How would you do "Due Diligence" when you know the house isn't up to code?

Question

http://www.zillow.com/homedetails/1407-SE-175th-Pl...

It says "House is being sold in as-is condition and needs extensive work. NOT financiable. House was updated by the prior owner who did not have the work permitted. City will require new purchaser to bring the house up to code. Buyer to do due diligence."

So, how would one find out what really needs to be done? It seems like looking at the condition isn't going to tell you the full scope of the work required. So, while I assume you'd call the "City", but who would you ask for? How would you do due diligence to determine whether this was a property you were interested in flipping?

Victor Menasce · Answer

Pretty straight-forward. Your goal isn't to be accurate in your construction estimate. Your goal is to be safe.

I've purchased properties that have been boarded up that had tons of violations and I could not even get inside the see how bad they were. So I assumed they needed to be demolished and rebuilt. If the reality was better than my assumption, then I got a bonus. If the deal still made sense with the conservative assumption, then I'm in good shape.

If you can't do a deal that's safe, then don't do it.

Example: The property below in Philadelphia was purchased without inspection for $40,000. These are before and after pictures. We put $120,000 in reconstruction. The finished product appraised at $235,000 and is leased at $2,000 per month. We refinanced it at 70% loan to value. Strong project that generates good cash-flows.

Aaron McGinnis · Answer

Assume worst case scenario... new everything.

Ariann Horne · Answer

I would say to make sure and check for fines, liens, etc. If it was not permitted some municipalities like to wait until a new owner comes to light and impose fines and inspections on them to get money. I've seen it a lot in my neck of the woods.  Make sure it's not on the list for demolition, just because they let you buy it doesn't mean it's not on the list.

If the area you are buying in isn't investor friendly and prefers only owner occupancy then you may see a lot of road blocks and "surprise" cost in the future.

Of course also check the taxes and zoning to make sure it fits with the exit strategy you had in mind. We discovered a building we were thinking of turning into condos didn't have  the required amount of parking to be able to sell, or even rent the units, simply by calling the building commission. We would have had to buy the building next door and tear it down. No one told us this until we did the investigating and talked to the right people.

Think like the government...

Jon Holdman · Answer

I've been there.  We had the city inspectors come to the property with me and my partner (who got this house when our borrower defaulted) and contractors and we walked through the house and they pointed out what needed to be done.  They DID NOT require we take it to the studs by any stretch.  They did require we dig up part of the basement, remove cabinets and open some walls so they could inspect plumbing and electrical.

More recently, I did a major bath renovation at my residence.  I had the main inspector out several times for "courtesy inspections" where we looked at and discussed certain aspects of the project.

Matthew Paul · Answer

How does the city know of the violations? do they do inspections on every sale?

James B. · Answer

@Victor Menasce

Well done, nice work!

Todd Runstein · Answer

Ouch!

Mark Gallagher · Answer

@Todd Runstein It's my experience that while municipalities certainly want to make sure things are done "right" but as long as you pay your money and cooperate you'll make out OK. It looks like from your link there's an unpermitted addition, but constructed well. Call the municipality and ask them what they would want to see to give it their OK. Which is important, because if a fire starts in the unpermitted section insurance could certainly deny the claim.

I once saw a 7,000 sf unpermitted addition to a 1,500 sf house. It was in the middle of some woods about 200 feet off the road, so no one knew about it. The homeowner ran out of money and it became a foreclosure. There were no permits, no drawings etc. I don't know what happened but one could imagine the town would want it back to the studs at the very least to check the structure out.

Dylan Long · Answer

I'm sure someone here has been through something similar before, so they'll likely have better advice. But I'd definitely ask the listing agent what they know.

How would you do "Due Diligence" when you know the house isn't up to code?

Most Popular Reply