Canada Foreclosure in Boom Town BUT....serious problems

3 Replies

Hi Folks,

Came across a deal in a boom town and wanted to see if it was actually a deal. Keep in mind this is in British Columbia (BC) Canada so some things differ but any advice is still welcomed. The aim is to buy, rent for 1-3yrs and sell when time is right. Thanks so much in advance for taking the time to read and even more so if you post.

THE TOWN

This town is a booming natural resource town, a lot of industry moving in, massively high demand for housing (They even brought a cruise ship into this place to house some of the workers as housing is so scarce).

THE PROPERTY

This place is a bit of a nightmare like stuff you see on the shows except nobody has been paid to make this place look so disheveled. It is a foreclosure with serious water damage. It was listed for $150k then after inspected/appraised was dropped to $130k due to the leakage and mould in the basement. It's a 3BR 2Bth home with basement. 1800 sq ft right in town close to a school.

REHAB

This place needs work. Likely that the whole house needs to be dug around and the whole basement waterproofed. Problem is said to be an external underground plumbing problem on the exterior, suspected Storm Water Drain. Inspection is rumoured to have mention of serious water damage (duh!) and there is apparently chat about a footing/foundation issue which could be a dealbreaker. A house down the road got basement waterproofing done PLUS Perimeter drains PLUS sealed it with tar (Lifetime warranty) for $20,000. The mould has gotten into all walls down the bottom so Stripping, Cleaning and starting fresh down there is a must. This would include electrical and furniture and probably plumbing. Upstairs is dated and even has some mould so may require stripping and cleaning etc. Place is foreclosure and is old and gross so will need furniture, and big remodel. Built in 1960's so may have asbestos issues. Driveway is cracked and needs repair. Roof is New (within a few years, thank god something positive!) and half the windows are new. Boiler is ruined and needs replacing, New Heating likely required. Estimated budget is between $85,000-$110,000 depending on foundation damage unless someone has feedback on this?

AIM/PLANS for REDESIGN

With the intention of renting, we are looking into options to have separate Basement entry (Could be a little small) and designing this home to suit local worker rental for the short term and ideally family for the long term. Looking to do medium quality everything with a modernized look appealing mostly to 20-40yr old workers and couples/families. We want move-in-ready design. Curb Appeal needs sprucing. Opportunities exist with so much demolition to redesign with most efficiency. As mentioned total budget for Rehab is around $85,000-$110,000 unless someone has alternate suggestions?

THE MARKET/ARV/COMPs

There aren't many homes for sale in the area at all as demand is so high. People in the town have within 3 years gone homeless because of the boom as homes so expensive. But new workers coming in are filling voids with bigger pockets (no pun intended). Nearly all single family homes are going for at least $250k. A 4 BR 2 Bth home on the same street in good shape is currently listed at $350,000. Estimates for this home are between $300,000-$380,000 depending on quality of rehab. Rental Income for single family homes of this type in the area is $1500-$2500. If we were able to separate the basement then we may be able to get $1000-$2000 per floor? Some rooms in this town are going for $1000pm!

THE FORECLOSURE ASPECT

Some decent articles explaining the Canadian Foreclosure process here:
http://whatthesooke.com/2010/11/21/foreclosure-in-bc-what-you-need-to-know-part-i/ http://whatthesooke.com/2011/01/16/foreclosure-in-bc-part-2-at-court/ http://whatthesooke.com/2011/02/11/foreclosure-in-bc-part-3-closing-and-possession/

This foreclosure is a "Power of Sale" where a lender is ordering sale through Court. A Bid has been accepted on the property at undisclosed amount (No court date set yet so bid not public yet). I have been warned there is a lot of interest in this and there will be a bit of a bidding war apparently. I am interested enough to go in but not too interested to haggle too crazily. I would look at probably not paying more than $180,000 for this at all but might go in for less at court.

BREAKDOWN

Purchase Price = $150,000

Bid War Blowout = +$30,000

Loan/Mortgage Interest = ???

Rehab = $120,000

Closing Costs = $5,000

Murphy's Law = $20,000

ARV = $325,000

Profit? = 0

This is an ultra conservative guess at worst case scenario. For my first flip it might be a bad idea.

ADVICE / SUGGESTIONS ?

What I am looking for are a few things and if anybody has any insight I would really appreciate it!

- Is my estimate about right for Rehab costs?

- Is this deal any good?

- Advice for basement water damage?

- Are foreclosures dumb as a first timer? This place just has pretty decent returns and huge demand so thought would be a good learning exercise.

We live out of town and thus have to budget for higher rehab costs but they will no doubt come down.

Any advice and suggestions welcome! Feel free to tear me down too if this sounds preposterous. Cruel to be kind I say! I am partway through reading many of the suggested books but wanted to get right into real world experience.

Thanks for your time!

Matt


Originally posted by @Matthew McLean :
Hi Folks,
Came across a deal in a boom town and wanted to see if it was actually a deal. Keep in mind this is in British Columbia (BC) Canada so some things differ but any advice is still welcomed. The aim is to buy, rent for 1-3yrs and sell when time is right. Thanks so much in advance for taking the time to read and even more so if you post.

It sounds like you are speaking of Kitimat, which is in its own bubble, void of any grounding in reality, at the moment. Anything you do here will be speculative in nature and should be short term. When things end in Kitimat, it will be equally as sudden and anyone who purchased property during these frothy times, will not want to be holding it {or will have wanted to pull enough revenue from it that you do not care if it can be sold}.

THE FORECLOSURE ASPECT
This foreclosure is a "Power of Sale" where a lender is ordering sale through Court. A Bid has been accepted on the property at undisclosed amount (No court date set yet so bid not public yet). I have been warned there is a lot of interest in this and there will be a bit of a bidding war apparently. I am interested enough to go in but not too interested to haggle too crazily. I would look at probably not paying more than $180,000 for this at all but might go in for less at court.

I'm not so certain you are dealing with a Power of Sale? BC typically relies on judicial foreclosure and since there is a mention of a court date, it sounds more probable you are looking at a foreclosure.

As a general rule we do not engage in "bidding" on a property {we've never bought one at auction} ... we set our price {range} based upon our analysis and simply will not pay more.

BREAKDOWN
Purchase Price = $150,000
Bid War Blowout = +$30,000
Loan/Mortgage Interest = ???
Rehab = $120,000
Closing Costs = $5,000
Murphy's Law = $20,000
ARV = $325,000
Profit? = 0
This is an ultra conservative guess at worst case scenario. For my first flip it might be a bad idea.

Regardless of whether those numbers are accurate, they indicate your "profit" could be a (loss) of $20,000.

Your earlier mention of a $20K price tag to externally excavate, install French drains, waterproof, insulate {there is no point in doing the rest and not bothering to insulate}, and backfill would be {more than} adequate under normal situations, but in the hyper-economy of Kitimat, it could possibly be short if major landscaping is also required to redirect and capture run-off.

My experience with mould has been it is often like an iceberg - what you see on the surface is only 1/3 of what is present. Looking at the pictures posted, you could have a level III remediation effort. Depending upon the HVAC system in the house, it will also be contaminated and need to be replaced.

Depending upon the vintage of the house, the tile on that basement floor (shown in one of the photos), should be tested for Asbestus.


ADVICE / SUGGESTIONS ?
What I am looking for are a few things and if anybody has any insight I would really appreciate it!
- Is my estimate about right for Rehab costs?
- Is this deal any good?
- Advice for basement water damage?
- Are foreclosures dumb as a first timer? This place just has pretty decent returns and huge demand so thought would be a good learning exercise.
We live out of town and thus have to budget for higher rehab costs but they will no doubt come down.
Any advice and suggestions welcome! Feel free to tear me down too if this sounds preposterous. Cruel to be kind I say! I am partway through reading many of the suggested books but wanted to get right into real world experience.

In a "normal" environment, your rehab numbers appear to be adequate unless the mould situation is throughout the main floor walls and attic as well. However, in the bubble economy of Kitimat, labour will be stupidly expensive, so you may need to adjust a little further to ensure you have encompassed the delta.

You also know that the issue of water ingress needs to be addressed before renovating the interior or you will only end-up right back here.

The foreclosure is not really the factor here - though the property is likely in foreclosure as a result of the prior owner deciding to walk rather than confront the water issues.

This is an ambitious undertaking and may very well not make economic sense. The ARV does not look sufficient to make it worth flipping. As a rental you would need to hold it for at least a decade to receive payback.

Another thing to keep in-mind is you will most probably be unable to secure conventional financing on this house (it is uninhabitable) until it has been renovated. This means you will need to fund the purchase and rehab from your own pocket, via private financing or through hard money. You need to factor these opportunity and financing costs into your analysis.

As an alternative way of looking at the situation ... What is the lot (land) worth relative to the existing structure? Would it be more cost effective to demolish the existing structure and drop a prefab home on the site ... then rent the prefab?

Hi @Roy N.

Your advice is as always greatly appreciated. The picture you paint is becoming a very familiar one to my ears after discussing it with multiple realtors and friends.

I think in the end after looking at it all and considering your very valid points as well it appears as though this one is a bit of a poor first project really. We definitely don't have the funds to finance this ourselves either. The analysis component is a huge learning exercise for me and you taking the time to comment gives me huge help in knowing things I need to work on there.

I am going to start a little smaller, there are so many amazingly helpful stories on BP and I don't feel I should make such a huge mistake that has already been made elsewhere and recorded on these boards!

Will possibly keep looking at Kitimat for the timebeing but will be a little more cautious.

Thanks a lot again Roy for your input here, it is much appreciated!

For those who like canada BC foreclosure investments and are interested!

This is the MLS

http://www.realtor.ca/PropertyDetails.aspx?&PropertyId=14022321&PidKey=974175776&Mode=3

I have a bunch of info from the Realtor and a few local connections I have made if somebody wants to save on some of the homework? Let me know!

Thanks again Roy.

Matt

Hey guys I'm originally from Terrace B.C and love these outside analysis of the area.  I think I just have so much hope for the area that I'm letting it cloud my judgement.  If either of you have more info on the area I'd love some extra reading material.  

@Roy N.  @Matthew McLean  

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