Selling a fire damaged rental property?

3 Replies

My father has a rental house that recently burned down.  While much of the structure is still there the support beams that hold the weight of the house is damaged.  So it has be categorized as a total loss.  We have been discussing what to do about the house as rehab costs are far beyond what insurance will cover by about $100K.  So my suggestion to him is to sell it and take the insurance payout and the money he gets from the sale and reinvest in a new property.  My thoughts are that it would be faster this way to acquire a new income generating asset than to wait the 8-12 months for reconstruction.  

I'm not sure on the square feet of the land itself, but it is large enough that if you were to demolish the house you could sub-divide the lot into two.  You would just need to install water and sewer for the second half.   The insurance company will cover the cost of demolition up to $10K.  Estimates however, are clocking in at about $20k.   Which my father is willing to cover.  We have entertained a few offers which have been underwhelming.  One person offered the tax evaluation value of $110K for the lot as is another offered $85K as is.  My father is looking to get 150K as it is a fairly large piece of land in a high demand area.  When all is said and done if he had the resources he would develop it into two rentals himself.  Sadly he does not.  (if it matters the value of the property before the fire was $347K roughly)
Time is also an issue so waiting the time for building is not realistic for him.  

To my question...    Would he be able to get more money out of the land with the burned house gone? 

@Daniel G Blais A few different scenarios to consider... 1) What about clearing the lot, then subdivide it into 2 lots yourself (or as many lots as you can). You have a much more marketable product and will increase the number of potential buyers. It also cuts your clearing cost in half on a per lot basis. 2) Would it make sense to try to rezone into multi-family or HPR that would allow more than 2 units? I don’t know the area your talking about, but just thinking in highest and best use terms. Do your homework and see what the city will allow. 3) Would it make sense for your dad to clear it and build a duplex on it? In most areas, you can do that without having to go through the rezoning process. It sounds like he would have to come out of pocket to build it, but depending on rental market and long term goals, it might make sense. Personally, I think number 1 might be the best option, but I don’t know your specific market and what the numbers would look like. What market are you in?

@Jason Strain  
1) Sub-dividing ourselves presents a bit of a hiccup.  The city has demands before allowing it.  I wasn't privy to the conversation I only know what my dad told me.  They want him to pay out of pocket to asphalt 200ft of alleyway (which is gravel currently)  All the way out to the street before they would allow him to sub-divide.  With an estimated cost of $20K (to me this seems high for asphalt but its what he told me). This doesnt include another $20K for the sewer line and water.  This was actually the route we wanted to go but the City is basically playing games.  

2)  Rezoning for multi-family honestly I'm not sure.  When we saw the cost to rehab the house.  Building anything other than a manufactured home is out of his price range.  Its a large lot but might be small for anything more than 4 apartment units.  Its right in the middle of many residential houses.  

3) A duplex was actually the first thought that entered his head before he got the estimate for rebuilding.   If rebuilding is off the table then developing it further is not going to work for him.  

As to my father's goal, I think what he has decided to do is sell and reinvest in one possibly 2 single family homes with mortgages and possibly do a rent to own lease option.   He has no mortgage on this house, he owns it free and clear.
The market we are in is Seattle WA, King Country.  Des Moines WA specifically so there are many water view properties in this small town. Unfortunately this house isn't one of them.