Inspection Done - Look for advices on this house

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Inspection Done - Look for advices on this house

Member since 2021 · 44 posts · 8 votes

**This is cross posted since more foot traffic here**

Hello BP,

I am here to soliciting your input and thank you! Looking for a 2nd rental. Inspection done today. I am on the fence.

- Location: Old neighborhood, up and coming. 6 houses to an elementary school ( 7/10 per Greatschool.org). Within a mile, there's a high school (6/10), sports field, community rec center, swimming pool, police station and fire station. Also with in a mile to major turnpikes.

- House: 50's brick ranch, builder grade everything. 3 bedroom, 3 bath but only one shower. There's a space for adding a shower.

- Inspection issues: 1) the cement on the side of the house and back patio. big crack, 3 inches lower than its original place. The settling force tilted the basement window well. to repour the cement and fix the grading, about $20K

2) original insulation(disgusting), original electrical (need various repair), original plumbing, sewer line needs work (clay and cast iron). New roof.

3) Finished basement. Lead paint is one basement bedroom. About 400 sqft basement ceiling has asbestos. The entire 1200 sqft basement floor has asbestos but encapsulated. Faux wood paneling in the entire basement and one room at the main level. Not sure what's behind the faux wood.

4) no dishwasher in the kitchen, no hook-up.

My concern: the market is crazy, we paid the market price for this one, not a deal. This is "as is", so can't negotiate price for inspection results. I don't think I have a deal, but I don't think I can get a deal in this market, either. The inspector is very familiar with the neighborhood and he said the overall condition of this one is 3.5/5.

What should I fix before I can rent it out? Is this property too high-maintenance for a rental?

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

4y

This is a terrible house for a rental. Based on the problems you have, and the costs associated with them, you are never going to CF, your cost will be tremendously high, and it will probably take 30 years before your CF (if you have any) will recover your costs...sorry.

IS there anyway you can get out of this deal?...and when you say "you don't think you can get a deal in this market", that tells you don't invest in that market...NOT to take any property you can get. An investor collects money, not properties. The goal is ALWAYS to get a deal, and NOT just accept the best that comes along. You'll go broke very, very fast that way.

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Dan H.:

Quote from @Joe Villeneuve:

I've seen a lot of "smart seasoned" investors lose their shirt/skirt by using "smart seasoned" guesses. Why, when you don't have to? Why take chances taken when the opportunity for quick/controlled financial gain is right in front of them?
Depending on future events, that you have no control over, isn't investing...it's speculating...and there's no need for it. Even if that huge future appreciation takes place, all that means is an even greater loss because the compounding factor is never utilized.

I have seen this quote that depending on future events is not investing many times, but I have never seen a definition of investing from a legit source that does indicate some form of expectation of profit. Investing depending on future events is investing if there is an expectation of profit by definition.
It is little different than Robert K using his own definition of asset. I understand what he desires to show, but the home you live in is an asset by virtually any dictionary definition. I wish he would not redefine the word.
Historically there is a poor correlation between initial cash flow and the actual cash flow achieved over a long hold period. without doing research on future expectations, I would purchase the highest projecting cash flow property at purchase (projected initial cash flow). In most urban areas these are the class d properties or have some other high risk. Nationally, they are often from markets with declining populations and/or declining incomes (some Midwest markets). Even if you invest for cash flow, you should do research that provides some level of confidence on the future performance. Recognizing that occasionally there are items like the Great Recession that can impact your projections. Does this mean you are not investing? If you are expecting a profit you are investing by definition. If you are expecting a profit but have not researched your investment, a fool and his money are soon separated.
Most of my RE investments are value adds. I typically extract my investment via a refi. Poor positive cash flow with zero invested produces incredible ROI. however my approach is not passive. It is definitely a job during the process. It is not for all investors. I believe it can produce great returns, but I know it is not the only way to succeed in RE.
Your responses for initial cash flow being the only criteria that dictates the success of an RE is historically incorrect. The best return markets (using Case Shiller ranking) for this century had poor initial cash flow. But they ended up having great cash flow over the long term (great rent increase) and great appreciation.

Me thinks you missed my points.

The definition of an asset in the dictionary, is based on accounting. The definition I give, is based on practical application and use...which is more important than the accounting definition to REI's since the accounting definition is only on paper.

The true values of CF and equity aren't the face values of CF and equity. The true values are based on what they are buying.

NCF adds to the cost, but is actually an exponential loss due to what it could be if reinvested.

The actual value of equity decreases with every dollar it appreciates. The initial equity is actually what the REI is paying for the property since it comes from the DP and represents a form of cash (stagnant) that is increasing on a one to one relationship with increases in PV. When you buy a property you are buying it for 20% of the PV, so the DP (cash) is actually worth 5 times its face value. When your initial equity doubles from the equity you paid for (DP...you bought the first 20%), you are losing money because that equity is going down in true value. When you buy the property that equity is actually worth 5 times its face value. When it doubled, it is now only worth 3 times its face value. If that property were to be sold to access that equity, and reinvested it, the true value of that equity is now worth 5 times its face value again...but the face value is the same it was when it was in the original property,...it's just worth more now.
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Foti Karastamatis
Member since 2020 · 45 posts · 46 votes
4y
Walk away. Too many issues and not enough upside. There are always deals. Finding them takes time. Start looking for wholesale properties and or wholesalers. Foreclosures are coming . Be patient. Stash your cash. I'm not a huge believer in "saving your cash" but a bad deal is much worse and will cost you more than just money.
2 Reply
Anne W.
OP
Member since 2021 · 44 posts · 8 votes
4y
Update: I was able to get $15K from the sellers.
0 Reply
Foti Karastamatis
Member since 2020 · 45 posts · 46 votes
4y
$15k from the sellers is a red flag in todays market. If it was a "deal" they would NEVER of done that. They would of gone to the next buyer. However, $15k still won't be enough to make it a good deal. Don't let emotion or the feeling "of I'm never going to find a deal" let you make a BAD decision. EVERYONE on this forum has said to walk away from this "deal". It's no deal. Lead paint and probably water lines, asbestos, clay pipe, old wiring and plumbing not to mention everything else you mentioned and everything you haven't seen. I've been a hands on general contractor for over 35 years and a RE investor longer than that. No matter how much you "wish" a deal to be good, it wont be. "Not sure what's behind the faux wood" is just another HUGE red flag... if it looks like a duck and sounds like duck, it's a DUCK. Don't get DUCKED!

2 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Sometimes the best deals you make, are the ones you don't.
2 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Anne W.:

Update: I was able to get $15K from the sellers.
So what.
0 Reply
Foti Karastamatis
Member since 2020 · 45 posts · 46 votes
4y
Quote from @Joe Villeneuve:

Sometimes the best deals you make, are the ones you don't.

AMEN BROTHER!
1 Reply
Foti Karastamatis
Member since 2020 · 45 posts · 46 votes
4y
I don't want to sound like I'm beating you up. Everyone here wants you to succeed. We all know that if you have a bad experience, it'll probably be your last. RE investing is the best way (IMO) to create and keep real wealth. The fact is, you already knew it was a bad deal but you tried to justify it to yourself anyway. A VERY expensive mistake that most here have probably made. Learn from others mistakes without having to pay for them.
2 Reply
Michael Robbins
Property Manager · Henderson, NV · Member since 2018 · 501 posts · 317 votes
4y
@Anne W. if you are paying the market price then I would walk away from this one. BUT i would at least try first to sent the seller a "request for repairs or request for credit in lieu of repairs" that reflects all the major work that needs to be done on the property. It might be worth a shot.
0 Reply
Derreck WellsPro Member
Specialist · Pelham, NH · Member since 2013 · 547 posts · 269 votes
4y
"I don't think I have a deal..." Then you shouldn't buy it. Period.
1 Reply
Gene Livingston
Investor · Kyle, TX · Member since 2015 · 113 posts · 102 votes
4y
I hope you used a scope on that plumbing system. Replacing cast iron piping on an old house can cost over $30k.
2 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
Quote from @Gene Livingston:

I hope you used a scope on that plumbing system. Replacing cast iron piping on an old house can cost over $30k.

Amen. Everyone overlooks that old cast-iron waste pipe. And they don't realize that THEY have to replace it up to the city main tie-in. Under the foundation, under the whole lawn/deck/driveway/patio, whatever, and then under the sidewalk and asphalt to the main line. Cheapest I ever saw was $7500......
3 Reply
Rick Albert
Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
4y
Quote from @Foti Karastamatis:

$15k from the sellers is a red flag in todays market. If it was a "deal" they would NEVER of done that. They would of gone to the next buyer. However, $15k still won't be enough to make it a good deal. Don't let emotion or the feeling "of I'm never going to find a deal" let you make a BAD decision. EVERYONE on this forum has said to walk away from this "deal". It's no deal. Lead paint and probably water lines, asbestos, clay pipe, old wiring and plumbing not to mention everything else you mentioned and everything you haven't seen. I've been a hands on general contractor for over 35 years and a RE investor longer than that. No matter how much you "wish" a deal to be good, it wont be. "Not sure what's behind the faux wood" is just another HUGE red flag... if it looks like a duck and sounds like duck, it's a DUCK. Don't get DUCKED!

I disagree, I get price reductions and credits all the time. Depending on the situation, a Seller may not want to do the dance with another Buyer and start the escrow process over. Therefore they are better off giving the current buyer money. It also shortens their carrying costs by avoiding another 30 day escrow.
Good job on the $15,000 but based on what you listed that doesn't even cover one aspect of the property. Do you have the funds and desire to take it all on?
0 Reply
Anne W.
OP
Member since 2021 · 44 posts · 8 votes
4y
@Rick Albert some of the $15K comes from seller agent's commission. In addition, I got $6K from my own agent. Cosmetically the house is ready to rent. $3K/month.
1) sewer line: we are having sewer root blading and re-scope again, then decide if we need a replacement.
2) plumbing: main shut-off is copper, visible plumbing in bathrooms are copper.
3) electrical: electrician coming tomorrow. Electrician panel is 100 amh. On the phone he said 100-year houses in NY don't need rewire the whole house. but do need to make sure all outlet grounded and GFCI.
4) HVAC: furnace from 2007, ducts, too. AC from 2021
5) sinking concrete sidewalk: I am going to see if polyurethane foam can lift the slab.
0 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
Quote from @Anne W.:

@Rick Albert some of the $15K comes from seller agent's commission. In addition, I got $6K from my own agent. Cosmetically the house is ready to rent. $3K/month.
1) sewer line: we are having sewer root blading and re-scope again, then decide if we need a replacement.
2) plumbing: main shut-off is copper, visible plumbing in bathrooms are copper.
3) electrical: electrician coming tomorrow. Electrician panel is 100 amh. On the phone he said 100-year houses in NY don't need rewire the whole house. but do need to make sure all outlet grounded and GFCI.
4) HVAC: furnace from 2007, ducts, too. AC from 2021
5) sinking concrete sidewalk: I am going to see if polyurethane foam can lift the slab.

#3) BS. Get another electrician. 100A is not sufficient for modern loads. Also, a 100 yr old house is likely to have K&T , at least in some areas, if not all over.
1 Reply
Anne W.
OP
Member since 2021 · 44 posts · 8 votes
4y
In order to be CF big positive in my targeted neighborhoods, houses needs to be under 400K. Since January, I have seen a murder house (younger son killed mom and paralyzed older step brother), a meth-cooking house still tested positive in the basement, a hoarder house that every inch needs a rehab. Those are listed at 400K and will be sold above of course. In February, I saw a house that is in a C neighborhood and later found out more than 10 registered sex offenders within 1-mile radius. Even I have a PM, I still want to see the property at least once a year. I don't have what it takes to invest in those areas despite of amazing CF.
Also, I do think current valuation is high. CF houses in C neighborhood may be most frothy. Too much downside risk if I buy there now.
0 Reply
Anne W.
OP
Member since 2021 · 44 posts · 8 votes
4y
@Bruce Woodruff basement faux wood panels are in the place of drywall nailing into studs. If we need to rewire, demo faux wood is not a big deal. Faux wood panel is popular in the 70's, so I think the basement was finished then.
0 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
Quote from @Anne W.:

@Bruce Woodruff basement faux wood panels are in the place of drywall nailing into studs. If we need to rewire, demo faux wood is not a big deal. Faux wood panel is popular in the 70's, so I think the basement was finished then.

With all due respect, you sound like you have no clue. You're still talking a complete re-wire....and then a new drywall hang/mud/texture. (Any kind of paneling is pricey right now)
That's a lot of money. $30k....?
But you sound like you're sold on this house - why did you even bother asking us to waste our time giving advice when you were going to get it anyway?
2 Reply
Anne W.
OP
Member since 2021 · 44 posts · 8 votes
4y
@Bruce Woodruff with all due respect, construction is not so high and mighty that a woman wouldn't comprehend the amount of work, knowledge and cost. You reminded me how expensive the rewire is and I considered the worst case scenario. You reminded me of the old plumbing, and I paid attention to it when I checked on the house again. However, I don't think I have to tackle ALL deferred maintenance items now. With $20K credit, I can go ahead with the purchase.

No need to cyber bully me calling me "waste our time". I appreciate everyone's feedback. They are extremely helpful in terms of presenting a worst case scenario and sharing different perspectives. In the past few days, I had time to research everyone's point on big-ticket repair. @Joe Villeneuve Joe's comments also got me really thinking about CF. I am considering selling my other rental next year that is twice the value of this one and only rent at 10% more.
1 Reply
Foti Karastamatis
Member since 2020 · 45 posts · 46 votes
4y
Quote from @Anne W.:

@Rick Albert some of the $15K comes from seller agent's commission. In addition, I got $6K from my own agent. Cosmetically the house is ready to rent. $3K/month.
1) sewer line: we are having sewer root blading and re-scope again, then decide if we need a replacement.
2) plumbing: main shut-off is copper, visible plumbing in bathrooms are copper.
3) electrical: electrician coming tomorrow. Electrician panel is 100 amh. On the phone he said 100-year houses in NY don't need rewire the whole house. but do need to make sure all outlet grounded and GFCI.
4) HVAC: furnace from 2007, ducts, too. AC from 2021
5) sinking concrete sidewalk: I am going to see if polyurethane foam can lift the slab.
$21k credit is great. Congrats on that.
Copper pipes are great EXCEPT houses that old used LEAD solder. That's the issue because it leaches lead into the water.

100 amp elec panel might be ok if everything is properly grounded BUT grounding outlets isn't always easy or inexpensive even with copper pipes too use for ground. If you rewire you will be forced to update to current code. New panel will usually be 225 amps. A modern kitchen, depending on size, can easily take 15 circuits. That's probably close to the entire house as is. GFCI outlets don't always fit into old elec boxes because the GFCI are physically much larger than regular outlets and old boxes are usually very small. Boxes can be replaced but it can add significant cost. Hopefully you don't have fuse type panel. I have seen insurance companies drop policies unless elec system was certified and or panel was changed to breakers.

Make sure the heat exchanger is inspected in the furnace. One from 2007 probably wont have cracks like the old cast iron ones but they do rust, or burn out.
1 Reply
Gene Livingston
Investor · Kyle, TX · Member since 2015 · 113 posts · 102 votes
4y

Dont know how it works in NY, but around here computers, "smart" refrigerators, wifi thermostats and other gizmos want 3-wire systems. On the upside tho, a 100-yr old house is not going to have a slab, so pulling a ground wire isn't all that bad. But then again, almost ANY electrical work of consequence is going to trigger some things like requirement to bring everything up to code. Potential quagmire. But our job is to solve problems.

K&T for those unaware, is knob and tube..I always laugh when I see that stuff. Dont know why, but it amuses me.

0 Reply
Anne W.
OP
Member since 2021 · 44 posts · 8 votes
4y
@Foti Karastamatis thank you Foti! The electrician said there's no need to rewire. When the furnace was installed in 2007, there was an electrical permit and at least part of the electrical was updated. However, we are getting a new 225-amp electrical panel. I also checked with the insurance, they saw the permit history and it's all good.
1 Reply
Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
4y
Quote from @Dan H.:

I am not of the @Joe Villeneuve thought that a REI must have positive cash flow to be a good investment. You can research the metrics of an area and make educated forecasts that are likely to perform to your well researched conservative pro forma. Similarly, positive initial cash flow can turn to negative cash flow as it did in many areas in the Great Recession (Detroit, Las Vegas, many areas in Arizona). Final item is that there is not a good relationship between initial cash flow and long term cash flow. All 3 of the cities at the top of the case Shiller highest return list for this century (San Francisco, Los Angeles, San Diego) had poor initial cash flow in the 2000 and poor initial cash flow today. However, the cash flow on a property purchased in 2000 in any of those cities would be insane. I have 2 properties purchased around 2000 in San Diego. One is an STR but its rent to purchase ratio would be over 2% as an LTR and the other is an LTR and its rent to purchase ratio is almost exactly 2%. Not only do they have good rent to purchase ratio, but one has appreciated over $1M and the other over $2m. When purchased neither of these had good cash flow compared to other markets (and if purchased today they would have poor initial cash flow).
However, I think your property is not a good investment and this is my thinking: you indicate it is not a good deal (buying at retail value). It requires a lot of work/expense which I would not be averse to if the work were likely value adds. Replacing a thrashed kitchen or bathrooms could be a value adds. Opening up a floor plan could be a value add. Fixing cement issues, old wiring and old plumbing are not going to produce a return that matches the cost. They are necessary maintenance items. You would be better served by finding another property, even if it also was not a deal (paying retail), that the work needed was going to add a value greater than its cost (i.e. has a value add).
Investors should strive to pay less than retail. They should strive to get paid for work performed (i.e. work be a value add). This property does not meet either of these conditions.

Note you did not present a pro forma. Even if the conservative pro forma based on valid metrics projected significant rent increases, I would still pass on this property and look for one that you will not be doing huge amounts of work for negative value (meaning cost is greater than the value added).

Good luck

I have the same issue even with the $15K you are getting from the seller. You are paying retail. The repairs will cost more than $15K and add virtually zero value. This results in your total investment will exceed the ARV. Potentially worse, the various repairs require work to get quotes, manage contractors, etc. You will not be receiving any compensation for this work.
Let's analyze a hypothetical property that is offered at full retail but instead of needing new plumbing, new electrical, and having a sagging sidewalk it had an outdated, thrashed kitchen and a bathroom that was 50 years old (maybe blue or, worse, pink tub - you get the idea). You would update these items but instead of adding virtually zero value they add a value greater than their cost. The value in excess of the cost would be your sweat equity (compensation for the effort).
Hypothetical 2: you find a turnkey and pay retail. You would not have paid more than ARV and it would not have required the same level of effort.
Final item is with the cap expense items of the property you are considering, there is likely to be more discovered. This happens a lot more with items like plumbing and electrical than it happens with kitchen replacements.
Basically it is my belief that you will invest more than the ARV and spend a lot of time. I believe there are better RE investment options.
Good luck
2 Reply
Anne W.
OP
Member since 2021 · 44 posts · 8 votes
4y
Update: the property is already rented out at $2700/month. It's gone in 2 days, tenants have 750+ credit score, works for Google.
I disagree with the opinion of investing in infrastructure does not add value. For old house, the listing would say "updated electrical, new sewer line, new window, new furnace", etc, and buyers know the value of that. Reddit has many discussion threads about it and those young kids are hyper aware of flipper houses that ignore the basic maintenance items.
0 Reply
Anne W.
OP
Member since 2021 · 44 posts · 8 votes
4y
@Dan H. thank you for the feedback. You are absolutely right, I did spend lots of hours to research and manage contractors on top of a full-time job. It's stressful. I still have a couple of exterior projects for the summer. Luckily, I have paychecks to pay for repairs.
I did learn a lot, such as electrical grounding is enforced in the 60's and absolutely don't touch houses with aluminum wiring,which I don't have.
As to finding houses below retail, it's extremely difficult in my targeted areas. We lost 1000+ SFH due to natural disasters...
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