Potential consequences of a nearly 0 day gut rehab?

Question

Innovative? Strategy

I'm following another investor who's completed somewhere in the range of 50-100 rehabs in a major metro market. 
He will do major rehab work while the homes are under contract, BUT before he closes. He will gut and rehab the home, replace roofs, etc. It's crazy, but it slashes his holding costs. His rough REOs are nearly retail or rent ready on the day he closes.

What would be the worst thing that could happen if he was caught in the act? Could the bank try and get him for trespassing? Doubt it would be worth their time. Could they cancel the deal?

Has anyone run into something like this in the past?

Steve Babiak · Answer

One very real problem with this is when there are title issues, and the bank can't close until those are corrected.  I have seen it take over a year in one case in my area.  Meanwhile, the listing agent and the preservation companies have to do their reports on condition - so imagine them telling the bank that the condition is above average when they thought it was a dump.  Now, the bank addendum will allow the bank to cancel the contract for any reason - they can certainly see getting more money given the improved condition, so I'd bet they cancel.  Lastly, in my area, the owner has to sign the repair contract so that the contractor(s) can give that to the municipality to pull permits; is this guy pulling permits, or just a wild west type?

Mark H. · Answer

I've done deals where I've done *some* repair before closing, but it was always with a nod and a wink from the seller's agent, and with me fully understanding that any repair funds go "poof" if the deal doesn't close for any reason.

BUT..

In  my most recent short-sale purchase, it almost backfired on me big-time.

The previous owner had a bunch of dogs, who ruined the carpets with urine & tried to eat their way through a wall in one bedroom.  with the seller's full written permission, I patched the drywall, painted that room & treated the floor with enzymes to remove the stink.  I had some really nice leftover baseboard moldings, so I installed them as well..  That room looked really spectacular when I was done...  The short-sale was taking forever, so I used the seller's leftover paint and touched up the walls throughout the house, cleaned & mopped, etc...  I really wanted *my* appraisal to hit the number...

Since it was a short-sale and I knew the seller's bank would be "rush rush rush" after they approved the deal...  and MY lender won't accept a loan on a house without carpet, I had a couple of remnants installed...

Then, the sellers bank did a real appraisal for the property...  they had done a couple of BPOs, at least one was a drive-by...

They came back asking for more money, because the appraisal was higher than the contract price...  (of course it was, the house originally smelled like pee & wasn't financeable do to the holes in the walls, missing carpets, & grunge..).

Sooo... I probably wouldn't do it again to that level... I got lucky & was still able to close the deal...

Gary Parker · Answer

I can personally attest that short cuts to save a little can cost a lot.  The successful people on BP giving advice are successful for a reason.

J Scott · Answer

We've occasionally done some work prior to closing, but ALWAYS with the seller's written permission.

The best example is a house that had a severe roof leak -- we wanted to minimize the damage caused by expected rain prior to purchase, so the seller agreed to allow us to patch the roof.

James H. · Answer

If this guy can rehab the place so fast, how much holding costs is he really saving? Two weeks? One month? Probably not worth risking what he is putting into the rehab.

I bet this is more common than we might think.

In fact, when I was trying to get FHA financing on a house, there were some issues with peeling paint on the exterior trim and some small missing sheet rock behind the washing machine spot in the the laundry.

It was "not suggested" that it wouldn't be a big deal if I bought a gallon of paint and touched up the trim and also put a little 2 ft patch in the sheet rock on a Sunday.

Overall, I do think the reality of repercussions would probably be negligible, but it was the straw that broke that camel's back on a deal I was starting to feel nevous about. I coudn't imagine doing real rehab work before closing. You would have to have cash to close even pull it off as financing is so undependable today.

James Vermillion · Answer

Exactly my thoughts.  Some people will always look for shortcuts, and it may work for a while, but they rarely work forever.   I try my best to do things the right way...it may take a little longer and cost a little more, but I feel the long term payoff and being able to sleep at night without worrying about certain things more than make up for the cost.

J Scott · Answer

All I can say is that he's not as smart as he might lead you to believe.  Please don't follow his strategy.

Jon Holdman · Answer

I'd say the realistic worst case is that he would lose whatever money he's invested if the deal doesn't close.  I'd guess (but its just a guess) that the bank wouldn't come after him for trespassing or anything.

Is he getting permits for this work?  If he's doing gut rehabs and works without permits, and on houses he doesn't own, he's really playing fast and loose.  In this case I could see much greater consequences.

Ophelia Nicholson · Answer

My issue would be me pouring money into a house that I don't actually own! What happens if I am never able to take title- I can't go back to the bank and say hey can I have $30k back that I put into YOUR house.. I have heard of people doing that in our metro area and I think its crazy- If I could get past fixing up a house I don't own maybe it could make more sense to me.

Don Konipol · Answer

Everything works until it doesn't.  Alterimg a home you don't own or have permission to in any way is a felony.  The law of averages say something crazy will happen at some point - not knowing what that is is quite a risk by itself.

Potential consequences of a nearly 0 day gut rehab?

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