Will I have trouble getting a mortgage loan on a hoarder house?

Question

Hi all,

I've done a couple flips and I'm looking at purchasing my first rental property. Asking is $100k, which is far under market, but the current owner is an elderly woman with tons of pets who has it stacked to the brim with stuff. Overall, however, the house is livable -- the exterior is well maintained, there are no major problems in the interior save some cracked drywall and a few water marks. And, weirdly enough, it's clean -- no evidence of infestation or anything. There's definitely a lot of clutter and cats, but it smells fine, and where you can actually walk it's very well maintained.

The sale is contingent on the current owner finding alternate housing, and she is willing to rent back. I'm not totally against this if she can pay a market rate. But in that case I'd be unwilling to get into a hard money loan which may put me in a position where I'm either hemorrhaging money or evicting on old lady out of the house she's lived in for 50 years.

I see two options here:

1. Go under contract and wait until she finds alternative housing to close, get a hard money loan, and BRRRR.

2. Close ASAP, get a mortgage loan on the property as-is, allow her to rent back, and rehab it when she leaves. Then get a HELOC to cover flipping expenses for other projects.

The way I see it, option 2 lets me see profit immediately. The only hurdle would be actually getting the mortgage loan and average priced insurance. Will I have an issue with this? Should i just wait to close until the seller is ready to move?

Thanks,

Paul

Paul Dodson · Answer

Thanks all.

My agent notified me this morning that the property went pending -- they took the first offer and their agent didn't give us a courtesy call or anything. That tells me they may be in dire straights.

At any rate, we are on backup, and you've given me a lot to consider. @Jeff S. I'm very conservative in my estimates -- I'm assuming $40k rehab for this place -- but you've convinced me not to get into a rent back situation. Anything could be hiding.

Thanks,

Paul

Jeff S. · Answer

… the current owner is an elderly woman with tons of pets who has it stacked to the brim with stuff. Overall, however, the house is livable …

I’m doubtful it's livable, @Paul Dodson.  I bet you’ll be shocked at what’s under her “stuff” once it’s removed.  Her “tons of pets” don’t give me a good feeling either.  Unless you’ve done this before, Paul, your rehab costs will be significantly higher than you think.  There are also health concerns when you rehab a place that had a lot of pets in these conditions.

We’re regularly involved with hoarder homes.  They can be great financial opportunities since they cannot be funded conventionally, and they tend to scare all but battle-hardened flippers.  They also provide a chance for you to do good for someone in need.   I will tell you that as a landlord, you absolutely don’t want to deal with the issues surrounding a hoarder and especially with evicting a hoarder.  Make sure your contract requires the property to be uninhabited when you close and don’t lease to her.

Hoarders usually know they have issues and are often desperate for a way out.  She could be viewing you as a godsend.  Many strategies here but your offer should allow her to either leave everything or take what she wants.  Perhaps offer to pay to rent a truck for her.  From our experience, when hoarders leave, half will take everything, half will take nothing.  You never know but make it easy for her.  Some years ago, a borrower and I helped an elderly hoarder move some of her belongings to a storage locker.  She made a lot of money on her sale, and we also helped locate a financial planner for her.

Hoarders have issues that you’ll never understand but have to be sensitive to.  Their belongings can cover up an enormous number of physical issues with the property.  Be very considerate with them and very careful about what you buy.

Good luck to both you and her.

Jeff

Theresa Harris · Answer

If it is below market value and you plan on holding onto it, talk to a lender.

Jody Sperling · Answer

There is an alternative to your listed options, and it's the one I'd seek in your situation. Ask around from private lenders for someone who structures 20-year balloon notes on rental properties. I have a lender who would give me a similar product to a bank and the interest would be 4.25% fixed for twenty years.

Finding the private lender might take some work, but they are out there. Aside from that, your only other challenge would be where to pull funds for the eventual rehab once the tenant moves or passes. Best of luck!

Will I have trouble getting a mortgage loan on a hoarder house?

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