Must a single family home be brought up to electrical code to be a rental?

Question

Just getting started with wholesaling. I inspected a lead I got from direct mail the other day and I'm wondering if I went way too low on my offer because I overestimated the rehab cost substantially.

The owner was an elderly lady who passed away. The house was built in the '60s and was extremely well maintained. Everything in it was ancient, but in perfect working order. The HVAC components were way old, but fully functional. 15 year-old water heater.  Fuse box and two-prong outlets throughout the house.

I submitted an offer based on the cost of totally renovating the house for retail sale. I'm new at this, but my assumption is that the electrical system has to be brought up to code in order to sell the house. Of course, the kitchen and bathrooms have to be re-done. Add on all the wood paneling removal and drywall installation, floor treatments, etc, etc. and it got to be a pretty good size rehab cost to prep the house for retail.

But like I said, this house was very well-maintained. Aside from all the wood paneling in the basement, the property is essentially in move-in condition for a renter. All the mechanical systems and the roof are fully functional. The house look great, cosmetically.

So my question is would the electrical system on this house have to be brought up to code for it to be used as a rental? My thought process was that a landlord wouldn't want a house that needed the electrical system re-done, which then made me view the property only as a "rehab for resale," which necessitated a bunch other stuff like kitchen, bathrooms, replacing old, but functional mechanical systems, etc.

If this property could have been legally rented without the electrical overhaul, I could have made a much higher offer. It doesn't bother me that I missed this one because I erred in the right direction (low), I just want to get myself properly calibrated so I can make "intelligent" low offers. I think I might have made an "uneducated" low offer on this house.

Lenzy Ruffin · Answer

Everyone, thank you so much for your input. This was extremely helpful.

Gilbert Dominguez · Answer

Well I cannot speak about your area. You would have to look up the Landlord/Tenant laws there but where I live there is no such a thing as a building needing to be up to code in order to be used as a rental. Code violations are a different matter. However usually the authorities will not force you to bring a building up to code if it is safe in the condition that it is in. If every building had to be brought up to code people would be screaming at authorities, all up in arms. Your concern as a landlord is safety.

If you convinced me that my building absolutely had to be up to code and were representing yourself as some kind of authority and I found out later you were lying about it I might say I would have cause to take you before an authority especially if I were an elderly person or a relative of theirs.

You better make sure you know the law and are certain about what you are telling people about the value and use of a property with regards to everything needing to be brought up to code. Honestly if it was me I would be hunting you down if I found out you convinced my grandmother her property was worth far less because it was not built up to code yet it was in a safe condition.

JD Martin · Answer

Where I live, electrical only needs to be brought up to code if the electricity has been disconnected for a certain length of time - I think it's one year, but it could be as low as 6 months. In fact, we had to walk on a deal for this very reason, because the sellers had let the electricity be shut off, and the municipal power board wouldn't reconnect without a full electrical upgrade (wiring, panel, proper number of outlets, counter outlets, etc). Once that came into play, there wasn't any way to make the numbers work on the house for a rental.

Do not underestimate the costs of running new electrical work. It can add up on you in a hurry, especially if you are in an area where you can't even touch an outlet if you're not a licensed electrician.

Steve McGovern · Answer

Lenzy, I, personally, think you're right on, and here's why:

1) wholesaling is an art- and your USUAL buyers are investors in 9 out of 10 cases, BUT there is that occasional 'regular owner-occupier-rehab it as I go' type of owner that you can run into.

2)  that rehab-as-i-go gal I mentioned, above...   think about her anxiety-laden husband...  --OR-- That  rehab-it-as-i-go guy I mentioned above...  think about his owner-occupier-move-in-ready wife for a moment.

You have addressed the needs of that 'other' party in the transaction.... or the next "other party" after the investor.

3) FUSES?!?!  They may operate absolutely perfectly and have a real-time lifespan of another 40 years...  but this isn't an argument of "the walls are too green" or "There's condensation between the panes?" or  "I'd really prefer quartz countertops to formica" we're talking about here.  This is something that someone is necessarily going to want to update.  It doesn't matter much if it legally NEEDS to be brought up to code, any Home Inspector worth the paper pulp in his certificate WILL call that out as a potential issue, and the new Owner's Insurance company will likely call attention to it, too.  With aging fuse boxes necessarily comes the questions of aging metal-armored cable, with-which comes the questions of a faulty ground contact in that cable.  Yes, I'm assuming a little here, but you said it yourself:  "Ancient."   It needs improvement.

Assume that a property like this needs the work, and go from there.  You can always offer more, or maybe, if you have your license, you can even work on a tiered percentage as opposed to a flat fee.  Offer options.

Mark Gallagher · Answer

@Lenzy Ruffin

OK well I think you're on your way to your first deal. Certainly keep us posted.

Lenzy Ruffin · Answer

@Mark Gallagher I do not. I was so charged up about somebody calling me with a house to sell, I ran out of the house without my camera. And photography is my hobby, so that was no small oversight for me.

Mark Gallagher · Answer

@Lenzy Ruffin

Do you have any photos?

Lenzy Ruffin · Answer

@Mark Gallagher Definitely taking it as advice that I very much appreciate. I'd get nowhere if my rehab estimates continued to be way, way off.

Mark Gallagher · Answer

@Lenzy Ruffin

Absolutely. I hope you're taking my point of view as advice, not condescending because that's certainly not my intent.

I think you definitely have a deal on your hands, it just needs to be fine tuned. If we meet in the middle of repair estimates, that's $45K. If you can sell for $200K, that puts you at about $187K net. Minus $45K in repairs that puts you at $142K.

Purchase for $95K and try to wholesale for $105K.. that leaves good meat on the bone for a seasoned and unseasoned investor alike.

Keep us posted.

Lenzy Ruffin · Answer

@Mark GallagherThe seller wants $100K. As far as the assignment fee goes, that's where I put my error margin which was admittedly wide because this was the first house I've done a repair estimate on. I'll get all these numbers dialed in correctly with a little experience.

Must a single family home be brought up to electrical code to be a rental?

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