4-plex with fire damage: a great place to burn money?

Question

I am currently negotiating a purchase of a victorian 4-plex.

The pros:
Amazing location in one of Portland's hottest neighborhoods.  
Immediate upside potential-rents could handle a 20% increas w no improvements; 30% or more with minor upgrades with additional anticipated increases as neighborhoods continues to gentrify.
Very cool building that has many updates already (electrical, plumbing, windows).

The cons:
Roof needs immediate replacement.  Not leaking but roofer won't certify.  $20k
Attic shows signs of historic fire damage with charred framing.  $35k to rebuild and permit.
Date, cause, and extent of fire damage is unknown.  Damage could extend into ceillings and walls and require replacement.  This would also make top two units uninhabitable during repairs. Repairs: $70k+++?????

Seller will not do any repairs.  What to do?

Walk away?  Is this a pandora's box of potential grief?

Replace the roof, make minor improvements, enjoy cash flow, and deal with fire damage upon sale or much later date?

Fix it all now with permits and hope costs and timelines are within anticipated estimates?  Like how often does that happen?

Any insights are appreciated!

Christine Kwasny · Answer

As a follow up to anyone looking at a similar situation:

We did purchase this building, and decided to do a full overhaul right away for various reasons, which in hindsight was the wise decision, although we were a tad bit over our heads

.

In regards to replacement of the roof and fire-damaged roof structure, we interviewed and compared quotes from two large fire re-hab companies.  Both were very competent and I'm confident either would have done a great job.  Basically, it came down to cost and differences in approach.  Costs were very close, so that wasn't a big issue.  One wanted to do stick frame; the other pre-built trusses.  We decided to go the stick frame route due to savings in time, and flexibility to make adjustments as needed once the old structure was removed.  There were also serious access issues.  As it was, removing the old debris and getting new materials up was challenging enough.  I don't see how trusses could have been placed short of helicopter.

In the end, we got lucky; the fire damage was mostly restricted to the roofing structure, although there was fire damage to interior walls from where the fire started, which was minor and not load bearing.  Basically, the structure was engineered, plans reviewed and approved by the City, and the work was done.  The crew did a great job and and the finished product is great.  Now there are no more worries on that end.  It could have gotten pretty ugly with fire damage in wall structures that would have required repair/replacement.  We were prepared for that, but were fortunate that this part of the project stayed on budget. I should note that this was a very large and messy job.  Vacating the building was a necessity; the interior and exterior were full of debris and heavy construction for nearly 4 weeks, a situation no tenant would appreciate and I see as a liability.  The contractor was very conscientious, but removing an entire roof and fire damaged material is very messy business that is pretty major construction.

The project as a whole took nearly six months, but the building is fully renovated inside and out, it's beautiful and low maintenance.  We have been able to get higher than anticipated rents, and overhead should be low for a long time to come.  It took nearly 8 weeks of negotiations with the seller; 6 weeks to select the right fire repair contractor; 6 months of vacancy; and countless incredibly stressful situations, but it's over and done with and I feel we have an great asset added to our portfolio.

Bill Gulley · Answer

Everyone should do a fire rehab at some point.....LOL!

Get an engineer to inspect the chared areas, just because they are black doesn't mean there is structual problems. Get an estimate to replace anything required, there may not be anything to replace. Often too, you can box frame over damaged members, the engineer can tell you that and how.

I'd want to know that before I purchased, you may not need to make the repairs now but you could have insurance issues as well, another consideration.

Time line, LOL, double what they tell you, IMO.

After you see what the damage is and the costs you'll have a better idea on how to proceed and if repirs are required or if the can be deferred. Good luck, you may need it....(Really, it may not be so bad)   :)

Christine Kwasny · Answer

@Andy Luck:

Yes, you are correct that getting emotional can be your undoing.  I really don't get emotional with the properties because...well, I just don't.

And, yes we were lucky.  I almost didn't buy the place; my brother is a firefighter who told me all about victorians and their lack of fireblocking and how the fire damage could be extensive and unpredictable.  I typically don't even consider a building this old because I don't want to deal with all the old stuff like galvanized pipes, knob n tube, lathe n plaster, lead paint, old windows, etc.  We made an exception here since all these things had been modernized, and the building showed no signs of structural compromise despite the severely damaged roof structure - as verified by several structural engineers.  After many opinions, it seemed like the fire damage was probably limited to the roof, with little to no damage to the vertical structure.  We got lucky, as this was the case, but we were prepared for more extensive damage.  In addition, we got a fair purchase price for the risk we were assuming and the neighborhood is hot, hot, hot.

Just replacing the roof (which was about shot anyhow), the underlying roofing structure, engineering, permitting, etc, etc was about $45,000.  The damage was old - probably from 1987 when the last fire department response was recorded and the vintage of the interior remodeling and system upgrades (plumbing and electric).  I suspect that the owner at the time took the insurance money, upgraded the interiors, plumbing, electric, installed new wood windows, and simply slapped a new roof over the charred structure.  At the time, this neighborhood was redlined, and the property had recently been sold from the federal redevelopment agency after completing a nearby freeway and hospital project that bisected and essentially destroyed the historic neighborhood.

The before/afters aren't very interesting unless you call an in-kind roof replacement exciting!

Andy Luick · Answer

I'm glad it worked out for you...but you are also very lucky...the visual damage on a fire damaged structure can be the tip of the iceberg, depending on where the fire started and how it progressed.  So what were your total all in costs on this one?

Victorians have a special place in my heart...as they probably do for you as well....problem is, getting emotional with a property usually comes at great expense.  We rebuilt a complete fire loss in a historical neighborhood in metro Atlanta.  Like you, we stick-built the roof framing and it wasn't easy.  Ours was a single story but with an enormous attic and took us about 3 months to rebuild a 2,500sf residence.  The attic had the bulk of the fire charred studs and one interior wall....the rest was smoke and water damage.  The home had been completely renovated prior to our work and the fire was actually started by a tenant on purpose over some dispute with the property manager.  Welcome to landlording.....not my tenant by the way....we turned it around as a contractor and then rented it for the owner who was about to lose it to foreclosure.

While we are talking about fire losses & damage - READ your insurance policies FULLY BEFORE any loss occurs.  In fact, sit down and read them when you first place the policy.  The policies are all written by crafty lawyers with decades of experience and they are all written with the intent to minimize coverage.  Don't get caught up in the advertising 'cause nobody is on your side!  For instance, flood insurance usually won't cover your loss if you were the only house to flood on the street.  So you many have purchased a rider that doesn't cover what you think it does.  Better safe than sorry...I can tell you the horror stories both as a long-term contractor and as an owner/investor.  The example above was fought by the insurance company for almost 2 years before the owner brought it to us and we were able to get it worked out. Try to put people on your team who value and have relationships as you just might need to call upon them someday.

Pics?  before & after would be fun to see!

Roy N. · Answer

@Christine Kwasny

It's good to hear the outcome and congratulations on the new addition to the portfolio.   You've demonstrated with the right amounts of patience and perseverance these old buildings can make lovely modern homes for our tenants.

Bill Gulley · Answer

BTW, if you have an engineer, they can certify the plan and componets which will usually override city inspectors, unless they are engineers. Politics too, if the engineer will trump thier call, but that is what engineers do, assume the responsibility. Good luck...  :)

Christine Kwasny · Answer

Yes, the seller got her own opinion.  she agrees with our assessment of the roof and roofing structure replacement.

Just got word from the contractor on if ceiling replacement will be required by city: $40k and 4 months.  Yikes!  City has a lead paint ordinance that requires everything to be contained and disposed of as haz-mat, thus the exorbitant price tag.  I am trying to get a better indication from the city if we would be required to do this extensive, and expensive, repair.

We are running into the end of inspection period so I think at this point we may have to mutually agree upon $400k as an allowance for the roof replacement scope covered under the original $35k, and get bother week for inspections.  However, we now have addt'l info that leads us to believe things can likely get much more expensive, and we are getting tank locates, sewer, and inspections done next week, we will (hopefully) have a better handle on just how bad things could get, and go back to the seller with a more certain upper limit of what we are willing to spend.

Roy N. · Answer

Christine Kwasny:

I must have misread your original post as I had the impression you were not certain whether extensive repair is necessary.   In your later posts it would appear that a certain degree of replacement will be undertaken either by requirement of the local authority or for your own piece of mind.

You also indicated the Vendor is unwilling to entertain any repair prior to sale.  Has she investigated the required repairs on her own?  What is the possibility you will be able to use your {worst case} estimates to secure a price <=400K to provide you with a "what have we found now" buffer?

Christine Kwasny · Answer

I haven't gotten the worst case scenario bid back yet.  Coming later today.   I am just ball parking, should these need to be replaced:

Replacement of top unit ceilings and associated vacancy and unit clean up. $10?

Repair of wall structure and siding, and any potentiallly damaged wiring or plumbing. $15?

Potential renovation of top floor-flooring replacement in units and common entry and stairs, paint, kitchen and bath replacement.  Approximately 1300 sq ft total.  $20?

Potential repair/replacement of front balcony to current safety code, front entry porch, and repair/removal of precarious rear stairwell. $25?

Only the first two items are potentially necessary, but if the units are vacant and messed up, may as well upgrade at that time. I'm planning on doing so sooner or later anyhow.  They are ok as is, but the area has gentrified well beyond the current quality of these units.  The other items can be deferred but should eventually be addressed for aesthetic and safety reasons.

Does that sound reasonable?

Michael Seeker · Answer

If your including repair/replacement of decorative detail, then 35K seems right.  What other repairs are needed that would account for the other $65K you're budgeting for?

4-plex with fire damage: a great place to burn money?

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