I posted something at the Foreclosure forum but thought that the experts here may have different perspectives to my problems since this is looking more and more like a fixer-upper now.
Here is the summary of the situation:
Bid a foreclosed property unseen (huge mistake!) in CA . Took a quick look around and found the following problems:
Upstair shower leaks heavily
The leaks caused downstair kitchen cabinet inside wet with large visible amount of mold (?). According to the association vice president, they had two other units with similar problems that cost up to $45K to fix!
other cosmetic problems (paint, window screen etc).
Here are the financial terms:
Bought at $178500 with 1000+sf
Similar property listing price is $280000
A smaller unit (700+sf) on the same street is listed between $235K to 259K
Lender forclosed amount was $259K
Recent comp (closed in 2/2007) on the same street (same plan as the currently listed one but has 800+sf) was sold at around $300K.
The lender did provide an inspection report for me to sign which disclosed local termite and some dry rot problem. But nothing about mold. The Property Documentation provided by the bank also included a section on “Property Disclosure Document” which contained half page of “Toxic Mold Disclosure”. The section did not have any check boxes but rather just a quote of California Law related to mold disclosure.
Although the property was sold “AS IS”, having this document actually misled me because I thought the bank would have disclosed it if there was any mold problem because they did have an inspection report.
Apparently the bank doesn’t think so and told me it is not an option to back out at this time based on that reason – although I am not entirely convinced that I want to back out yet, just wished that I had this option.
At this point, I am looking for your experienced investors’s input in the following areas:
How hard is it to deal with this kind of problem? Will renovating fix the mold issue? Any estimate on the cost?
Once it is fixed, how hard is it to sell the property undestanding that I have to disclose this situation to any potential buyers?
This is a condo with four units sharing one building. The association considers anything inside the interior wall to be common and any repair will be covered by the association unless it is the owner’s fault. The VP of the association told me that similar problems have been paid by the owners. But our situation is unique because it is obviously not my fault that there is a leak because I am not the owner yet. She can’t tell me easily whether the association can pay for it or not.
Has anyone here dealt with a condo association? Is it reasonable to expect the association to fix the problem and I will cover the portion that is related to fixing the leak and anything outside the interior wall?
Given all the problems, is this a really bad deal that I got myself into? Or is there still any chance to make it profitable?
You do need to figure out where you are in your market. Are prices headed lower or are they stabilizing and headed up again? Someone in your market can tell you this.
This is going on in two different cities that I work in. At one point in the winter, there were several condos in a complex for sale, typically 6-8 units. Now that prices are down, sellers aren’t listing their property anymore unless they really have to sell so inventory is now down to around 3 units and the really low priced ones are now gone. That area is turning around. In another, the prices have been dropping since 2006 and they’ve continued to go down. Had one owner who didn’t want to be the lowest one on the block and didn’t want to sell in the winter. Now they’re thinking of listing again as they moved for work and the number of listings is now up to about 14 and some of them are setting new lows for asking prices. There were about 6-8 listings in the winter. We’re 10k lower than we were back in the winter. Again, all real estate is local.
Anyway, my comment on this deal is that you’re looking at a lot of work with a possibility of an average gain depending on the market.
As for the bank misleading you, I wouldn’t really blame that on the bank, I’d just have to say you’re not used to dealing with foreclosures. They’re usually pretty clear about not making any representations about anything. Even most standard purchase and sales contracts on a normal house say things like the owner and it’s agents doesn’t make any representations or warranties on anything. It’s a total buyer beware type of environment and even more so on a foreclosure. Even home inspections have disclosures that they only inspect what’s visible. You just have to hope that you’ve bought it cheap enough to make your money back.
As for the association paying, good luck with that. I’m guessing that they’re probably going to be making an insurance claim and maybe it’s up to the insurance company as to whether they’ll pay the claim or fight it.
You were right about needing to find out the direction of the market. I don’t know the total number of condos listed for this project. But the ones I do know all seem to be in distress. The one in my original email that is listed for $280K, the agent said something about “priced low for quick sale due to possible foreclosure”. The other one that is listed for $235-259K may be in similar situation as their record shows that the owner bought it at $285K back in 2004 for 0 downpayment. I’d imagine that they probably wouldn’t have it listed for so much lower than their purchase price if they didn’t have to sell.
So, the market is definitely lower than before… but is it the bottom? it is very hard to say. Everyone here is saying that they want to wait until the summer to make a judgement call. I will have my realtor to do some more comps and research and find out if there are any recent deals in this project that I am not aware of.
I search this forum for mold problem fix and most people think that most of the time it may not be as big a problem (same as in the foreclosure forum). So assume I have to keep the property (at this point there doesn’t seem to be any choice anyway) and put up the expense to fix the mold, what should be my next step:
According to a neighbor who rented for 20 years in this project, the rent for my condo can go $1600 per month. So if I am in a hurry, $1400 should rent it out very quickly, right?
My monthly mortgage payment is $950.00. HOA is $245. Insurance should be low as HOA has a blanket property insurance so we only need to cover the unit’s inside.
If I can sell the house at $250K (this should be a very safe number and I won’t be making much profit), should I sell it or rent it and wait until the market turn around?
First off… NO WAY a leaking shower caused $45K worth of damage.
It can happen if a pipe burst and it filled the house with water. But if all you have is a kitchen cabinet and a wall with some mold NO WAY!
Get someone you can trust who can look at this problem. My guess is the shower is a one piece tub/shower unit. If so rip it out, they cost about $1000. You’ll find some rotted subflooring in the bathroom too, don’t panic it’s just plywood replace it, replaster the wall around new tub/shower, install new floor tile, DONE.
Pull the wall apart where the water traveled through to that kitchen cabinet, don’t be a butcher, you can neatly, with a utility knife cut a section of the drywall out and see what you have, spray everything in that wall with bleach and water solution, clean or replace cabinet with mold in it.
People freak out over mold, RELAX, mold can not live where there is NO MOISTURE, fix the leaks, hit the mold with bleach wipe it up, respray with bleach your done. These $45K mold abatement estimates are a joke. They are going to do exactly what I just told you to do.
If what your telling me is correct there is no way you’re going to spend over $3000 fixing this.
I disagree. I’m going through this right now with a 4 unit building I own. If the problem has been on-going for awhile, it can be a low 5 digits repair bill. If you are in SoCal, San Diego, then you will pay a premium, but $45k does sound high. Moreover, the condo assoc. is not likely to go for a bleach and patch job. If you start a battle with the assoc/insurance company, you be tied up for years haggling over this and could end up in court (more money and time down the drain).
As for the market, if you are in SoCal and you think the market will stabilize in a few months, you have Rose color glasses on (IMHO). Condos are always the first to get soft and last to recover. This recovery o the market will be a multi-year process as we are just at the beginning.
As for being a rental, this will be a breakeven situation (at best) after you figure all your expenses correctly.
My advise is figure out how to make a quick exit and perhaps make some money and move on(and reflect on leassons learned).
Thanks all for the input… Although many of you differ in terms of the seriousness of the mold issue, one thing is clear is that it shouldn’t cover $45K.
The condo currently has a huge water leakage (loud water running noise). My realtor suggested that this should be considered an emergency and that we should notify the current owner (bank) and the association in writing that they need to take quick actions to fix the problem. This will protect myself in the future because all of these happened before I am a real owner (escrow is not closed yet).
That leakage is also what’s creating all this mold concerns…
I agree that real estate in SoCal is very soft and I am not holding my breath for a quick turn around. This is my first residential investment so not sure what kind of returns people usually expect in terms of flipping or renting. If I should take the exit after repair job, do you recommend listing it with an agent? How much commision do you usually pay a realtor (my realtor is not familiar with that area)?
And as far as “the patch job” I got news for you. If you removed the source of the moisture/mold, clean effected areas, and repair/replace areas that can not be cleaned the Assoc. doesn’t have a leg to stand on. That’s a good repair. I’ve seen some of the “expert” repair work done by the insurance company contractors. You can do better work yourself. Take pictures before and after and document everything. Comparing a 4 unit rental to a single condo is not equal. If you have a water leak in a 4 unit multifamily with people living on top of each other your in a whole other mess. NO way $45K Not even $5K
Jennifer, why would you make an investment if you didn’t know a range of expected return? Also, how does your realtor not know what to charge? Is it their first day?
Did you get a copy of the declarations/by-laws for the association? If so, they will go into detail on the ownership of the unit vs. common area and also describe who is responsible for repair and maintenance on specific property. Once you make a claim to the association, they will pass it on to the insurance company. Ever since Mold became a huge financial issue in this country, most insurance carriers have placed a mold/fungus exclusion on their property forms…they won’t pay.
Actually the latest court cases are starting to turn the other way. Recently a mold case was dismissed because of the lack of scientific evidence that mold caused any of the problems that were alleged.
And of course we don’t know where that 45k number came from. You should be able to get your own inspection. I think if you back out of the deal, you’d probably lose whatever money was in escrow and if they required 5k, that’s a pretty big amount. With foreclosures, I guess there weren’t any contingencies so you don’t have any other outs.
This IS a building with 4 condos in it. Mine happens to be two story so no one lives above me. But the other three units are staggered up somehow (I don’t know the whole configuration yet).
To gsuidiot:
I bid the property because the price was too good to pass – against my common sense because I didn’t even check the inside of the unit before I bid. But it is so much below at least the current market price (who knows what that market price is next month!), that I thought I could make some quick profit by flipping.
However, given the current situation, it is likely that I can still make a decent profit. I just didn’t expect to have to put in so much extra work. For a starter, this may still be a very good deal. However, I have other obligations and making a quick buck this way may not be worth it.
I am not a very marticulous person when it comes to numbers. So I just want to see the average return one should expect in the residential area and compare that with my investment… sort of helping to guide my future decisions.
I did read through the bylaws last night. It clearly stated that everything behind the walls are common area and should be covered by HOA unless it is the owner’s fault. In this case, it can’t be my fault as I am still not an official owner yet. Trying to get in touch with HOA president all day…
Also called the bank and they are finally sending someone to fix the leak problem right now. I will deal with them on the mold issue later…
To henryinma:
I spoke with an attorney and it seems that even with foreclosure, a buyer may still have some rights. I don’t want to take any legal actions just want to know all my options.
I just wouldn’t go into this thinking it’s not your fault. It could be the case that it’s the previous owner’s fault in which case when you buy the property, you’re assuming the previous owner’s liability.
Typically on a condo it’s up to the unit owner to purchase unit insurance and the master insurance covers the common areas. Damage inside the unit would be covered by the unit insurance and damage outside by the master insurance that would be in the condo fee.
In this case, it’s possible that the bank didn’t have unit insurance so there’s no coverage for damage inside the unit. Also with master insurance, there’s sometimes a deductible amount before it kicks in and sometimes its up to the unit owner to pay that amount before the master kicks in if it’s their fault. An instance of this would be a water heater or a washer hose failing and flooding the unit below.
Anyway it sounds like it’s going to cost you a few thousand to fix. You may still make money depending on the market. If you try to flip it, check in the other forums on the tax implications. Some say that your property will be treated as inventory and taxed at your short term capital gains tax rate which if you’re in the 28% tax bracket also means paying about 15% for social security tax plus whatever your state income tax may be. So before you know it, about 40-45% of your profits would be gone in taxes. Renting it out for a year and then selling would put it in long term capital gains tax and no self employment tax so you could be in the 10% tax range instead. Or you could do a 1031 and roll the gain into another property which you can only do after owning for over a year. You may wish to consult an accountant/tax professional to go over all your options.
As an investor, litigation/legal action is the last thing you want. This cost both time and money. Investors or owners who get into lengthy disputes with HOAs, insurance or other parties always seem to have a terrible tale of woe. Its good your checking your options but no one is going to be in a hurry to resolve this except you