Tax foreclosure gut rehab questions

7 Replies

Hi everyone, 

I am faced with a problem I'm hoping some people on BiggerPockets can help me with.

I'm looking to buy a 6 family property in my area that is going to be foreclosed on for unpaid taxes. I've negotiated with the city and they've agreed to allow me to purchase the lien before the tax auction around 6 weeks from today. As of right now, the lien on the property is for $300,000 in unpaid taxes and the owner has disappeared from the area.

This is a brick building built in 1969, and according to the property card it has (1) one bedroom, (2) two bedroom and (3) three bedroom units. I gleaned this from the number of rooms per floor and total number of units.

In my area, purchasing a property for $50,000 per door is totally unheard of, however this does require a significant rehab. I have private money sources who will loan me the purchase price and rehab costs for this building, secured by a 1st lien on the property at 8% interest. I also have an excellent GC as well as an investor client (I'm an agent) who I've become good friends with that is helping me with this project.

As a selling point for the investors, I offered to escrow 6 months taxes, insurance and interest payments at closing as I think this should cover me for the time to complete the rehab.

I'm planning on gut rehabbing the property (kitchens, bathrooms, electrical, plumbing, new gas boiler, insulation, roof, windows, flooring) and renting it to section 8 tenants in my area. Section 8 demand around here is insatiable and seeing that there is no supply, I am very confident I can screen rigorously and get good quality tenants. In addition, the units rent for much higher rates in this area than cash tenants.

But there are two issues I'm facing.

Because this is a property "condemned" by the city (I put that in quotes because at least from what I can see from the outside, the property looks like it's safe to walk in), I cannot enter the building. 

This week someone from the building department and someone from the fire department will accompany me to the building and allow me to see inside, however I can't walk the property on the inside with my GC to assess the condition, see the scope of work and see the layouts. 

Secondly, I don't know how long I should be underwriting for the time to complete the entire rehab. 

I'm selling an investor a building right now that was fire damaged and from several walkthroughs with his entire crew, we are estimating it's going to take 12 months to complete the entire building. Granted, it is comprised of (2) 2 bedroom units and (8) 3 bedroom units and was basically totally destroyed in the fire, but I am still concerned that 6 months to complete this rehab is too aggressive.

And finally, I don't know exactly how to estimate the gut rehab costs for this building and although I believe I'm underwriting this conservatively, I'm worried I won't have enough money to complete the rehab. 

I'm willing to put up my own money (I have around $130k of my own) to finish construction if it came to that point, as I'm confident I will be able to pay off investors and cash out $200k+ with a 1.4x DSCR when I refinance in 9-12 months.

However I'd prefer to borrow additional money from the investors at 8% instead of using my own funds if possible and keep my money as kind of a "worst case worst case reserve fund".

I've attached my underwriting sheet here to show rental rates, gut rehab cost projections and refinancing assumptions so you can get a feel of whether or not I'm being conservative enough. The vacancy assumptions, repair costs and management fee costs are direct from a local bank I'm speaking with and most of the other assumptions are what I've seen after analyzing $100mm+ of P&Ls this year.

If you guys could A) Tell me how I can possibly find out the layouts without walking the building (I'm worried the units are railroad style which rent for 30% less than regular layouts) and B) Estimate gut rehab costs and time frame without being able to walk the entire property (if that's even possible), and C) Whether I should pull the trigger on this deal, I would greatly appreciate it.

Thanks!

Hey Joshua,

A couple of questions I've got off the top is how many square feet is your building?  How good of a relationship do you have with your GC and as a general average, what is he charging per sq ft for basic rehab of low end apartment finishes?  That will give you a rough shot idea as to what your full guy rehab costs will be.  I advise you to obviously break down each construction cost to get your real budget etc, which you should have to track progress in conjunction with a payment schedule as to not get too far over your skis during the process  

I think 6 months is much to short a time frame to rehab 6 units.  I think you're between 9-12 months.  Again, it depends on your GC and his subs.  Here in Boston, 6 months would be a dream to get 6 units done.  Then again, if you're paying top dollar for your GC, maybe he can get it done.  You need to have an honest conversation with him.

Regarding layout, who cares how they're laid out now if you're doing a true full gut? If you are you're going to be removing most every wall except structurals. If you plan on keeping the existing layouts, then that's another story. If you are doing a true full gut, you have the opportunity to "re-layout" each floor plan to maximize the amount of space, therefore possibly increasing your bedroom counts, therefore increasing your cash flow and value of your building. You'd need to hire an architect to layout those floor plans for you. A good architect will provide you a full set of construction docs as well, including structurals (if needed), window and framing schedules. If you indeed have the rail car layout (I'm personally unfamiliar with) and you can't get as much money for them, then it's a perfect opportunity to maximize the layouts and bedroom counts. Just be sure to nail down those construction costs and don't let them get too crazy. You need to find the happy medium between cost and ROI.

Best of luck!

Originally posted by @Andrew Schena :

Hey Joshua,

A couple of questions I've got off the top is how many square feet is your building?  How good of a relationship do you have with your GC and as a general average, what is he charging per sq ft for basic rehab of low end apartment finishes?  That will give you a rough shot idea as to what your full guy rehab costs will be.  I advise you to obviously break down each construction cost to get your real budget etc, which you should have to track progress in conjunction with a payment schedule as to not get too far over your skis during the process  

I think 6 months is much to short a time frame to rehab 6 units.  I think you're between 9-12 months.  Again, it depends on your GC and his subs.  Here in Boston, 6 months would be a dream to get 6 units done.  Then again, if you're paying top dollar for your GC, maybe he can get it done.  You need to have an honest conversation with him.

Regarding layout, who cares how they're laid out now if you're doing a true full gut? If you are you're going to be removing most every wall except structurals. If you plan on keeping the existing layouts, then that's another story. If you are doing a true full gut, you have the opportunity to "re-layout" each floor plan to maximize the amount of space, therefore possibly increasing your bedroom counts, therefore increasing your cash flow and value of your building. You'd need to hire an architect to layout those floor plans for you. A good architect will provide you a full set of construction docs as well, including structurals (if needed), window and framing schedules. If you indeed have the rail car layout (I'm personally unfamiliar with) and you can't get as much money for them, then it's a perfect opportunity to maximize the layouts and bedroom counts. Just be sure to nail down those construction costs and don't let them get too crazy. You need to find the happy medium between cost and ROI.

Best of luck!

 Hi Andrew,

Thank you for your insight and all your help, much appreciated.

To answer your questions, I think I was using the term gut wrongly. I don't care to remove every single wall and gut it from top to bottom, if the plumbing and electrical are OK I will keep it.

My whole gut renovation thoughts were based on making it look as nice as possible while minimizing energy and water bills as this building is a half hour outside of Manhattan so utility bills can get wild.

I'm focused on doing the following:

-Installing new energy efficient windows

-Wrapping pipes to lower heating and hot water costs

-Installing a high-efficiency gas boiler

-Putting on a new roof

-Installing low flow toilets, showers and faucets

-Ripping out sheetrock and double insulating the walls that are most exposed to the elements.

I'm not sure if that qualifies as a "gut rehab" but I know the scope of work is significant.

I'm just assuming it will take around a month per unit to put in 6 new kitchens, bathrooms and sheetrock and put in the new boiler.

As to the layouts, I'm working with the city to get a chance to go in and take a look but I won't be changing the layouts. If it's a railroad style (which means kitchen leads into a bedroom with two doors, leads to another bedroom with two doors and a third bedroom with two doors, all of which connecting in a single line like a railroad), I will be passing on the deal. Here is a link to a layout blueprint http://www.nyhabitat.com/floorplan-ny-apt/15899/15...

I haven't gotten a chance to walk this with my GC and it's my first deal so I don't know exactly how to estimate it roughly. If you think it will take a longer time frame than that, or more per unit (as I'm assuming Boston prices are similar to my area), please let me know.

Thanks again Andrew (and anyone else).

Josh

I don't know anything about NY, but I'd check with the Sanitation inspector, or building department, or whoever is in charge of condemning buildings.  If that's the case, and it's condemned, you are likely to be required to bring the whole building up to code.  You may not be allowed to do only what you want to do.  So check into it before you go further.  This sounds like a pretty big project for a first one.