Purchase with Mold in Basement (?!) + 203k Renovation Loans?

[Chris Platis]

Hi BP Community! 

Pursuing my first home purchase, a charming 2-family farmhouse with strong short-term rental potential in an area with reliable full-time renters. I will be hacking the house and enjoying a change of pace from NYC in the meantime. Before I dig into a few specific concerns, please allow me to present the numbers:

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---THE NUMBERS---

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• Asking Price: $295,000
• Hopeful to Close At: $260,000

• Reno Costs: ~$90,000 

• Price After Reno: ~$430,000 

• Monthly Income: $1800 (with me occupying 1 of 2 units)

• PITI (Principal + Interest, Taxes, Insurance): $1900 
• Vacancy: $60 
• Repairs: $50
• Garbage: $50 
• Electric: $250 

Cash Flow: -510 / month 

$510 to live in a beautiful home + build equity...not too shabby (I hope!). I will be able to short-term rent my side to potentially break even and maybe even profit Year 1. 

By Year 2 I aim to rent both sides, which would put my cash flow in the positive between $1200-$1300. 

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---THE SITUATION---

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Mold

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The home is riddled with mold in the basement. The story is that the homeowner removed the tenants to show the home better. Winter came, the house sat on the market, the homeowner winterized the home which shut down the dehumidifiers and the basement sat in cold, wet conditions which let mold survive and thrive.

I've already begun spiraling down the rabbit-hole of assessors and remediators, many of whom bring up $20,000-$40,000 type numbers off the bat. 

The homeowner claims she "will fix it" with the dixie cups and bleach I saw on the kitchen counters. I obviously do not want to buy a home infested with mold and potentially incur major remediation costs. 

Does anybody have any thoughts or experience in this situation? 

Any general advice, words of wisdom/caution on how I should proceed? 

My initial thinking is to potentially present two offers: One in which she takes care of the mold, contingent upon my hiring a licensed assessor afterward to inspect and sample the entire home and everything being clear, or her further doing whatever necessary to bring the home to that safe condition. The other offer would be significantly less (in the realm of a reduction of $30,000) in which I simply say that I will buy the home and take responsibility for the mold. 

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Renovations

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The home is actually in fairly decent shape considering its age, but will certainly  require the following immediately: 

• New Windows: ($15,000) 
• Scraping and Painting Inside/Out: ($15,000) 
• A new boiler or electric heat conversion: ($6,000-$9,000)
• Minor Kitchen and Bathroom Updating: ($10,000)
• Several Doors and General Carpentry work: ($10,000)

This roughly brings Immediate Renovation Costs to $60,000 (to my best knowledge)

Other work which can be sidelined but will need to be done within 3 years: 

• New Roof: ($25,000) 
• Tree and Shrub Removal: ($5,000)

I'd like to bundle a renovation loan into my mortgage via FHA's 203(k) program. This would increase my monthly mortgage by about $400, but allow me the funds to bring this property to an amazing potential, increase rents, and greatly raise the value of the property for a potential sale. Some lenders have shied me away from the 203K, another I just spoke with seems to be a big fan, though she mentioned loans above $35,000 can be very tedious and time-consuming for FHA Borrowers.

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---CLOSING THOUGHTS---

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• Does anybody have any experience with FHA and/or 203K renovation loans?
• Experience or advice on mold in basement, in any scenario or my presented one?
• Renovation costs – one idea I've had is to borrow via 203K for the allotted $35,000 to "fast-track" the loan, and spread out costs myself over the coming 2-3 years (which is financially feasible). Any thoughts on this? Would rather stay liquid for a potential next investment, but just exploring all possibilities. 
• Am I trying too hard to revive a beautiful home and make this work? I've looked at so many properties and finally feel I had found something flexible enough to meet my needs of owner-occupy, short-term AND full-time rent, not overpriced, with potential to force appreciation (mold removal initially, and creation of additional bedroom in owner unit would bring rent/resale up). I sort of love the home and property, and am just being cautious, trying to explore options and see if this thing works. 

Thank you all so much for your time, support, and input. Love BiggerPockets, and so greatly look forward to hearing from you! 

Cheers, 

Chris