HELP! New investor bought a lemon in SoCal - seeking guidance

[Juan Escarcega]

Hey BP!

I am currently FHA house hacking a property that I purchased about a year ago just south of USC which, unbeknownst to me, had illegal construction, which caused a host of problems, in addition to other issues. None of this was disclosed to me at the time of purchase and there is reason for me to believe there may have been some funny business. After speaking with friends, family and mentors, I was strongly suggested to seek legal counsel in regards to recovering damages, but am trying to avoid a costly and drawn out litigation which may prove more trouble than it's worth.

I'm currently in talks about having my case reviewed and have gotten several quotes from architects for building plans, but the timeline is too uncertain and I am accruing steep holding costs in addition to any fees/plans/services I have to pay, etc. My biggest hurdle has been in obtaining a certificate of occupancy, which is a lengthier and more expensive process than I (and my wallet) had hoped. To further complicate things, I am in an RSO zone and have been holding off on getting tenants in the meantime to avoid paying relocation fees.

The silver lining is that the supposed DUPLEX that I bought is legally recorded as a TRIPLEX in a rapidly gentrifying area and has already gained equity, but that type of project falls outside my scope of rehab capabilities and my finances are stretched pretty tight as it is. I've called around and from my understanding, borrowing is essentially out of the question, so I'm on a deadline to get things on track or risk foreclosure...

Ideally, I'd like to keep the property and salvage my credit but am exploring other options to try and stay ahead of everything. In a nutshell, I'm out of money and short on time, but my assumption is that losing the property would destroy my credit and make me a leper in the banking world.

Should I:

Sell ---As is or with duplex/triplex plans?

Salvage ---Find a financial partner or hang on and ride out the process?

Chapter 11 ---Would anyone even touch this?

Or... cut my losses, consider it my RE hard knocks education and start from scratch?

Any ideas? I'm open to anything at this point.

[Ali Boone]

I don't see why you couldn't 1031 it into another property. Do you have an idea of how much you would lose altogether if you were to sell it now? Do you have an idea of rehab costs if you were to make it the triplex? I would say--pencil out the numbers of every single scenario and I feel like that will present at least a little bit of clarity on which options are even feasible and then you can go from there.

I don't have a more concrete opinion on that as it's a bit out of my wheelhouse, but one other thing is that @Jeff Greenberg holds a monthly networking meeting in Santa Monica (2nd Saturday of every month) and it's very casual and people all introduce themselves and then anyone can ask anyone questions. It might be a cool place to present this scenario and let everyone there chime in with thoughts and ideas. There are a lot of investors there and from a lot of different facets of investing, so you might have a good chance of getting some worthwhile ideas. If not ideas, someone may know a right person to talk to. Couldn't hurt to just put it out there and see what you find out.