Rehab went over budget, now stuck.

[Caitlin Jones]

Attempted to rehab house to turn into rental. Everything we uncovered just kept adding more and more to do. House is now down to studs and needs at least 100k more work. Should I just sell as is and take the loss? Is there any creative lending to take advantage of without getting completely hosed?

[Kevin Sobilo]

@Caitlin Jones here are a few thoughts:

1. Why did you gut a house to make it a rental? In the VAST majority of good rental markets function is MUCH more important than form (aesthetics). I may gut a room here or there especially a bathroom or maybe a kitchen but never found a reason to gut a whole house for a rental rehab.

2. When you gut a space, costs spiral exponentially because you need to bring everything up to current code! When you don't need to bring things up to current code, only perhaps make health and safety updates required for renting.

3. When you are dealing with a significant rehab you want someone who can manage the rehab and that usually is NOT your contractor. Your contractor wants to make money for THEMSELVES by selling you the most expensive and easiest option for the CONTRACTOR. Also, the contractor is not an investor and doesn't look at how to address the issues in the same way as an investor would.

So, its good to manage things yourself if you are able to get deeply involved in those technical issues, have a partner with those skills, or if you were a bigger operation have a project manager of some kind.

4. Before you consider whether to finish this rehab decide whether it even makes sense to do it. If spending $100k will only increase the value of the property from its current state by $100k, there is nothing but risk to proceed. 

[JD Martin]

Quote from @Caitlin Jones:

Attempted to rehab house to turn into rental. Everything we uncovered just kept adding more and more to do. House is now down to studs and needs at least 100k more work. Should I just sell as is and take the loss? Is there any creative lending to take advantage of without getting completely hosed?

 No good way to answer this without hard numbers. How much did you pay for it? How much is it worth after rehab? How much can you sell it for in its current condition? How much will it rent for? How strong is your rental market? ETC. 

*Usually* - and this is a real generalization - it is better to complete a house than sell it torn to shreds. Your market for an incomplete house is severely limited and most investors are going to want discounts to take on a project in progress. 

[Chris Seveney]

@Caitlin Jones

Sell and eat your losses but several questions

What was your original budget?

Who did the initial walkthrough to determine work

Why is it down to studs? What made you remove all the drywall as well?

[Caitlin Jones]

The house was my first that I bought 11 years ago. It was built in '59 and the previous owner did mainly DIY fixes for everything. When I bought the house in '13 I was told it's up to code, but just. As a 23 year old at the time, it sounded great to me. Now, I've learned otherwise. Nothing was up to the new 2020 codes when we started renovating last year. The house needed leveling which is why the walls needed to come down. The initial budget was around 50k but we quickly saw that disappear when everything created a new problem. We were in WAY over our heads and the contractor was of no help. He just kept coming up with new issues and needing more money that didn't exist. 

As of right now, most offers we got on the house were for around 50k and 80k is still owed. I don't have the remaining 30k to pay off the mortgage. 

[Kevin Sobilo]

Quote from @Caitlin Jones:

The house was my first that I bought 11 years ago. It was built in '59 and the previous owner did mainly DIY fixes for everything. When I bought the house in '13 I was told it's up to code, but just. As a 23 year old at the time, it sounded great to me. Now, I've learned otherwise. Nothing was up to the new 2020 codes when we started renovating last year. The house needed leveling which is why the walls needed to come down. The initial budget was around 50k but we quickly saw that disappear when everything created a new problem. We were in WAY over our heads and the contractor was of no help. He just kept coming up with new issues and needing more money that didn't exist. 

As of right now, most offers we got on the house were for around 50k and 80k is still owed. I don't have the remaining 30k to pay off the mortgage. 

How out of level was the house? Plaster and drywall may crack when you level a house but repairing that is MUCH less costly than taking it to studs and redoing everything to current code.

[Bruce Woodruff]

To me, this decison would be all about the $$..... SOunds like you are going to lose money regardless of which way you go. So which has the less money going down the toilet?

But don't forget to factor for future appreciation...if you (or your Realtor) strongly believe that this area/house will double in value within 5 years, then that is a different animal.....

[Scott Mac]

I wonder how much it would have rented for if you just simply did a fix up instead of ripping everything out down to the studs.

I've seen several of these places down to the studs at very very very discounted prices compared to a completed home.

Does your mortgage allow you to strip this down to the studs. Without bank approval?

Good Luck!

[Dan H.]

In mid May we complete a rehab of a little unit that we budgeted $60k and it went over $100k.  It was my first time busting budget but we did new things that cost more than I expected.

To start, deed states unit was 1901 but I believe it was 1920s.  Think 1901 was date used when they did not know actual date.  So unit was very old.  We removed wall (plaster and lathe), added walls, re-did all electrical and plumbing, added half bath, full remodel Of existing bathroom, expanded kitchen.  We also initially were only going to exterior paint as needed but ended up Repainting full exterior. it was shocking to see how fast the money was going out.  I had to do much more work myself than I had intended.  

We were saved because it was a high cost area where improvements add a lot of value. 

I definitely feel your pain.  Large rehabs are a lot of work.  it sucks not to be well compensated for the effort and risk.  

If there is any way you can finish the rehab while pinching Pennies, that would be ideal.  To sell a project mid project will result n low offers.  Can you manage the effort and keep costs under control?  That is required at this stage.  

Good luck

[Matthew Paul]

Quote from @Caitlin Jones:

The house was my first that I bought 11 years ago. It was built in '59 and the previous owner did mainly DIY fixes for everything. When I bought the house in '13 I was told it's up to code, but just. As a 23 year old at the time, it sounded great to me. Now, I've learned otherwise. Nothing was up to the new 2020 codes when we started renovating last year. The house needed leveling which is why the walls needed to come down. The initial budget was around 50k but we quickly saw that disappear when everything created a new problem. We were in WAY over our heads and the contractor was of no help. He just kept coming up with new issues and needing more money that didn't exist. 

As of right now, most offers we got on the house were for around 50k and 80k is still owed. I don't have the remaining 30k to pay off the mortgage. 

 The house didnt have to be up to 2020 code , It just needed to be up to code the year it was built . A 5 year old house isnt up to todays code .  Built in 59 , yes there will be some settlement , I have a couple houses that arent level inside , but they are fine and are rented . 

Its a difficult situation , right now you have a fixed loss of 30K . This isnt hard to recover from . Now dumping another 100 grand into the house could possibly put you behind the eight ball . 

[Bruce Woodruff]

Quote from @Matthew Paul:

Quote from @Caitlin Jones:

The house was my first that I bought 11 years ago. It was built in '59 and the previous owner did mainly DIY fixes for everything. When I bought the house in '13 I was told it's up to code, but just. As a 23 year old at the time, it sounded great to me. Now, I've learned otherwise. Nothing was up to the new 2020 codes when we started renovating last year. The house needed leveling which is why the walls needed to come down. The initial budget was around 50k but we quickly saw that disappear when everything created a new problem. We were in WAY over our heads and the contractor was of no help. He just kept coming up with new issues and needing more money that didn't exist. 

As of right now, most offers we got on the house were for around 50k and 80k is still owed. I don't have the remaining 30k to pay off the mortgage. 

 The house didnt have to be up to 2020 code , It just needed to be up to code the year it was built . A 5 year old house isnt up to todays code .  Built in 59 , yes there will be some settlement , I have a couple houses that arent level inside , but they are fine and are rented . 

Its a difficult situation , right now you have a fixed loss of 30K . This isnt hard to recover from . Now dumping another 100 grand into the house could possibly put you behind the eight ball . 

He's right, it doesn't have to be up to the latest code - unless you start messing with stuff. If you had left it alone, you'd be fine. Try to avoid doing anything else that requires permits....in other words, paint, flooring, cabinets...are all fine.

Or is it too late for that?