Rental Fire - Whats the smart move?

Question

Long time lurker, first time poster. Struggled with what part of the forum to place this in, please feel free to relocate.

I've had a rental for a number of years, bought it in 09' as a primary residence and converted it to a rental in 15'. Its been cash flowing well great, and I've had great tenants all along. Was an easy arrangement without much fuss. Couldn't complain. Until last night that is, when a good thing turned into a truck sized hole in my roof. I'm inexperienced on a good day, and my best asset is I know just how much I don't know, least of all about home restoration following a massive fire in an occupied rental.

The story so far, is that thankfully nobody was hurt (bullet dodged) and neighboring properties were unaffected (miracle). Massive damage through the whole house, and was 5 minutes away from a total loss. Fortunately, I had the proper insurance in place, and made sure the tenants did as well. I've got loss of lease payments/expenses covered in my policy so I should be OK on that front. Adjusters, investigators, and fire marshals are scheduled to come visit asap.

Soon comes the fun game of cat and mouse, where the insurance company tries to low ball me, and I get the oh-so-enviable task of arguing my case for more money. Before then, I need to determine who will do the repairs, so that they can help negotiate with the Adjusters for the final quote. A great company showed up on the scene (before I did in fact), and was able to board up the house to protect it. They are obviously pushing for the up-sell right now, and are hoping to do the full renovation. The company name is 360 restoration, based out of Avon Indiana in Hendricks county (in case you were curious).

360 has been extremely helpful so far, and seem to have a lot of experience working with insurance companies and repairing these types of homes. They are already working 2 other house fires in metro Indy. From an experience perspective, I think they will be hard to beat. However, my gut says I shouldn't sign with the first company I talk to, no matter the sense of urgency, and that at the very least I should bid the project out to a few folks and see what my prices look like. My primary concern, is that we'll be walking the property with the adjuster soon, and I feel pressure to have a contractor in place by then or I may lose out on some negotiating power.

My question for the community, is in these circumstances should I be bothering to bid this out to multiple contractors to try and find the cheapest guy? Or should I be aiming/prioritizing experience over cost in this extra difficult legal and insurance quagmire?

For bonus points, here are some more fun things to consider;

• What do i do with the tenants? What about security deposit? They really loved the place and want to stay, but obviously they can't. Also don't want to leave them high and dry, but just am not sure about the standard operating procedure in this type of event.
• What role does the mortgage company play in all this? I've considered paying off the mortgage to cut them out of the loop so I can have more direct control of the funds. This is an option for me, but i'm not sure its really worth it (or smart). I would just re-finance or sell the property after it was remodeled. 
• Any tips about the renovation in general? I'm curious if there are some easy wins to build some sweat equity into this project. Ideally, I'd like to find a way to turn this loss into an opportunity for profit. Realistically, I'd like to cut costs and pocket the difference (ethically and legally).

TLDR - House go boom boom, how me fix smart?

Jon Holdman · Answer

You DO NOT need to have a contractor in place when the adjuster comes.  Do not just go with the first one that shows up.  Get multiple bids on a specific scope of work.  Frankly, I'd be very leery of a company that just shows up right away.  I've had bids from these disaster mitigation places and their prices were jaw droppingly expensive.

If your lease is like mine, the tenants are released from the lease.  They need to find a new place.  Renters insurance will help them out.

You're just starting down a lengthy road.  Its going to be a blast!  At this point, its likely too late to pay off the loan, so the mortgage company is going to be all over this process.  Checks from the insurance will be made out to you and the lender and both will have to endorse.  If you're lucky, you'll mail the checks to them, they endorse and mail back and you deal with it from there.  I doubt that will be the case, given the extent of the damage.  Most likely they will want you to endorse and mail the check to them and they keep it.  If you get repairs done, they will pay out up to the insurance amount to the contractors.  You'll pay the rest.  If you don't do repairs, they will apply it to the loan.

If you have replacement cost coverage (hopefully) the payouts will happen in two steps.  First the adjuster will evaluate the cost of the repairs.  Then they determine depreciation, based on the age of items and subtract that to determine the "cash value".   They will pay you that amount, less your deductible. They should pay this out pretty quickly.  If you only have actual cash value coverage or choose not to repair the damage, that's all you'll get.  If you have replacement cost coverage and you do the repairs, they will pay you the additional amount.  They may want you to do the work and then get paid, but in my experience they've paid the additional amount as soon as you have a contract in place.  YMMV.  Then you'll find additional stuff as the work progresses. You can report that to the insurance co, too, and hopefully get a supplement.

Around here, its really common for roofers (lots of hail, here) to negotiate with the insurance comp any on your behalf to try to maximize the payout. Public adjusters will do this, too.  You may want to look into this.

Its not easy to DIY the work in this case.  Insurance will only pay out the depreciation portion of the claim with a contractor.  If you have a contractor and then try to DIY part of the work, the contractor may still want the "overhead and profit" portion of the payout on the work you do.  They will say "we're subcontracting to you".

Curtis Robbins · Answer

Thanks everyone. I'll definitely take your advice and bid this out to multiple contractors. I appreciate the referrals Russ, i'll use this when I start making calls. We're still wrapping up the investigation and I hope to start making calls this weekend.

Had the adjuster out today, and it sounds like we're going down to the studs, and losing the truss system on top with new electrical, plumbing, hvac. Still haven't received the quote from the adjuster yet though. Will be interesting to see what that looks like, this could easily push the cusp of total loss or near it.

Right now, its sounding like it may be end up being ruled the fault of the tenants, so i'm going to need to make some decisions soon. They prepaid the months rent a few days before the fire and have a decent security deposit i'm holding. I'll need to decide what to do with that if the investigators rule against them. They have renters insurance, but i'm not sure to the extent of their coverage.

Still not sure about the mortgage situation, when I talked to the adjuster he seemed as though payoff was still an option, but I really don't know if its worth it.

Cliff Terry · Answer

Curtis,

Glad to hear that everyone is safe and sound. I have been in the restoration business for a very long time and as I was reading your post and was looking forward to giving some good advice from years of experience. But both @Jon Holdman and @Ross Denman gave really good insight on how the process works from the adjuster process, restoration companies and the mortgage company. They have really given you a good road map to start this journey with.

As along as the adjuster and the restoration company are on the same page with the scope of work that needs to be done it should be a pretty smooth process as far as the dollar amount need to put your home back together. I would suggest getting at least 2 restoration companies to look at it just to make sure they are seeing the same scope of work needed. Its a much easier process in the long run if everyone involved is on the same page.

Good Luck!

Ross Denman · Answer

@Curtis Robbins I work for a local property management company and in the 5 years I've been here, we've had 2 house fires. Neither were as extensive as yours, but the second just happened 2 weeks ago near the Butler/Tarkington area. The water and demo damage from the fire department was actually worse than the fire damage itself.

• This is a restoration job... I certainly not go with the "cheapest" guy out there. You need to make sure that you have a team that can verify that the structure is sound. There will have to be studs, trusses, joists, etc that will have to be replaced. They will have to deal with smoke damage and water damage. Exposure to the weatherization and the problems that have already been through will create an opportunity for excessive mold growth. A contractor who does not have experience with restoration is going to be a poor choice. Someone will bite off more than they understand at a price that will reel you in, then you will end up spending more money (probably out of pocket) to get it right on a second pass. There are several restoration outfits around town, so getting multiple prices from them makes sense, but I wouldn't put GC's in the mix unless you are certain that they are equipped to handle the specifics of this. Also, a good restoration company knows exactly how to deal with the insurance companies. Also, if you have a local insurance agent, that will help. I love my insurance agent... she's actually the one that gets stuff done for me. I never pass on allowing a professional to do what I don't know much about.
• You do not need a contractor there when the adjuster looks around, but I would certainly walk it with a restoration company to get an education of what needs to be done and ensure that the adjuster is on the same page.
• As a PM, we frequently have had a place available for tenants when there are events that make a home unviable for the residents and can usually assist in transferring them. You will need to let them out of their lease, refund rents paid for time that they can't stay there, and likely refund all of their security deposit since it will be nearly impossible to determine tenant damages and this restoration is likely to take care of any of those issues regardless. Being displaced like that sucks so anything to help them out is recommended.
• As far as renovation tips, it will likely depend on the home, age of the home, location, local market, equity, etc. If you have a 100 year old home in Broad Ripple, then do a full rehab and sell it. Wrap the profits in to another deal. If you have a rental in Eagledale or Lawrence, do the bare minimum and either sell it to another investor or continue to rent it. If you have a 20 year old vinyl in Avon, since you said it cash flows well, I would build it back out and rent it again. You really have to assess how each strategy plays out.

We mandate that all of our rental properties under management be updated to modern fire safety code. Many rental properties that we take over do not have proper or adequate smoke detectors. Many do not have proper GFCI outlets. Most do not have fire extinguishers. I have clients complain all of the time about $50-$200 in upgrading things to moder code compliance, but when you look back at these types of incidents, you realize that the money is well spent. Having solid insurance in place is also a good play. Don't be cheap when it counts... That's probably the biggest lesson that I have to convey to several of our clients.

One last thing, the Restoration Companies that we have used are Five Star, Michaelis (this is who we are using in Butler/Tarkington right now,) 360, and Moore Restoration. There are around a dozen that I have seen around town though. You may even see of the adjuster has any recommendations.

Rental Fire - Whats the smart move?

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