Multi-Units with Building Code Violations?

Question

I'm still in the beginning stages of analyzing properties and learning what is a great investment opportunity and what should be avoided.  My realtor sent me an updated listing for a property that we've been monitoring that had another price reduction.

It's for a 6 unit, 2 building 3-flat combo listing, that definitely needs a lot of work. The area is probably considered a C- neighborhood that is a mix of some newer rehab projects, but is still an up and coming neighborhood.  There are several other properties that are in need of rehab on the block as well, and some rehabs have already started.  It's still in a higher crime area, but very close to the approaching border of drastically lower crime ratings by only a couple of blocks.

The property itself has been reduced by more than 50% in 3 months.  The new listing price would have this at <$10k per unit on the sale price only, before any other costs are factored in.  I would expect the rehab costs to be on the higher end to bring it up to code and in move-in condition as future rentals.  It's a little difficult to find reasonable comps for it.  There was a recent rehab 2 flat on the same block just a few doors down that sold less than a year ago for $169k.  Another distressed 2-flat sold last fall for $10k, AS IS with major need of rehab. Another 2-flat on the block is listed at auction starting at $1k.  So the comps are all over the place!

My biggest question is this…the property is sold AS IS (which is expected) but has several code violations that the buyer would be responsible for.  Many of the items on the list of violations are fairly normal stuff (i.e. light fixtures replaced, new electrical outlets and covers, add GFCI's in wet areas, replace some screens/windows, water heaters).  It does need structural columns replaced in the basements which is a caution, as well as rear decks being replaced as the are build on cinders and not ground anchored.

Here's where I need the expertise from BP!  Has anyone had experience in dealing with code violations and city permits/red tape, etc?  Is this even something to consider??

I want to rehab and sell to investors looking to hold and rent, or I am considering the value to even just buy and sell to other investors who have greater resources to develop many properties on the block that could be picked up at some great priced.  It's a great tree-lined street, very close to 3 options of public transportation, and 3 blocks from a park.  Close to the expressway for commuting as well.  The neighborhood is definitely close to being in front line of rehabs moving into the area; it's just a little sketchy at the moment.

Thanks for any and all insight!

Brie Schmidt · Answer

@Travis Russell - I recommend a expediter if it is in the city of Chicago.  I would take @Joshua Burke up on his referral I had to use one before but I don't have their info

Account Closed · Answer

I still don't understand who did these inspections and for what purpose?  When and why was the property inspected?  Were any citations issued?  Citations usually mean fines to cure and re-inspect. Sometimes they are recorded against the property title as well.  Be mindful that there may be additional citations or warnings in the works that are not included in your current list.

If a muni agency did the inspections and made these requests then they'll have to be satisfied for habitability. Be sure you get a full understanding of the costs for any necessary permits to get rid of and/or remediate everything.  Where I am you have to have a permit to do any kind of demo due, even minor, due to air quality control issues.  Also make sure you get a full understanding of the costs of any fines, penalties and interest generated by the current violations.

Account Closed · Answer

I've bought more properties with code violations than without.  I've yet to buy one where money and effort wouldn't solve the problem.  Sometimes I deal with it, sometimes my end buyers deal with it.  Are you talking about actual code violations where a warning or citation was issued?  Or do you mean "not up to code"?  There is a huge difference.

Patrick T. · Answer

Travis, eventually you need to hook up with an experienced contractor who you trust.  In the mean time, in our area we just ask the building department for a "safety check".  There are no fees, and the inspectors are very reasonable.  It is not in their interest to be authoritarian, they understand your position.  But if there is a real hazard or violation they'll tell you.  It shouldn't worry you.  If there is that big a problem you need to know anyway.  If you go the route of un-licensed contractors and short-cuts, and do a lot of rehab, then the inspectors will find out about you in a bad way.  That is what you should worry about.  Do it right and be transparent.

Jorge Torres · Answer

@Travis Russell  tell us what happen?

Zach Shepard · Answer

@Travis Russell sounds like you've got a good one!

What kind of tenants are you marketing towards, market rate or Sec 8?

Just be sure not to over-improve the buildings. Garfield Park is hard to hit good ARV numbers and refi all your money back out.

Just my 2 cents!

Travis Russell · Answer

@k.marie poe I agree with you, most things on the list would want to be addressed.  I share the same concern with the brick bowing.  From the citations, it appears to have been added and not part of the original structure so I am curious if it would even need to be there?  I haven't seen the property yet, but wonder if it was added as utility or storage.  I can't imagine that it was a structural addition for living space due to the nature of the architecture.  Most of these brownstones are similar in layout and I haven't seen any that had major structural changes.  But I'm definitely remaining cautious about that detail in particular!

@Mike B. Thanks!  That's good to hear.  I know there is another 2-flat about 4 doors down that's at auction, and will most likely go for significantly less.  I'm meeting with my realtor later today to discuss this property and a few others.  She works with some investors and is very in tune with the market.  She's a shark!!!  I think I could actually get it for less considering the price history and length of time on the market.

I am starting to compile a very high level budget for the rehab to estimate my costs.  I know this one will require longer holding costs, and I'm also checking to see if they are deeded under one pin or two separate.  And if they are one, if the parcels can be separated.  That would at least allow one to be completed and back on the market while the other gets finished.  And I think that may be more appealing to buy/hold investors.  More to come!

Mike B. · Answer

I think you have a good deal. Just a quick search of Garfield Park showed one active 3 flat for $45k (short sale), the next true 3 flat is $79.9k (subject to court approval). My cost to acquire and rehab a multi in this area is $40k per unit (generally speaking). Your  purchase price per building is $28.25k which means you have $91,500 per building in rehab available. You may have a different budget and you also may have a different scope of rehab in mind as opposed to what I do for my investors so take my analysis with a grain of salt.

Account Closed · Answer

Nothing on the list looked difficult to cure and would most likely happen an any major rehab anyway.  But the comment about the bowing wall in the brick addition is troublesome. Once an inspector uses the word "dangerous" I'd be careful.  I've found that some inspectors can be beyond unreasonable with structural concerns.  Most of the general housing inspectors aren't trained in engineering and will get very rigid on stuff they perceive as structurally unsound.  Make sure you know if you'll be allowed to shore up that wall (if possible) or if you are looking at a teardown or rebuild.

Travis Russell · Answer

@K. Marie Poe the citations were from complains (assuming from tenants) that were filed with the city.  There are many records of a citation issued, an inspection which failed, and the citation was recorded a second or third time.

@Josh Rowley thanks for sharing your story and for the encouragement!  Good to know that it was a headache but worth it in the end.

@George Paiva agreed, but it looks like the only "stop work order" is on the tuckpointing.  The rest seem to be reasonable, and something that I would want to correct anyway, especially with some of them being safety hazards.

@Patrick Tutwiler that's really great advice and a great reminder!  So true - everyone likes and want to feel that they are needed and important.  But I think you hit it right on the head that if I approach them about all of the issues that haven't been corrected before (especially with many having been cited, inspected, and failed) and want to turn a mess into a home for 6 families, then I agree that they would likely want to help me get it done.  It gets it off of their naughty list then too!  Win-Win :)

@Joshua Burke Hi Josh!  I agree 100%…most of it would need to be fixed anyway.  It is a big project to consider taking on with starting out!!!  But I left my full-time job to dedicate myself exclusively into REI and create homes.  I was honestly tired of always feel like I was taking from people while working in Corp. America, and now want to do something that gives back to the community while still creating an income.  Half charitable drive and half self-motivated for income and financial gains.

They have reduced the price by more than half in only 3 months on the market so I wouldn't hesitate going in with a low ball offer and seeing what happens.  Worst they can say is no, right!?  I have the capital so now it's just finding the right property and the right team.  I'll PM you for your porch and expeditors details.  If this property doesn't work out, it's good to have a solid list of reputable people that are recommended from BP.

@Brianna S. I definitely will!  Yes it's in the city and I plan on keeping my focus in the city for future projects so it's better to learn the rules for one area.  There are more than enough areas within the city limits that are undergoing regentrification so the inventory should be there for a long time.

@Mike B. It's in Garfield Park, just west of the city.  They are selling 2 3-flats together for 6 units total between 2 buildings.  The original list was $119k, and has been reduced to $56.5k.  I still feel like that's high for other properties even on the same street.  All of the others need just as much work, and some even are still occupied.  I definitely want to avoid any occupied buildings!!  I fear my conscience couldn't handle making a LI family move out.

Multi-Units with Building Code Violations?

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