Advice on potential deal with City fines and postings

[Scott MacDonald]

Hi All,

I have engaged with the seller of a local seller looking to offload his property but there is a few complications with the purchase and would appreciate some feedback.

The seller presently has some tenants in there and the City is unhappy with the current conditions. The city has placed two orders on the property and are levying fines of $1,000 each (so $2,000 total per week). The orders regard to the fact there is no heating (the HVAC looks very dated), There is no working water heater and water damage from holes in the roof which has caused some wood rot and mould. The seller has not addressed these issues and presently has $60,000 in fines from the city.

I have viewed the property and I have estimated the repair costs to be around $125,000 as it needs a new roof, foundation work, windows and doors throughout, ceilings replaced, kitchen, bathrooms etc etc. but the ARV based on an identical property 5 doors down selling a few months ago I estimate to be around $575,000.

I spoke with the owner and they presently have a cash offer of $270k minus the fine balance at closing. I would be using a portfolio loan as the property would not be eligible for traditional finance so I would need to offer a little more to make the deal worthwhile for the seller compared to the cash offer.

My concerns are surrounding the fines from the city. I have read the orders and see they are attached to the building and will transfer with ownership but I have read that often if a new owner rectifies the issues and brings the property up to standard then these fines can often be dismissed. Now I completely understand I cannot count on this so my offer will take into consideration the fines that need to be paid and if they are dismissed then thats an extra bonus.

So I guess my questions are:

1. If I purchase the property and evict the tenants will the building be considered vacant and will this stop the fines while I complete the renovations. My concern is that it may take a few months to complete renovations and at $2,000 per week in fines it soon adds up.

2. I've never used a portfolio loan before and wondered am I able to factor in renovations costs with this or do I need a separate construction loan. If neither of these are available then I would need to look at hard money.

3. Has anyone any experience of getting fines dismissed from the city? OR at least reduced?

When I spoke with the seller he advised to take a look at the property and please make him an offer to get rid of this "headache" so that was music to my ears. Ive just never purchased a property which is on the City's radar for issues before. Any help/advice/feedback would be greatly appreciated.

Thanks,

Scott 

[Justin R.]

@Scott MacDonald Coincidentally, 60 minutes ago I got off the phone with a City Inspector for a property I'm buying that has some similarities to yours - it's red-tagged because of "creative" repairs by the current owner, but worth about $450k if it didn't have problems.  I've done one other project with a Code Compliance lien that was bank owned and accruing for 2 years. In both cases, the City couldn't care less about the fees. They just want the problem fixed. 

On my first project, even hard money wouldn't touch it.  So, I had to use my own capital and brought in another investor.  The City waived the fees when we submitted plans in preparation to pull permits.  It's turned out to be the best B&H property in my portfolio.

On the current project, a simple call to the City Inspector has paused the process.  It basically went: "Hey, I know the sellers haven't been responding to your notices about 123 X St, but wanted to let you know that I just went into escrow to purchase the property.  The family is having a lot of problems and are mired in a court case, but as soon as it's my property, you're going to see plans submitted to fix all this stuff. BTW, here's my name, business info, and everything else in case you need to contact me.  Cool?"  There are no fees at the moment, but they're being entirely accommodating to get the problem fixed.

I would go down to the City offices and have the conversation above.  Tell them the owner is having lots of problems, that you want to buy and fix the property, and that the lien and fees are making it hard (impossible?) to fix the problem.  Ask them what they can do to help you solve their problem.

And let us know what you find - my experience is in one large Southern CA city and one smaller one, but curious how it goes in your area.