Renovating a BRRRR rental property PRIOR to closing?

20 Replies

Hi all Looking for someone who’s been through this before and can give advice. I’m under contract for a private purchase of a SFH in South Philly. Seller is great to work with and super flexible. We close in a month. Anyway I would like to do some renovations to the home now (cosmetics only.. exterior work mainly) and also start working on kitchen and bath cosmetic updates. I would do this before closing mid October. The idea is to get this rent ready faster then usual and avoid trying to rent this mid holiday season. Has anyone done this before and if so, did you draw up some type of contract that allows you to do the work and get paid back if you didn’t close? We don’t foresee any issues. only concern Is tItle sInce Its In hIs moms name. However POA (her son Im dealong wIth) already went to cIty hall and did Probate paperwork to transfer deed Into hIs name, whIch I have a copy of paperworK confIrmIng thIs. Home is an AS IS purchase (grandmas house) Closing in a month, I’m cleared for financing Seller VERBALLY agreed to letting me do some work needed already for closing (new roof). Thoughts/recs? Thanks in advance

I wouldn't do any work until closed. Anything could happen with title, probate, etc to delay or prevent closing. We once had to wait 4 months to close bc of a probate situation, due to notice of creditors that wasn't filed.

My last probate didn't close at all so please don't take the risk.  Just make sure your contractors are lined up or possibly get more subs to make things go faster?  Or pay contractor a bonus for completing on schedule.

I agree with everyone else, don't do it. An agreement to get paid back if it doesn't close will only protect you if you go to court, and if they would even have the funds to pay you for it. Too easy for something to go wrong. Spend the time lining up contractors, pricing out material, doing all the due diligence you can on the rehab. 

Another factor to consider is if you aren't the owner you could be looked at as an unlicensed contractor doing work. You also won't have your home owners insurance coverage in place to cover your risk. Too much liability for such a small reward its not worth it. 

Good Luck, Aaron

I would advise against doing this for a multitude of reasons and if the seller runs this by their lawyer there is no way is will fly. Too much liability for the sellers in this scenario. 

Thank you all for the advice! Unfortunately to close, the house needs a new roof ($1800) with certificate of no leaks and also a plumbing cert saying there’s no leaks. Will work with seller to figure out if he can cover costs now and if we close successfully I’ll reimburse or something. The contractors to be hired are licensed/bonded/insured so work is legit from that standpoint.

The road to hell is paved with good intentions. Though I can understand why you want to do the work before the weather and holiday season sets in, those types of deals are fraught with problems. Better to wait and be sure. It's one of those types of deals that turn into a can of worms if you aren't careful.

@Mike B. In my early career when. I bought my first rental, the loan wouldn’t close unless the entire exterior of the home was scraped of loose paint and repainted. Apparently my mortgage Broker put me in an FHA loan and at the time, I had no idea that the paint would be an issue. About 2 weeks prior to closing is when I was told. We had to sign a hold harmless agreement and the work was allowed to be done and the loan closed. It was a serious risk to take but I was younger and a novice. It worked out though. I wouldn’t do anything extra or not required by the lender.
@Mike B. If your lender won’t close on the property without the new roof, maybe you could have the seller do a short term seller financing situation for you. He sells you the property. You are able to close. Do it with no money down and no payments until you have a balloon payment in like 6 months. If he has a mortgage on it then just have him keep paying it, or you could pay it but I would try not to. You can then do all of the work and then refinance it out with your lender and he can get completely cashed out at that point. But putting money into it before you own it is foolish even though it seems like the only way to get it done. Creative solutions will be your friend.
@Dave Passey there is no mortgage on the home and no delinquent bills or taxes. I’ll speak with an attorney tomorrow but perhaps do an addendum or other legal agreement to take care of the roof and other issues and once closed I can reimburse for payment. The sales price is already below market and appraised value by $5k so it’s a big savings in my area where there’s also little inventory. Hence the push to close on this property
Originally posted by @Mike B. :
@Joseph M. Yes. 9 squares, torch down rubber roof over the existing (no removal needed in this case). It’s a row home in south philly. They all do this. Definitely cheap vs shingles!

 Nice ! Best of luck with the deal . 

My wife is a lender.  They do rehab loans prior to closing.   They will loan up to the new appraised value once finished.   You have to use a licensed contractor.    I am not sure if they do this for income properties, or if its for single family only. 

There’s a lot that can be done pre-closing if you have a cooperative seller - which doesn’t expose either of you to a lot of risk. *measure the rooms and start prepping material orders * invite contractors over to bid on items and get them scheduled for as soon as you close Contractors are usually the long pole in scheduling, so getting them in and tentatively contracted is a HUGE step forward.

Mike,

From a Liability Standpoint, it would be better to use Licensed & Insured contractors to do any work at the property before you own it (especially the roof work).  You can require that they name both the owner and yourself as Additional Insureds.  That way, if there is damage to the property or someone gets injured their coverage protects everyone.  They should have Liability and Workers Comp.