Flipping homes with foundation issues

[Shanel Dial]

Hello, my question up front is does anyone have experience flipping homes with foundation issues or do you run away?  I am looking at purchasing a home in San Diego that has had minimal repairs /upkeep over the years.  After our inspection it was recommended that we get a structural engineer to measure the settlement of the house.  It is in an area know for settlement issues.  The reading came back that the home has settled 5 + inches on one side.  The engineer is unable to tell us if the settlement is 40 years ago (home was built in 1977) or if it is current.  We need someone to test the soil (estimating $4k for that test). We love the layout of the house and it has a huge backyard and pool. Concerned about the risk we would be taking on if we would pursue this.

[Mark Frattini]

@Shanel Dial

How much is the estimate for the foundation work? If everything goes exactly as planned how much are you going to walk away from this deal with? What if it costs an additional 10%-20% to get the work done? Do the margins still pencil out after paying capital gains tax?

My other concern besides taking on such a large project is that right now the market is pulling back. Depending on the reno timeline this could turn into a situation of trying to catch the falling knife. I would proceed with caution; Prices in San Diego have been falling for the last 3 months. The median sales price is down over $70k since May. Make sure to also look at other metrics than PPSF for your comps. September numbers will be published soon and I wouldn't be surprised to see that prices have fallen even further.

Remember that comps are backwards-looking metrics. Check into leading indicators as well. DOM has doubled, % of original price received is down, pending sales down, months supply of inventory has doubled. These numbers don't tell the full story since we are still in a sellers market using the months supply of inventory data and they are being compared to what has been a crazy last 2 years.

I'm still very BULLISH on San Diego real estate long-term. I am providing my clients with all of the data along with my opinion.

TL:DR Short-term flipping right now comes with extra risk, proceed with caution.