Must a single family home be brought up to electrical code to be a rental?

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Must a single family home be brought up to electrical code to be a rental?

Lenzy Ruffin
Washington, DC · Member since 2015 · 139 posts · 102 votes

Just getting started with wholesaling. I inspected a lead I got from direct mail the other day and I'm wondering if I went way too low on my offer because I overestimated the rehab cost substantially.

The owner was an elderly lady who passed away. The house was built in the '60s and was extremely well maintained. Everything in it was ancient, but in perfect working order. The HVAC components were way old, but fully functional. 15 year-old water heater.  Fuse box and two-prong outlets throughout the house.

I submitted an offer based on the cost of totally renovating the house for retail sale. I'm new at this, but my assumption is that the electrical system has to be brought up to code in order to sell the house. Of course, the kitchen and bathrooms have to be re-done. Add on all the wood paneling removal and drywall installation, floor treatments, etc, etc. and it got to be a pretty good size rehab cost to prep the house for retail.

But like I said, this house was very well-maintained. Aside from all the wood paneling in the basement, the property is essentially in move-in condition for a renter. All the mechanical systems and the roof are fully functional. The house look great, cosmetically.

So my question is would the electrical system on this house have to be brought up to code for it to be used as a rental? My thought process was that a landlord wouldn't want a house that needed the electrical system re-done, which then made me view the property only as a "rehab for resale," which necessitated a bunch other stuff like kitchen, bathrooms, replacing old, but functional mechanical systems, etc.

If this property could have been legally rented without the electrical overhaul, I could have made a much higher offer. It doesn't bother me that I missed this one because I erred in the right direction (low), I just want to get myself properly calibrated so I can make "intelligent" low offers. I think I might have made an "uneducated" low offer on this house.

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Gilbert Dominguez
Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
11y

Well I cannot speak about your area. You would have to look up the Landlord/Tenant laws there but where I live there is no such a thing as a building needing to be up to code in order to be used as a rental. Code violations are a different matter. However usually the authorities will not force you to bring a building up to code if it is safe in the condition that it is in. If every building had to be brought up to code people would be screaming at authorities, all up in arms. Your concern as a landlord is safety. 

If you convinced me that my building absolutely had to be up to code and were representing yourself as some kind of authority and I found out later you were lying about it I might say I would have cause to take you before an authority especially if I were an elderly person or a relative of theirs. 

You better make sure you know the law and are certain about what you are telling people about the value and use of a property with regards to everything needing to be brought up to code. Honestly if it was me I would be hunting you down if I found out you convinced my grandmother her property was worth far less because it was not built up to code yet it was in a safe condition. 

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  • Jim Viens
    Rental Property Investor · Kansas City, KS · Member since 2014 · 604 posts · 222 votes
    11y

    That will likely be something that varies from state to state or even from one municipality to another. I'd check with whatever city department oversees landlords. I'd plan on having to have it redone even as a rental (I personally would upgrade it for the safety of the tenants and to protect the property from a potential electrical fire).

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  • Lenzy Ruffin
    OP
    Washington, DC · Member since 2015 · 139 posts · 102 votes
    11y

    Thanks, @Jim Viens. I feel like my offer was about right, based on the safety issue you noted. I think the heir may think the property is worth more than it is because it is well-maintained. 

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  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Lenzy Ruffin

    What are the numbers you are talking about here? Perhaps you're overestimating your rehab costs. 

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  • Lenzy Ruffin
    OP
    Washington, DC · Member since 2015 · 139 posts · 102 votes
    11y

    @Mark Gallagher ARV $210K, repairs $63K, offer $68K on a 4/2 1200 square foot house.

    I can't seem to find the repair estimate sheet I used, but I remember the total and what I factored in: electrical system replacement, new kitchen, new baths (2), carpet on two levels, demo/drywall basement walls and ceiling, replace HVAC components. 

    There may be a couple of other things, but those are the major things. I used J Scott's repair estimate book as my guide. 

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  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Lenzy Ruffin

    I mean even if your repair estimate is correct, that's a very steep margin you're trying to accomplish. At $200K, that's a net profit of $57,000. Sure, we'd all love those but it's probably not realistic. 

    Electrical $6500

    HVAC $6500

    2 New Baths $7000

    Carpet $2000

    Kitchen $7500

    Basement demo $1500

    That's $31,000. Where's the other $32,000?

    On the surface it looks like you have $89,000 in fluff/margin in there. I can see why someone would not be really keen with your offer. They could probably list it on the MLS for $89,900 can get immediate offers.

    Just my two cents.

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  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
    11y

    Well I cannot speak about your area. You would have to look up the Landlord/Tenant laws there but where I live there is no such a thing as a building needing to be up to code in order to be used as a rental. Code violations are a different matter. However usually the authorities will not force you to bring a building up to code if it is safe in the condition that it is in. If every building had to be brought up to code people would be screaming at authorities, all up in arms. Your concern as a landlord is safety. 

    If you convinced me that my building absolutely had to be up to code and were representing yourself as some kind of authority and I found out later you were lying about it I might say I would have cause to take you before an authority especially if I were an elderly person or a relative of theirs. 

    You better make sure you know the law and are certain about what you are telling people about the value and use of a property with regards to everything needing to be brought up to code. Honestly if it was me I would be hunting you down if I found out you convinced my grandmother her property was worth far less because it was not built up to code yet it was in a safe condition. 

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  • Lenzy Ruffin
    OP
    Washington, DC · Member since 2015 · 139 posts · 102 votes
    11y

    @Mark GallagherMaybe it's because I'm not established yet, but the rehab estimates I've gotten from contractors are significantly higher than the ones you listed. Double, actually, for the kitchen and bathroom renovation. Using the 70% rule, I was looking at an assignment fee of $16K which would leave room to negotiate with the seller and/or buyer, as necessary.

    @Gilbert Dominguez You put a whole lot of "ifs" in your comment, man. I didn't do any of that stuff nor would I. I didn't even imply that I did. Please don't make up a hypothetical scenario with me as a shady character. I never talked to the executor of the estate (the son of the woman who passed on) about potential code violations or any of the other costs that went into forming my offer. I just came up with my offer and told him this is how much I can afford to pay for the property. I don't go out trying to convince anyone of anything.

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  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
    11y

    Lenzy,

    Cool, 

    Sorry if I made my own conclusions. You did do the right thing about formulating how much you were able or willing to offer according to what you intended to use the property for. On that part I would say you did do a good job I would have done the same. 

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  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Lenzy Ruffin

    You definitely need to find different contractors. You can't put a $15,000 kitchen and $15000 worth of bathrooms in a house worth $210,000. 

    $16K assignment fee.. again this number is very steep to me. $5000-$7500 seems correct.

    What number does the seller want in order to sell?

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  • Lenzy Ruffin
    OP
    Washington, DC · Member since 2015 · 139 posts · 102 votes
    11y

    @Mark GallagherThe seller wants $100K. As far as the assignment fee goes, that's where I put my error margin which was admittedly wide because this was the first house I've done a repair estimate on. I'll get all these numbers dialed in correctly with a little experience.

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  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Lenzy Ruffin

    Absolutely. I hope you're taking my point of view as advice, not condescending because that's certainly not my intent.

    I think you definitely have a deal on your hands, it just needs to be fine tuned. If we meet in the middle of repair estimates, that's $45K. If you can sell for $200K, that puts you at about $187K net. Minus $45K in repairs that puts you at $142K. 

    Purchase for $95K and try to wholesale for $105K.. that leaves good meat on the bone for a seasoned and unseasoned investor alike. 

    Keep us posted.

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  • Lenzy Ruffin
    OP
    Washington, DC · Member since 2015 · 139 posts · 102 votes
    11y

    @Mark Gallagher Definitely taking it as advice that I very much appreciate. I'd get nowhere if my rehab estimates continued to be way, way off.

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  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Lenzy Ruffin

    Do you have any photos?

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  • Lenzy Ruffin
    OP
    Washington, DC · Member since 2015 · 139 posts · 102 votes
    11y

    @Mark Gallagher I do not. I was so charged up about somebody calling me with a house to sell, I ran out of the house without my camera. And photography is my hobby, so that was no small oversight for me.

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  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Lenzy Ruffin

    OK well I think you're on your way to your first deal. Certainly keep us posted.

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  • Steve McGovern
    Professional · Lowell, MA · Member since 2014 · 232 posts · 223 votes
    11y

    Lenzy, I, personally, think you're right on, and here's why: 

    1) wholesaling is an art- and your USUAL buyers are investors in 9 out of 10 cases, BUT there is that occasional 'regular owner-occupier-rehab it as I go' type of owner that you can run into. 

    2)  that rehab-as-i-go gal I mentioned, above...   think about her anxiety-laden husband...  --OR-- That  rehab-it-as-i-go guy I mentioned above...  think about his owner-occupier-move-in-ready wife for a moment.   

    You have addressed the needs of that 'other' party in the transaction.... or the next "other party" after the investor.    

    3) FUSES?!?!  They may operate absolutely perfectly and have a real-time lifespan of another 40 years...  but this isn't an argument of "the walls are too green" or "There's condensation between the panes?" or  "I'd really prefer quartz countertops to formica" we're talking about here.  This is something that someone is necessarily going to want to update.  It doesn't matter much if it legally NEEDS to be brought up to code, any Home Inspector worth the paper pulp in his certificate WILL call that out as a potential issue, and the new Owner's Insurance company will likely call attention to it, too.  With aging fuse boxes necessarily comes the questions of aging metal-armored cable, with-which comes the questions of a faulty ground contact in that cable.  Yes, I'm assuming a little here, but you said it yourself:  "Ancient."   It needs improvement.  

    Assume that a property like this needs the work, and go from there.  You can always offer more, or maybe, if you have your license, you can even work on a tiered percentage as opposed to a flat fee.  Offer options.  

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    11y

    Where I live, electrical only needs to be brought up to code if the electricity has been disconnected for a certain length of time - I think it's one year, but it could be as low as 6 months. In fact, we had to walk on a deal for this very reason, because the sellers had let the electricity be shut off, and the municipal power board wouldn't reconnect without a full electrical upgrade (wiring, panel, proper number of outlets, counter outlets, etc). Once that came into play, there wasn't any way to make the numbers work on the house for a rental. 

    Do not underestimate the costs of running new electrical work. It can add up on you in a hurry, especially if you are in an area where you can't even touch an outlet if you're not a licensed electrician. 

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  • Lenzy Ruffin
    OP
    Washington, DC · Member since 2015 · 139 posts · 102 votes
    11y

    Everyone, thank you so much for your input. This was extremely helpful. 

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