How to deal with fire damaged rental?

10 Replies

Hello BP community I have a rental in Detroit that was vacant and someone got in and burned it up to the point that the insurance company is paying out the full insured amount. All the fire damage is inside so it could be repaired for probably slightly less than the payout. Or I could have it demolished. Detroit will hold part of my settlement until I either demolish or rehab. Anyone been in this situation? Any advice would be appreciated.

I did victims' services for a fire department and now am starting to buy and flip fire damaged houses. There are a lot of factors involved in this decision and ultimately you have to decide what is best for you. In my approach if a house is on the edge of rehab vs. tear down and rebuild, I would lean toward tearing it down. The older it is, the more advantage to going that route. 

Also, there are very few of us who buy fire damaged houses and a far bigger market for empty lots. 

Of course I know ZERO about the Detroit market so my input is fairly general.

@Brian Dvorak Why does Detroit get to hold part of your insurance money? It's your is that even legal? I would hire some kind of attorney and sue the hell out of the city to get your portion of the money back from them and then demolish the house and walk away. Just gives me yet another reason to avoid Detroit...

Good questions everyone. I'll tell you what I know, but there is also a lot I don't.

Estimating damage: It's hard to do. (-: There are a couple of things that in combination  will help. The insurance estimates help--that is what they think it will cost THEM (with their pre-negotiatied  contractors) to get it done. A good contractor who has some experience in this arena helps. Lastly, if you have  "per square foot" cost in your market just think of it as a full gut times the property square footage and that will get you close. If there are parts that are not damaged, you might be able to get away with less, but who has ever complained about coming in under budget?

Empty lot. In my area the county tax assessor breaks that down in the property records. Don't know that all areas do that. Of course, county assessments are notoriously inaccurate, but it is a starting point. Of course the standard answer: "comps." If you can find other lots in the area that is the best way to estimate cost. Remember that you should SUBTRACT the cost of tear-down from the value of the property. So if a lot is worth $50k and its is going to take $8000 to tear down and haul off, the lot is really only work $42k. Again a contractor that does demolition could give you an good estimate. 

Contractor costs are so dependent on market that I hesitate to even through out a number, but my last flip of a fire-damaged house which was a "full gut" --including full rewire and plumbing-- was $88 per s/f.

One other thing. Regarding the hold-back: I don't know how common it is, but it doesn't surprise me at all. Some homeowners will just take the money and leave and then the city is stuck with a major ordinance and safety violation that they have to deal with. 

Thanks Jeremy, 

To provide an update, I got an estimate from a local contractor in Detroit and he said it is mostly smoke damage and only upstairs. The worst area was around an outlet where he thinks the fire started. He priced out the job at 20K, excluding any inspection fees and permits. I'm leaning towards the rehab since the value of the home is around 55K.

Hello Brian

It seems you could easily go either way, if the property is cash flowing well in an appreciating market sector - rehab. Its not cheap to have a property demoed in Detroit, Ex.  2100 sf , two story, between two existing homes will cost approx. 13k, without asbestos and lead remediation - it will take 60-90 days to get utilities terminated, and proper permits issued. Depending on location the lot may not be worth the cost of the demo.