Would you flip a house with interior fire damage?

Question

Currently, my business partner and I are looking to put an offer on a single-family home for a house flip. The house is listed for $230k, and we plan to offer $235k. The potential after-repair value (ARV) for the property is estimated to be $440k. Based on our viewing of the property, we estimate rehab costs to be around $90-100k, but we anticipate that it may end up costing more. The main fire damage was contained to the living room, and the fire department removed the drywall from the ceilings but otherwise, everything seems to be reparable.

We plan on using a hard money lender for the deal, which funds up to 75% LTV of the ARV. However, if they do not, we have an additional $30k cash reserves as a buffer.

Would you consider this deal? Additionally, would you be willing to flip a house with interior fire damage?

We plan on using a hard money lender for the deal, which funds up to 75% LTV of the ARV. However, if they do not, we have an additional $30k cash reserves as a buffer.

Would you consider this deal? Additionally, would you be willing to flip a house with interior fire damage?

Chris Merchant · Answer

Be sure to check the flooring and floor joists for water damage as it is highly likely the FD poured lots of water in the main damage area of the dwelling.

Chris Seveney · Answer

@Kevin G.

We estimate but it may cost more?

How much more? Did you get a contractor and an engineer to review the damage to see what is still salvageable?

These are questions you will need to answer for the HML

Daren Jones · Answer

@Kevin G. I have purchased a fire damaged property to hold. I agree with @Eliott Elias if after you have done all of your due diligence (see below + all other rehab costs) and the numbers still work, go for it.

I completely agree with @Chris Seveney on making sure an engineer looks at the boards to make sure they are still structurally sound. Your engineer should be able to offer you an engineering report stating it is structurally sound with their stamp (if it is). This really helps a potential buyer.

@Andy Sabisch Yes, encapsulating the wood is a great way to go, we did the same thing.

@Chris Merchant I also agree on making sure there was not additional water damage from the FD putting out the fire.

@Carlton B. has a good point as well for the electrical. When we purchased the property we had to complete a state electrical safety inspection to make sure all electrical was 100% repaired on all fire damaged items. Oil based Kilz is a life saver!

Kevin, can I ask what kind of hard money rate, points, fees and term you are able to get on this type of project in the Bay Area today?

Best of luck with the project!

Andy Sabisch · Answer

Fire damage throws a wrinkle into any deal.  There are those that do these type of homes on a regular basis and know how to either encapsulate the remaining wood to ensure the smoke smell does not come back or replace to eliminate the issue.  The costs are higher than a straight reno so be sure you have either checked with those that do it locally or budget accordingly.

You reno estimate is based on what?  Just the fire repairs or are there other updates you will be doing to the property?  With the fire damage, the estimate seems low for the full reno.

I quess the market is still hot for you to offer over ask for a fire damaged property?  Is it on or off market?  How long has it been for sale?  Has the HML validated the ARV?

Before pulling the trigger, double check your ARV (be conservative) and reno costs (be through) and add a contingency.  There is money to be made on any property but as a mentor of mine said, every property has a price - for some that might be $0 but again, every property has a price that makes sense.

Joel Forsythe · Answer

I’ve done full fire restoration and remodel work. Your estimate seems too low, especially for up in the bay imho. Due to odor alone, you have to fully gut the entire house. The smoke and heat permeates the entire home, then water damage leads to potential mold hiding anywhere. The location of the fire itself is only relevant to structural damage. It’s the smoke, noxious chemicals, mold, and permanent odor deep into all the wall and attic cavities that can only really be dealt with by full gut demo. Then you’re using a chemical treatment to combat odors, while running negative air machines 24/7 until confident odors have been arrested before you move forward.

The secondary catch with doing a full gut renovation, the inspection process is now a full view x-ray, with anything and everything exposed any time an inspector walks on site. If they see something, they are obligated to cite something. Code upgrades can/will get triggered. Re-run your rehab numbers with full interior upgrades, not just piecemeal, and then see if it’s worth it.

David Dachtera · Answer

Based on the pix I've seen of fire damaged houses, I (personally) would plan on a total gut-to-the-studs rehab on top of replacing the burnt wood in addition to the HVAC, electrical and plumbing.

I'd pretty much expect to get into the property somewhere around (probably less than) 33% of ARV. I understand your market is "hot" ... for move-in ready properties. For near-total rebuilds, not so much, more than likely.

My $0.02 ...

Jeremy VanDelinder · Answer

I flip fire-damaged properties and own a restoration company which specializes in fire damage. It can be a big undertaking, although there can be profit in it IF the numbers are right and IF you have done your homework to know what you are getting into (both big “IFs”). Unless you are rather experienced with this type of damage, it may be hard for your to tell the extent of damage. The place to start is by asking the seller what the insurance company decision is—if they will share that info, that might tell you some of what you need to know.

The challenge with fire damaged properties is that there is more than meets the eye. For example, often fire damage is water damage--they put the red stuff out with wet stuff. Unmitigated water damage becomes mold damage and and there is the potential of extensive smoke damage in the same airspace. So even elements that don’t appear damaged can be contaminated. Also, ODOR is a huge issue. If the odor is not properly mitigated that will cause ongoing problems.

I would recommend you find a fire restoration company/contractor to walk the property with you and give you a good understanding as to what needs to be done. There are many things that could be overlooked as part of the renovation on fire-damaged properties.

Let me know if I can help--look at pictures, give specific advice, etc. Good luck!

David Krulac · Answer

I bought a foreclosed house that I could not get in before buying.  There had been a bad fire, 5 years earlier and the windows were boarded up with plywood and there were blue tarps on the roof. After buying and getting in the fire dmage was mostly in 1+ rooms but there was water and smoke damage in every room.  The walls were totally black with smoke, and surprisingly the house still smelled like smoke 5 years after the fire.  After removing all the fire damaged material, including the furniture which filled the house; the place still smelled like smoke.  After consultation with a remediation company that I have used before several times; it was determined that even after cleaning and deodorizing that on some hot July day that the smoke residue trapped in the wall cavities could be re-activated and there could be renewed smoke smell.  Therefore if I either decided to sell or rent, there would be the possibility of buyer/renter future complaints, maybe even a lawsuit.  It was then that I decided to remove all the walls and ceilings in the whole house.  Then treat the exposed studs and joists with chemicals to neutralize the smoke smell.  It worked and the new walls and ceilings were installed.  New roof, new insulation, new heat/AC, new electric service/wiring, new plumbing, new windows, new flooring, new kitche and new bath, etc. was installed and the house was sold to an owner occupant.

We have also redone houses with water, ice, sewer backup, and mold damage, and have used probably half a dozen different remediation companies.

David Krulac  Bigger Pockets #82 Guest

Angela Yan · Answer

Hi!  I have picked up a house a few years back with a fire that only happened in the living room as well however the rest of the house was intact.  I picked it up for real cheap and i put in 3x the amount i picked it up for. (Yes, it was that cheap as no one will touch it)  After it was done, i added about $50k in equity when i cash out refinance.  The only one thing to watch out for is that the inspectors from the city will have you on their hit list and expects all done to permit so make sure you don’t skip what is necessary and do things with permits.  If you have done all your due diligence and the numbers make sense and it is a home run, then go for it.  But don’t just fall in love with a deal just to have a deal. It seems like you already have some doubts so really get this as low as possible as permits take time and they are expensive along with everything else.

Bob S. · Answer

You never know , ASK , a

All the best

BTW you need to call the city and find out if they are involved since there was a fire, could be more permitting and inspections.

Would you flip a house with interior fire damage?

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