Refinance before or after remodel on inherited house

[Kaitlyn Masai]

Hello BP, 

I have a tricky situation that I could use some guidance on. My family just inherited a house in Marina, California. This house was previously by my uncle and his partner both of whom passed away in the last 6 months. The house was purchased for $476,000 in 2008. There is $7,700 in equity in the house and there is about $330,000 still on the loan. The house right now is a SFR (3 bed, 2 bath) and the value that I have found online range from $373,000 to $511,000 but generally seem to be close to $450,000. This house needs new flooring, a new toilet, minor cosmetic upgrades, and the backyard needs to be completely rehabbed. Additionally, there is a back house that was in the process of being remodeled. It is basically a studio apartment with a working bathroom but no kitchen. We want to rent the house out and already have a potential renter. My first question is should we refinance now or wait till after its is remodeled?

One problem here is that the house was owned by my uncle and now is owned by my mother through a transfer on death deed. However, my uncle didn't have a chance to transfer the loan to his name before he died. So the loan is in his partner's name and owned through a different executor. We've spoken to a lawyer about this but he was almost as confused as we are because apparently this transfer on death deed is very new.  

The second part of this is about the renter. This renter was renting from my uncle's partner but the house he was staying in is being sold. He wants to move into this house we inherited. He is known through my uncle's network as a good renter (never missed a payment, has been renting there for 8 years, and does repairs on their other properties). He offered to remodel the house for free in exchange for a discount on the monthly rate for the duration of the repairs. The house as a SFR could rent for $2,600. We would discount rent to $2,000 for about 6 months. Is there a way to do this and legally protect ourselves? Or is this just a huge risk?

[Albert Bui]

Originally posted by @Kaitlyn Masai:

Hello BP, 

I have a tricky situation that I could use some guidance on. My family just inherited a house in Marina, California. This house was previously by my uncle and his partner both of whom passed away in the last 6 months. The house was purchased for $476,000 in 2008. There is $7,700 in equity in the house and there is about $330,000 still on the loan. The house right now is a SFR (3 bed, 2 bath) and the value that I have found online range from $373,000 to $511,000 but generally seem to be close to $450,000. This house needs new flooring, a new toilet, minor cosmetic upgrades, and the backyard needs to be completely rehabbed. Additionally, there is a back house that was in the process of being remodeled. It is basically a studio apartment with a working bathroom but no kitchen. We want to rent the house out and already have a potential renter. My first question is should we refinance now or wait till after its is remodeled?

One problem here is that the house was owned by my uncle and now is owned by my mother through a transfer on death deed. However, my uncle didn't have a chance to transfer the loan to his name before he died. So the loan is in his partner's name and owned through a different executor. We've spoken to a lawyer about this but he was almost as confused as we are because apparently this transfer on death deed is very new.  

The second part of this is about the renter. This renter was renting from my uncle's partner but the house he was staying in is being sold. He wants to move into this house we inherited. He is known through my uncle's network as a good renter (never missed a payment, has been renting there for 8 years, and does repairs on their other properties). He offered to remodel the house for free in exchange for a discount on the monthly rate for the duration of the repairs. The house as a SFR could rent for $2,600. We would discount rent to $2,000 for about 6 months. Is there a way to do this and legally protect ourselves? Or is this just a huge risk?

HI Kaitlyn,

I was trying to wonder what you meant by only 7k equity as well since I think the prior response was also asking this same question.

Did you mean after your anticipated rehab cost (330k loan + potential rehab cost for materials) that you have 7k left  based on the value you have estimated? (lots of varibles here, needs more clarity)

To differentiate the questions you've asked I'll label them so that appropriate views on the question can be addressed such as the question about whether you should do the upgrades first or refinance first. This is an investor centric question and a lender question because you'll have to know the market before you figure how to upgrade the property so that you make the most use of the funds and not over or under rehab it based on that the specific market this property is in. The value you get from doing a kitchen or bath upgrade varies from market to market and even within those sub markets there are differences. So having a good mentor or a good agent who understands how these most recent sales (comparables) can affect your appraisal value is important. The last thing you'd probably want to do is spend $40,000 in rehab but only get $25,000 in value on the appraisal at today's current comps. Then again sometimes you need to rehab first because the property may not even be in lendable shape or condition. I dont know because from what you wrote I know very little about this property and you had provided a very large value range 373k to 500's thats huge discrepancy.

The other question you asked was a legal question regarding  protection between the tenant and their work they promised as "consideration," or value for the rent. You may want an attorney to draft the lease with specific language as to what is considered value to value and what ramifications you might have in the event the tenant who is posing as the "tenant," and the "contractor," in this case does not perform exactly to your liking. Sometimes this may be one document or a lease and a separate contractor agreement. This is not legal advice so I'd advise you go talk to an attorney about it usually they will offer the first 30 mins or an hour free to start the relationship.

Hope that helps.