Fourplex with severe foundation issues. What would you do?

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Fourplex with severe foundation issues. What would you do?

Jean G.
Investor · Las Vegas, NV · Member since 2015 · 173 posts · 46 votes

Hello,

so I recently got under contract the following property located in Southern Utah (well, we're still waiting for the bank to countersign, but they gave their verbal approval):

- Fourplex built in 1996, 5400 sf total (so each unit about 1350 sf)

- 2 stories - 2 units downstairs and 2 upstairs

- Short Sale

- Contract price: $51k

- 3 units rented at average of $550/month (market rent, if fixed up: $600), 4th unit unhabitable

- ARV if there wasn't a foundation issue (which needs to be disclosed to a future buyer) would be somewhere between $250 and $300k

- Value of the land (about 0.25 acres): $10k

The property was apparently built on soil that is rich in gypsum, and the proper procedures were not followed at the time (the proper procedure is apparently to excavate the soil down to a certain depth, then replace it with new soil that does not contain gypsum).

Poor drainage around the building caused water to get into the ground, which washed out the gypsum and the property started sinking. In 1999 piers were installed on one side, and in 2006 on the other side. It now seems that the perimeter of the building is stable due to the piers, however there was some sort of plumbing leak under the slab in the one downstairs units, which washed out some more soil, and the slab collapsed by as much as a foot, rendering the unit inhabitable.

There is a quote on hand for $22k from a foundation repair company to take out the collapsed slab, add some new soil, compact and pour new slab (all of which they supposedly can do without vacating the other 3 units), and another quote for about $130k to redo the inside of the affected unit, and correct other inside and outside cracks around the building and the other units. There are also 2 cracked windows because the building moved so much!

The $130k seems a bit excessive to me. I know that I can rebuild the inside of the affected unit (new kitchen, bathroom, flooring, drywall, painting etc) for $30k to $40k. And fixing some drywall and stucco cracks throughout the building can't cost all that much (even if we would restucco the entire building, we're talking +/- $10k).

So my question to you: what would you do?

I know that some will say "run", which I'm considering doing, and I would like to see how many people on the other hand would go ahead with this, or have had similar situations, and what your strategy would be?

One possible strategy would be to fix the slab for $22k, so that the building doesn't end up collapsing, but not fix the unhabitable unit, and just keep collecting rent from the 3 other units (tenants are paying slightly below market to account for any cracks they may have in their walls).

Demolishing the building and starting over is not an option, because the demo would cost more than a vacant lot nearby.

Thank you in advance for your ideas.

Jean

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Skyler Smith
Real Estate Agent · Logan, UT · Member since 2014 · 222 posts · 102 votes
10y

I would make sure that $250-300k figure isn't starry-eyed. If the ARV is really that high for the rents you're getting, and If it is really that affordable to fix the foundation issue (I was expecting you to say about $100k) then I would go through with it. If you don't want to deal with the headache, or don't have the cash for the rehab, for sure don't run from this deal. Just wholesale it to me. Do you realize how many Utah investors would love to have a 4plex under contract for $51k? Sign me up!!

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  • Kathy McKenzie
    North Las Vegas, NV · Member since 2016 · 1 post · 1 vote
    10y

    I would say run.  Eventually the piers could sink as well unless some type of drainage system was installed.  if that is the case then, I would just try to market it as is with your quote for $22k. I would also get a 3rd quote....since the difference between the 2 was so big.  $22k sounds about right....but I am not a concrete foundation specialist.

    1Reply
  • Skyler Smith
    Real Estate Agent · Logan, UT · Member since 2014 · 222 posts · 102 votes
    10y

    I would make sure that $250-300k figure isn't starry-eyed. If the ARV is really that high for the rents you're getting, and If it is really that affordable to fix the foundation issue (I was expecting you to say about $100k) then I would go through with it. If you don't want to deal with the headache, or don't have the cash for the rehab, for sure don't run from this deal. Just wholesale it to me. Do you realize how many Utah investors would love to have a 4plex under contract for $51k? Sign me up!!

    2Reply
  • Phil Bottfeld
    Certified Public Accountant (CPA) · COOPER CITY, FL · Member since 2015 · 126 posts · 36 votes
    10y

    Jean,

    I think a lot of people run away from problems.

    A lot of times problems can present opportunities. In this particular case, I see a lot of risk. While the cash flow numbers are great on the $51k purchase price, you have a lot of variables that are very expensive and would result in the deal being not as lucrative or worse a losing investment. Unless you have experience working with these kinds of foundation issues and you have run the numbers on the absolute worst case scenario and you still think it's s good deal.... Look for something with a better risk/reward scenario.

    I applaud you for trying to make it happen most people just run without considering it all. I might be wrong about this but your brief commentary makes me think catastrophe is inevitable on this property.

    Kind regards ,

    Phil

    1Reply
  • William Hochstedler
    Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    Hi @Jean G.

    • Utah's geology is very erratic, we see all kinds of geologic issues that affect one property but not the one next door.  I would make sure that this property is not sitting on a small pocket of problems not shared by the neighbors that will cause continual grief for millenia.  I'd get an engineer who understands this issue involved during due diligence.
    • Foundation problems tend to less expensive than people think and can be a great opportunity to pick up deals because most people run away.
    • $130K for a rehab on a 1350 sf rental unit is not just a bit excessive, it's crazy.  Even if you have to jack up walls and replace every stud from the inside, it shouldn't be half that.  Get more bids.

    Could be a killer deal depending on where it is.  Southern Utah is a big place with a lot of nothing but beautiful rocks.  At $10K for the lot, it doesn't sound like Saint George.

    Good luck.

      1Reply
    1. Daria B.
      Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
      10y

      @Jean G.

      With all that you already know as fact I would say run from this deal. Too severe I would say to take a chance.

      0Reply
    2. Jean G.
      OP
      Investor · Las Vegas, NV · Member since 2015 · 173 posts · 46 votes
      10y

      Hello,

      thank you for all the answers so far. I just wanted to clarify as there is possibly some misunderstanding: the quotes I was given were obtained by the current owner, and are not 2 alternatives, but 2 requirements.

      So $22k to repair the foundation PLUS $130k for the inside of the 1350 sf unit and some inside and outside crack repairs on the rest of the building and the rest of the units.

      I will definitely get my own quotes if I choose to proceed.

      @Skyler Smith The ARV is for a building that does not have foundation issues, in the same city. So ARV is maybe the wrong word, I should say COMP. But this particular building, we'd probably not get this amount because we'd have to disclose the issues. I will be in touch if I decide not to move ahead. But understand that at $51k, if you don't do any repairs at all, you risk the city shutting the whole building down eventually. So it's not really a $51k fourplex :-)

      @William Hochstedler The location is Cedar City, not St George. The $10k value for the land was given to me by the realtor, I didn't verify it myself. He said that's how little the lots go for because you have to spend so much on preparing the land before you build (excavating and replacing with new soil). I did involve an engineer who saw the property with me the other day, but so far he hasn't provided me anything conclusive to act on.

      @Kathy McKenzie The one thing I got out of the engineer so far is that if we can determine that the piers from 1999 and 2006 haven't moved since they've been installed, that would give us some indication that they are holding, and would make the whole outlook a bit better. Now I'm waiting for him to see how/if we can determine this.

      0Reply
    3. William Hochstedler
      Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
      10y

      @Jean G.

      The land will be worth way more than $10K.  If you tear down the building you have a stubbed lot that you can build a four-plex on.   $10K might not even cover the impact fees that you'd save.

      This sounds like a pretty good deal.  I'd pursue.

      Good luck.

      2Reply
    4. Nick Atk
      Cedar City, UT · Member since 2015 · 2 posts · 1 vote
      10y

      Hey there! Im from Cedar and I believe I looked at the exact same property. I decided not to go with it because the damage caused by settling was far more extensive that just the foundation. The rest of the building is literally being torn apart. Even if it could be fixed it wouldn't be worth it. That area of town has severe water drainage off the mountain and causes new problems about every other year. I would stay away from it!

      1Reply
    5. Nick Atk
      Cedar City, UT · Member since 2015 · 2 posts · 1 vote
      10y

      also, as for the 10k value on the property- definitely not worth it! If you built a new property on that land you better account for a new foundation every 6 or 7 years. It would be better to buy somewhere else and build.

      0Reply
    6. Lawrence Robinson
      Flipper · Columbia, SC · Member since 2015 · 66 posts · 29 votes
      10y

      Hello Jean G.. I agree with Phil Bottfeld that problems often conceal great opportunities. I also agree with Kathy McKenzie that the disparity between quotes received warrants getting one or more additional quotes. I further agree with you that "$130k to redo the inside of the affected unit" is exorbitant. Did you get detailed quotes outlining exactly what the contractor(s) would fix? This will likely reveal important details about the units to help justify your decision one way or the other. Also, did you arrive at your ARV by using a CAP rate and calculating rehab costs into your expenses? Also, have you investigated why the seller wants out? If these questions are making you jittery, I would consider wholesaling it to someone like Skyler Smith who may be more experienced in complex deals of this sort. Either way, it's a win-win for you. Good luck!

      0Reply
    7. Account Closed
      Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
      10y
      Originally posted by @Lawrence Robinson:

      Also, did you arrive at your ARV by using a CAP rate and calculating rehab costs into your expenses? Also, have you investigated why the seller wants out?

      How would you use a cap rate here to get ARV?

      0Reply
    8. Lawrence Robinson
      Flipper · Columbia, SC · Member since 2015 · 66 posts · 29 votes
      10y

      Hello Bob Bowling. You calculate cap rate simply by dividing the net operation income (NOI) by purchase price. Of course, any rehab costs go into the NOI calculation. If you get the ARV wrong, the entire transaction could potentially be a losing proposition. Many new investors are overly optimistic with ARVs.

      0Reply
    9. Account Closed
      Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
      10y
      Originally posted by @Lawrence Robinson:

      Hello Bob Bowling. You calculate cap rate simply by dividing the net operation income (NOI) by purchase price. Of course, any rehab costs go into the NOI calculation. If you get the ARV wrong, the entire transaction could potentially be a losing proposition. Many new investors are overly optimistic with ARVs.

      Lawrence, that is not correct. Rehab costs are not OPERATING expenses. Also dividing your NOI by purchase price does not provide a number that has any meaning. If you think different perhaps you can explain what that number means.

      0Reply
    10. Lawrence Robinson
      Flipper · Columbia, SC · Member since 2015 · 66 posts · 29 votes
      10y

      Bob, it seems you aren't familiar with commercial RE transactions. I never said the 2 were the same. A capitalization (cap) rate is used to express commercial valuations and, given that the discussion here is about a multi-unit residential property within the context of the true ARV of the property in question, specific to Jean G.'s  blog entry regarding whether he should continue or run from this deal, I think you are slightly off base here. My response to this post is purely to provoke thoughts about things that may have been overlooked.

      0Reply
    11. Account Closed
      Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
      10y
      Originally posted by @Account Closed:
      Originally posted by @Lawrence Robinson:

      Also, did you arrive at your ARV by using a CAP rate and calculating rehab costs into your expenses? Also, have you investigated why the seller wants out?

      How would you use a cap rate here to get ARV?

       This is exactly what you said and my question to you based on your statement.  Either you can answer the question or not.

      0Reply
    12. Account Closed
      Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
      10y

      I also said

      dividing your NOI by purchase price does not provide a number that has any meaning. If you think different perhaps you can explain what that number means.

      Are you agreeing now that making that calculation is a waste of time?

      0Reply
    13. Jim Adrian
      Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes
      10y

      If you decide to fix it you could use the vacant unit to rotate the others into as you fix the others.

      1Reply
    14. Shaun Hunt
      Cedar City, UT · Member since 2014 · 113 posts · 30 votes
      10y

      Jean, as much as I hate to say it, I would highly recommend you come and view the property yourself. Both Nick and I have been to this property. I was there during the last week of December.

      As we opened the door of the named section, a stench hit the realtor and I as if we had run into a wall. To say the floor has settled a bit is an understatement!! I wish I took pictures.

      There was a few inches of standing water that must have come from the sink of a drain pipe. You could tell what someone had for dinner. My guess is a huge pot of Ramen noodles, for they were scattered all around the pipes that had been leaking.

      All of the carpet and tile had been removed. There are a few inches of gap from where the bottom plate of the framed wall used to be and where the floor is now. It looks like a hole for a wading pool.

      The south wall of the four plex shows a significant bow, etc. etc.

      I have five rentals in Cedar. Four of them have had settleing issues, but nothing like the fourplex.

      I would have put money down on that place, that day, had I felt it would be worth it.

      Fact is, someone is going to buy this place, with cash, it just won't be me.

      0Reply
    15. Leigh C
      Brooksville, FL · Member since 2012 · 429 posts · 220 votes
      10y

      If it were me I'd sign the 51k contract then do an "inspection"   Bring to light all the major issues and go back to the bank for a price reduction, 35k sounds like a better idea.

      I'd then rent the 3 units till something stopped me from doing it further and fill the hole in the slab in and pour new concrete.    Use that particular unit as storage.  

      Once the unit (if ever) got to the point the city wanted to condemn or it wasn't rentable I'd do the numbers if it was worth keeping.  

      Paying 12k or even 17k a door for the 3 good units makes sense.     Fixing the 4th unit for 50k doesn't really seem like good math.    

      1Reply
    16. Jean G.
      OP
      Investor · Las Vegas, NV · Member since 2015 · 173 posts · 46 votes
      10y

      @Shaun Hunt

      I did visit the building last week but only got into the "bad" unit, not the other 3 occupied units. In the vacant unit, they have fixed the plumbing leak and there is no longer water standing. The stench was bearable. I can see how that unit could be fixed. If the slab is properly repaired/replaced, it's no different from a normal gut (and I've gutted stinking places before) with a normal rehab crew.

      That's what prompted me to post here. It wasn't bad enough for me to clearly see that it's a bad deal.

      The more important question for me is the general condition of the rest of the building, and of the other 3 units that I didn't get to see (yet). Ie cracks in the stucco and drywall all over the place, and general structural condition.

      From what you're saying, it's not worth fixing, which is what I'm leaning towards as well, however I've also considered @Leigh C's strategy. The other units are occupied right now, and if the building is stabilized and all I need to do is fix the foundation, and can continue operating the other 2 units, that could be an interesting option.

      Jean

      0Reply
    17. Shaun Hunt
      Cedar City, UT · Member since 2014 · 113 posts · 30 votes
      10y

      if you do purchase the building, I would be thrilled to learn what is involved with such an undertaking. 

      I am just a rookie investor. I can fix most rental type issues, but I can't do a gut of that magnitude.

      I would be very interested in learning from you.

      I do know a few contractors here in Cedar if you are interested in meeting them.

      Next time you are in town, let's do dinner.

      0Reply
    18. Ndy Onyido
      Toronto, Ontario · Member since 2014 · 615 posts · 172 votes
      10y

      @Jean G.

      Having read through your post and the various contributions, I will walk away! Some folks say there are opportunities here and others applaud you for sticking to it instead of 'running away' from problems....

      For me, 'serious foundation' issues with the secondary damage done to the existing structures? Why stick it out when I can move on to the next available opportunity..

      Thankfully enough, a different set of eyes have seen same property (@Nick Atk) and @Shaun Hunt and made their comments.

      @Leigh C

      Your suggestion presumes that its going to be rentable for a sustained period;am actually concerned that with all the damage already done to the property-foundation and structures that its stil rented....not sure how long will last before authorities intervene....

      0Reply
    19. Leigh C
      Brooksville, FL · Member since 2012 · 429 posts · 220 votes
      10y

      @Ndy Onyido   Nothing is certain, everything is a gamble.    Calculate the best you can and roll the dice if the odds are in your favor.     Risk tolerance with all investors is much different, it's why so many of us exist.        In my mind even if he loses the 2 downstairs units maybe he can still salvage the 2 upstairs units.     4 years from now its very possible he will have covered his investment.     

      As long as he isn't putting someone's life at risk he should be fine.   If the property is actually risking lives then I'd run regardless of the math.

      0Reply
    20. Jean G.
      OP
      Investor · Las Vegas, NV · Member since 2015 · 173 posts · 46 votes
      10y

      @Shaun Hunt I'll take you up on the dinner offer and yes I will be interested in your contractors when the time come. I am thinking of possibly bringing my trusted contractor from Hatch, whom I already have good experience with. I'd have to pay for his lodging though since it's a bit far to drive back and forth.

      The interior comestic work really doesn't worry me, it's all work that I understand and could do myself if needed (which means I can instruct and monitor contractors). It's more the structure of the building (ie things I can't see and don't know) that worry me.

      What transpired so far from my engineer, is that we believe the existing peers are not holding well and the perimeter walls continued to settle even after the installation of the last peers in 2006, so those will need work too. So I've decided to follow @Leigh C's strategy and use the engineer's report to reduce the price to $31k. If the bank agrees, I'll gamble (fix the foundation, but probably not fix the destroyed unit for now, and keep the other 3 rented, rehab as people move out), if not I'll walk (or see if @Skyler Smith is still interested after reading all this :-)

      Jean

      1Reply
    21. Shaun Hunt
      Cedar City, UT · Member since 2014 · 113 posts · 30 votes
      10y

      Thanks for the update. I read the engineer report and from what I could tell it is structurally sound. 

      I had to have three engineer reports for three properties I purchased that had issues.

      Sounds like a fun project. If I could dedicate more time and had a trusted contractor and a was of cash, I would love to do what you'll do to that place. 

      See you soon.

      0Reply
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