Tax foreclosure gut rehab questions
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!