credit back on the carry back however this was done via promissory note.
This is a house hack deal and the location is perfect. The day we went into escrow a rehabbed comp was listed on the market for 880k. I鈥檓 worried if I ask for the credit the seller will look for any reason to get out of escrow and put this back on the market.
I got this off market.
Let me know what you would do.
You will probably be abandoning this property, unless the seller is willing to pay for the repairs. Is your lender aware that you are using owner financing to help purchase the property, because if not they need to know this. FHA won't let you buy something unless structural issues are handled or you are buying with FHA 203k. A lot of those things in downtown have major hidden issues and multiple Mickey Moused add- ons
You will probably be abandoning this property, unless the seller is willing to pay for the repairs. Is your lender aware that you are using owner financing to help purchase the property, because if not they need to know this. FHA won't let you buy something unless structural issues are handled or you are buying with FHA 203k. A lot of those things in downtown have major hidden issues and multiple Mickey Moused add- ons
Right now, the seller owns a house with foundation issues. The seller has a problem.
One escrow closes and you become the legal owner, you have a problem. Is this a problem you want to own?
If you're planning to tear down the house and replace it with a McMansion (the dirt is worth more than the sticks and bricks), then perhaps the existing foundation is not an issue because you'll likely be replacing it anyway.
I am a civil engineer so honestly structural does not scare me as much as the normal investor. Maybe I鈥檓 wrong but this does not make me run away immediately. I got a ballpark estimate of 5k.
@Aaron K. yes lender is aware. He has been involved every step of the way. Fha appraiser did not catch the foundation crack. I hired a third party inspector that caught it. I hired him because I saw one of his reports on a house I was flipping. He is very thorough. Will crawl under a foundation. Take photos of small hairline cracks etc. His reports are insanely thorough.
If it is only $5k and you're buying it at such a discount that you're worried the seller will put it back on the market for much more, then close the deal and fix it after. As long as the numbers still work, foundation issues aren't the end of the world.
@Account Closed definitely not going the year down route. Do you really think the house will have to be torn down? Talking around to local investors. Settlement and foundation issues seem to be normal for houses built in the 1930鈥檚 in this area. Locals are not freaking out. One guy I talked to bought a house and found a log was being used to support the frame 馃槀. He鈥檚 owned it for 10 years and kept it like that lol
@Bryan Devitt Thanks for the input. I was starting to think I was crazy for not walking away immediately lol. I appreciate your opinion coming from the contracting end as well. Have you ever dealt with structural repairs in your line of work?
I have clients that have dealt with many foundation issues but I don't do them personally. I just see the before and after. Everything above the foundation I have dealt with. Many things scare people off and I look at them and think "it's a half day of work and $200 in lumber". I have seen a few foundations that have needed a few repairs because they're built on crappy soil, but the "new" screw jack systems have been doing amazing work at fixing the problems much quicker and cheaper than the old methods.
@Account Closed definitely not going the year down route. Do you really think the house will have to be torn down? Talking around to local investors. Settlement and foundation issues seem to be normal for houses built in the 1930鈥檚 in this area. Locals are not freaking out. One guy I talked to bought a house and found a log was being used to support the frame 馃槀. He鈥檚 owned it for 10 years and kept it like that lol
Houses built in the 1920s and 1930s (before the United States had building codes) often did not have foundations. The 1930s house I owned in San Jose, California for 33 years, for example, had two-thirds of the house sitting on top of the ground with no foundation (the one-third of the house had a partial basement for the water heater). The locals did not freak out, but the adobe soil there expands when it rains and contracts during long periods of droughts (the late 1980s and the early 2010s).
What you do in your area is your business, but I learned the hard way to be on a solid foundation (my picture window at the front of the house cracked during the drought of the late 1980s and it took me awhile to figure out why). Some California cities also have seismic codes requiring the house to be bolted to the foundation, but I don't know how they are being enforced. The seismic retrofit issue did not come up when I sold my San Jose house in 2015 (realtors would know about this requirement).
This is great info thank you! So what made you learn your lesson? How much $ was there in damages due to the foundation.
That foundation sounds identical to mine. 1/3rd of it is a basement for water heater. The other 2/3 is individual wood posts sitting on seperate small concrete footings. I believe this is why the home is settling different amounts in different areas. Each posts has its own footing basically. No slab to keep everything acting as one. It has a lot of variables that way.
In my opinion there is a right price for everything. I'm wondering how much $ this will actually equate to over time. The current owner bought it like this 10 years ago. And it hasn't cost him a penny. I'm thinking I would pay $5,000 up front for bracing and call it a day. Does having a crappy foundation really affect the value, rents, or operating costs?
Can you clarify what you meant by saying it wasnt caught when you sold but realtors would know about this? Did the buyer of your property have the home inspected? Did you ever have the foundation repaired or just the window?
I own a 1923 house in Reno, NV. It is on what is known as a "rubble" foundation. Basically granite rocks. There are no known problems outside of getting insurance. Most insurance companies wanted the house to be retrofitted for earthquakes. I have not retrofitted as of yet and have found reputable insurance but it was a bit of a challenge to find. I am brand new in all this but hope this helps with your decisions.
The owner could back out anyways if you try to renegotiate, but you could attempt to negotiate the price down further. Wood foundations are the easiest to fix. If it's concrete, then it will be quite a bit more work.
This is great info thank you! So what made you learn your lesson? How much $ was there in damages due to the foundation.
That foundation sounds identical to mine. 1/3rd of it is a basement for water heater. The other 2/3 is individual wood posts sitting on seperate small concrete footings. I believe this is why the home is settling different amounts in different areas. Each posts has its own footing basically. No slab to keep everything acting as one. It has a lot of variables that way.
In my opinion there is a right price for everything. I'm wondering how much $ this will actually equate to over time. The current owner bought it like this 10 years ago. And it hasn't cost him a penny. I'm thinking I would pay $5,000 up front for bracing and call it a day. Does having a crappy foundation really affect the value, rents, or operating costs?
Can you clarify what you meant by saying it wasnt caught when you sold but realtors would know about this? Did the buyer of your property have the home inspected? Did you ever have the foundation repaired or just the window?
I believe the same thing as you do in that there are no bad assets; there are only bad prices. I also grew up in the Northeast where the frost line in winter got below 4 feet. Foundations went down 6 feet and became stand-up cellars to create additional rooms. In my mind, if it's a house that's going to survive more than a couple of winters, it has to by definition have a deep foundation (which is a psychological bias discussed by Nassim Taleb in his book The Black Swan).
When I bought my house, my realtor used the half-inch rule. As long as the foundation cracks were less than half an inch, that was to be expected (the foundation cracks in the house I bought were a quarter of an inch). What I learned over the years is that the expansion (during rainy seasons) and contraction (during periods of drought) of the adobe soil wreak havoc on houses without a deep foundation. My house sat on concrete for the two-thirds that only had a crawl space, but I don't know how deep it went. I also counted 16 bolts holding the house to this concrete wall, which is better than nothing, but it doesn't comply with the seismic bolting codes I researched a few years ago.
The front picture window cost me a few hundred dollars to replace, but it's the only thing I had to replace. The glazier struggled to fit the replacement window and I didn't ask why (I stood on the sidelines and let him do this thing). At the time, my mindset could not believe the house had shifted ever so slightly on its foundation (my psychological bias). Since I sold my house as is, I never had to deal with the larger cost of repairing the foundation. My buyer turned the house into a McMansion and flipped it. I have no idea what he did. The real estate lawyers advised me to have no contact with the buyer. I'm getting my former address information from Zillow and the street and satellite views of Google Maps.
In the 1990s, the San Jose Mercury News ran a story about how homeowners had to bolt their house to the foundation (either then or when they sold the house) and I received junk mail from contractors offering their services. I added this newsbit to my my mental checklist, but when I asked my realtor about it a few years ago, she had never heard of it. Perhaps the takeaway is to read, but take with a grain of salt, stuff you see in newspapers. In the 1990s, the Mercury News also ran a story about San Jose's Urban Forest initiative that required homeowners to plant a tree between the sidewalk and curb if feasible to do so (either then of when they sold the house). My realtor had never heard of this requirement either.
Other houses on my street were much older than mine (they were built in the 1890s, while mine was built in the 1930s). The Victorian house with its charming gingerbread trim next door to mine had been retrofitted in the 1950s and was raised a few feet off the ground (to create a lean-over cellar for additional storage space). I don't know what the driving force was for this change. Perhaps the house had a foundation, or perhaps it didn't and one had to be installed. Philosophically, when you buy an old house with its charm, you also buy the problems that come with it. Since I don't fix and flip really old houses (or any house, for that matter), I'm not aware of the costs involved. Experienced rehabbers on BiggerPockets know the costs better than I do. My conclusion for me is to stay away from houses that require extensive work because I can change a light bulb and the smoke alarm batteries, but not much else.
I would get on the phone with the seller to discuss the issue and see if they are willing to work something out. If that goes well, I would take anything they offer and close the deal. If they won't budge on the foundation issues I would still go forward with the deal. Given your professional assessment of an easy repair (around 5k), I would still go forward with the deal given the excellent terms you have already negotiated.
I buy a lot of homes with foundation issues, and these always turn out to be excellent value add buys with easy fixes.
"Im about halfway through escrow period structural damage was found during the inspection. My inspection contingency window closes in two days. What should my next steps be?"
If it were me, I'd kill the deal immediately if not sooner, then start with a clean slate and a new offer. You don't have time to negotiate that I can see, so kill it and start over with a new offer that takes into account the problems.
You can fix the building but you can't fix the location :) I would ask for an amendment for additional time due to damage found - seller could say yay or nea. Have a structural engineer look at it, get a quote on repairs & include a contingency to price to cover the unknowns - consider meeting seller somewhere in the middle if you really want it. Foundation leveling can be tricky but not necessarily a deal breaker, this still sounds like a good deal to me.
I can tell you from experience, go with your gut, not emotions. If it walks like a duck, talks like a duck and feels like a duck, it is a duck. RUN!! There will be mor fish to fry!! Horde a LOT of cash for when this entire thing implodes. If you are worried about them selling to someone else with structural issues, let them sell it to some other sucker. Ask for at least half of repairs. They were trying to sell you a bill of goods. RUN!!!!
Swanny
Im about halfway through escrow period structural damage was found during the inspection. My inspection contingency window closes in two days. What should my next steps be?
FYI
This is a tri plex in downtown Riverside, CA
517k purchase price via FHA 5% down
+36k seller carry back. Balloon due in 5-7 years with $150/month payment.
B class neighborhood
Historic buildings all around. (This bld is not in historic registry to my knowledge)
Built in 1929. No estimate on cost to repair damage.
The floor on the second floor is not level due to the structural issue with the foundation.
Please advise. I want to ask for a credit back on the carry back however this was done via promissory note.
This is a house hack deal and the location is perfect. The day we went into escrow a rehabbed comp was listed on the market for 880k. I鈥檓 worried if I ask for the credit the seller will look for any reason to get out of escrow and put this back on the market.
I got this off market.
Let me know what you would do.
Good to meet you...
Did the seller disclose the issue on their TDS... If not youre in luck. If so youre not.
As for foundation work..Heck I have bought homes without foundations and put the foundation under them.. It isnt rocket science. Yes expensive however not difficult.
@Michael Quarles thanks for the comment my man! I鈥檓 a listener of your podcast and love your content. You inspired me to start reaching out directly to sellers back when I was in college. I took notes on how you speak to sellers and I still use them before I get on calls.
Regarding the TDS...he disclosed that the second floor was unlevel but did not specifically mention settlement or foundation issues...sort of walking a fine line there.
What happens if he knew about the structural issue and didn鈥檛 disclose?