Fire Damaged First Deal

Rehabbing, Fix and Flip, Rental Properties
1

I have been working through reading this forum for the past two weeks as I prepare for my foray into REI. I feel pretty prepared aside from the experience of actually getting into action - which I am ready to start now.

I came across a lead on a home in a good neighborhood that was heavily damaged by fire 3 years ago. It’s currently boarded up, and has a fence protecting all rear access. It’s currently listed for sale and I plan to call tomorrow to get some information from the listing agent (the listing agents dont have a website if that means anything in terms of the sophistication of their dealings). From what I’ve gathered, showings are only conducted from the outside - leading me to believe that this home will need a major gut job. :shocked

I know what investors are scared to touch is an opportunity, so I am very interested in doing a deal here, although it may be complicated. I am assuming that the seller has gone through all the insurance related procedures considering the fire was 3 years ago, and the home is ready to go.

I plan on asking for the following
-Documentation can they provide on the fire particularly from the insurance company, including full rehabilitation estimates.
-Asking price and when the seller is looking to close.

Once I have that information, I plan on getting city regulatory bodies to give me information on all city codes that govern the rehab and hopefully get references for general contractors.

Get contractors estimates in writing for all required work.

Figure .70 ARV less all rehab costs (x1.3 for unexpecteds), getting to code, temporary insurance during work (Yes i know not all will do this), my profit, estimates of financing costs (I will have to use a HML), and selling, title, home warranty, and inspections = My MAO. Am I missing anything here?

If anyone has done a job like this successfully, please let me know. I’d like to get as much guidance as possible. I will most likely find a partner for this deal with some similar experience under their belt and cash connections. Wholesaling is a possibility, but I am very intrigued by the profit and learning potential - so being involved is key.

I appreciate any advice from you guys. I studied real estate in college, and currently work in commercial, but I have learned TONS more on this site.

Many thanks!

Chris

2 
 I am a contractor and fire gutted buildings scare me however you are right an opportunity may exist. Be careful the house may look good from the exterior but be in terrible shape inside. From what I've read a property can be worth less than the land value when it needs tore down to get to the land. Just something to consider. 

 The contractors you get should be familiar wih this type of work. I know guys that are great at remodeling interior paint, drywall, making things work, I also know guys that are exterior specialists. Most guys are one or the other some are good at both very few. I would suggest making sure your goto guy understands structural work and how to go about doing it right or you may get buried.
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I’m a Firefighter and a Real Estate Investor.

My first question to you would be…How many rehabs have you done in your life??

If this is your first one, I would suggest starting with something less complicated. These homes can have SEVERVE damage done by radiant heat, structural problems, electrical and plumbing systems can literally melt together.

Having said that…If you can steal it. You may find it much more profitable to simply demolish the home and sell the land. If this is an established older neighborhood with very nice homes, lot’s haven’t been available there in DECADES!!! By removing that eyesore and placing a for sale sign in the front yard you now open people eyes to the possibilities for the lot. It might have an older ranch house on it now, with that gone the new buyer could possible build a much more valuable Colonial style home and therefore pay more for the lot. You see this at work in commercial real estate all the time. A investors buys 2 or 3 homes on a busy street. The homes are all junkers. He demolishes all 3 and sells the land for more than the value of all 3 homes. It’s perception. People drive by that lot everyday, they just don’t see the LOT, what they see is the burned out HOUSE. Show them the lot and I;ll bet you’ll have NO PROBLEM making money on a very simple project. Get prices for the demo, back those numbers out of what the land is worth, anything behind that is your profit. Be sure the septic system can be used for the new home, or even better, that sewers are in place. Sell it, and make a nice, quick, EASY profit, and move on to the next one.

I’ve done rehabs on fire damaged buildings. The thing you MUST calculate is how much TIME it is going to take just to get to the point were you can start RE-BUILDING. There’s a TON of labor in just getting to that point. Labor=MONEY, and on Fire damaged homes it’s BIG LABOR and BIG MONEY. If you don’t have experience in other types of rehab, I’m just worried that you make a mistake about how much work will be involved, and THAT, is your profit.

Good luck, let us know what happens.

4

Thanks for your responses guys. I talked to the realtor yesterday who indicated that the insurance company offered about half of market value for a full demo, and obviously it wasnt taken. She also said the owner owes about or above what it’s worth fixed up. This looks like a short sale candidate soon enough. I might make a decent offer with my inspection contingency to get access to the inside just for kicks, and then reduce the offer by a pretty big amount for repair work. Are inspection clauses loose enough for this typically? I know it depends on wording.

The bank is not going to want to take this one at all.

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If your a CASH buyer/no inspections/no contingencies a bank is far more willing to cut their asking price. That is the KEY. A NO CLAUSE OFFER all CASH!!

Of coarse you DO inspect it. You just do it on the QT. I’ve actually pulled plywood off homes to get in there and look around. I know, I know, technically it could be considered breaking and entering, but I always call the realtor and tell them I’m going to look around before going. If a piece of plywood “happens” to be loose all the better. I’ve had cops show up and ask what’s going on. I’m always EXTREMELY respectful and give them the realtors business card or phone number and encourage them to call and confirm my scheduled showing. Once they know your not a scum bag looking to steal copper, they usually start talking about how much work is involved in the project. Police are as good to you, as you are to them in my experience.

Good luck.

6

Good Luck on the project I just wish I was your contarctor on this one he’ll probally make as much as anyone!!!

7

What is QT?

Thanks.

8

QUIETLY!!!

9

This is most definitely true. Especially if you’re a firefighter! :biggrin

10

Thank you.

11

I have experience with fire damaged homes. My third investment property had “light” fire damage. As a contractor myself I was able to view the property by being “hired” by the listing agent to secure the property, changing locks\boarding it up. You may not be in a position to do this but you absolutely MUST inspect the damage. I have seen other investors buy auction properties sight unseen with unfortunate outcomes even in the best of markets. If this is a bank owned property then you might be in a good position to get it for a deal. Banks are not in the real estate business nor the rehab business. They will use contractor estimates, usually provided by the listing agent, for the total repair costs. The property is then valued based on those estimates. This is where your opportunity lies to make money. In my experience, it’s not fire that creates the most damage. Our firefighter companions online might agree with me but I have found that heat and smoke are the worst enemy. It’s very simple to replace a few charred 2x4’s but melted wires, plumbing, and the almost impossible to remove oder of smoke can be far more challenging. If this is your first rehab then make sure you have significant funds to get it done.

One of the biggest challenges I have encountered is having enough cash to get through the project. Remember these properties don’t qualify for mortgages. At least not until it can appraise which means working electric, plumbing, kitchen, etc. I bought my fire properties for cash and due to the amount of damage I paid approximately what the land was worth considering they were labeled “knock-downs”. But after shelling out enough cash to buy the property you need enough reserve to get it to appraise for a mortgage to get your cash back and start carrying the property. Unless you qualify for a commercial loan which can be tough if you have no experience with these types of deals. The bank needs to be confident you can pull it off.

Bottom line… Look for something elese to start with. There is a risk reward ratio here that’s very high. Could make a lot of money, if you do the work yourself. Hiring contractors won’t get you the profits needed. No matter how solid an estimate a contractor gives you if they run into issues they will up charge you and they will walk away. Then you are stuck!

One last comment: Be prepared for appraisal seasoning. If you buy this property dirt cheap get it fixed less then 6 months then you become your own comp. Appraisers won’t stick their necks out for you and if a property and its improvements were done in less then six months you may have trouble getting it to appraise. Actually the buyer will have trouble because the bank will not provide the loan…

Take your time, do your homework…

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70% I do not feel is a deal in almost any market right now unless you have a guaranteed and immediate exit strategy or hold. For all the work you are doing, you need to be at no more than 50% LTV. The best thing to do is to have 10, even 20 deals like this that you are evaluating then cherry pick the best deals that are the easiest with the least risk. I say this from experience as budget overages, surprises, delays, extra mortgage payments, agent commissions, taxes and all the costs that go into a big project like this add up quick and swallow your profit whole. I barely got out on one full gut rehab. The profit ended up no where near the time and risk. Stick to your guns, 50% LTV with almost no risk.