New investor question about a questionable flip

4 Replies

Hi everyone!

As the title says, I am relatively new to REI, have been educating myself, learning, absorbing, and reading everything I can get my hands on. I went to my first foreclosure auction last week, and even though I lost by a few thousand, I was confident in my numbers. I have some construction background and family who are general contractors, so I knew the value wasn't in the deal any higher than I wanted to bid. That being said, I don't have the experience to know when too much rehab is too much, so to speak. One deal I am looking at now is a good example.

I want to preface this by saying I am not in any way seriously entertaining this deal yet, just wanting to get a feel to see if it is worth researching and doing the legwork to determine if it is viable. 

I live and invest in North Central Florida, relatively rural area. The city I live is not large, but growing. Growth is expected to continue at a fast pace here. I came across a property from a coworker who came to me that she owns. It is a ~1400 SF 3/2 home built in 1987 in a nice and desirable neighborhood. I noticed in on MLS and saw the sale price of 60,000. Red flag. Checked the property on the property appraisers web site, last sold for $144,000 in 2005.

I talked to my coworker and she informed me that the house is built in a neighborhood with a lot of hills, and the house was built on one, as most were. It was not disclosed to her when she bought it that it had some soil compaction issues and the foundation had some cracking. I did not think to ask her if she had a home inspection done at the time. After the cracking got worse when they moved in, they talked to their insurance company, who sent someone out to test the soil. About a week later, her insurance company dropped them. The bank assigned an insurance company and their premiums skyrocketed. They ended up buying a new house, and renting this one out. Cracking continues to be an issue, and the bank finally agreed to negotiate a price to sell the house. That is where we are now. 

She has it listed with a realtor, who she says received multiple quotes to have the foundation/soil repaired. She claims it was in the $40K range. Current tenant is leasing for $1100/month and would like to remain there if home can be repaired.

So, a few questions:

1. If I were to make an offer and go after the house at say, $40K, and put 40-50K in fixing the soil/foundation issue, would the home regain its original appraised worth, or is this a scarlet letter on the home that will forever cause it to be devalued?

2. If I could pick the home up as-is and just monitor the situation while continuing to have it as a rental, would that be an option? I realize there is a moral issue I am having a hard time squaring about having a renter and his/her family in a potentially dangerous home, although there are no indications the home is in immediate danger. I also realize I would pick up a pretty hefty insurance price on the home. 

3. If the home was ever condemned, would there be any real value in tearing it down and rebuilding on a lot I now own in a nice neighborhood, or is this being overly optimistic about taking a giant bite out of a poop sandwich?

4. Any other ideas/options that could be on the table here? The homeowner really wants to sell and be done with it, and I am thinking the bank may be willing to play ball and dump a home they have no desire to take back. Coworker says they haven't ruled out letting the bank foreclose on it, and I have to think that the bank would do everything to keep that from coming back to them on their books.

5. I have the cash to purchase this property as-is. However, I would need to find funds to perform a drastic rehab. Do hard money lenders take on a property that is in a state of repair such as this one, or should I seek out external investors? 

I tried to put the most important relevant details in without dragging a wall of text out further than needed. Would be interested to hear the thoughts of people who are vastly more experienced than me. One of the things I see repeated here as well as other sources I have been studying is that sometimes these "hidden potential" homes are overlooked by others, but they could also end up being a nightmare.

Thoughts please, and thank you very much in advance. I have thoroughly enjoyed my short time here, this is a great community at BiggerPockets.

-DC

Foundations can be tricky but certainly can be repaired.   Just ask anyone who has owned a home in Texas.  I think every single on of mine has had some foundation work.   Talk to the company that quoted the repairs, they can tell you if the repairs would be a permanent fix or a temporary solution.

On another note, an appraisal from 2005 should in no way, shape, or form be the benchmark you are using for value.     You should wipe it completely from your mind.  It is irrelevant.  Better to focus on the CURRENT value of properties in nearby subdivisions that do not have foundation problems.

Finally, I'll say foundation issues are not usually life threatening scenarios, so I don't see any moral issue here.  (Again check with the company.) It usually just means that if left unchecked, the condition and value of your property will continue to deteriorate.

BTW, I am NOT a Property Manager.   The new Profile page allows you to add credentials and based on my credential decided I should be a Property Manager.  I have since deleted the credentials.

I am an Investor

Thanks for the input, @Greg Scott ! Don't sell yourself short, I bet you could manage a mean property!

I completely understand what you mean about scrubbing the thought of the old appraisal. For some reason I tend to use it as an early benchmark when evaluating a property, but I can see how that could be a recipe for disaster. Would you recommend using the property appraisers site to gain a better understanding of comparable properties in the neighborhood or is that better left to a realtor?

Good to know about the foundation issues. It eases my mind a bit about potentially buying this property to use as a rental until we could decide what to do with the foundation.

@Derriel Cribbs

I would be concerned other neighboring houses have some of the same issues. If that is the case the area may come with warnings for future buyers that would cause buyers to avoid that area. Is there a chance there is any sink holes in that area? I know there are in Live Oak not far from Lake City. So you may pick it up and keep it well enought to rent, but  would you be able to sell it later on ? I think there needs to be more information and absolutes on the ground issues in order to make a confident decision. 

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