First Flip Opportunity - unknown septic condition

[Kevin Degnan]

Hi folks,

I'm thinking of making an offer on an REO in Massachusetts (Middlesex County). This house has been on the market for a while, with a couple price drops. It's a 2 bedroom, 1 bathroom, 1000 square foot house, on a small lot (under 1/4 acre), and definitely needs some major updating. The issue is the septic system....I have no idea what kind of condition it's in. I contacted the town Board of Health and there is no record of any previous Title V inspection. There is also a private well on the property, and no town water available nearby.

I see a ton of potential for the house, but I'm worried about the septic system.  I know the lot is too small to accommodate a new construction, but I believe the existing house will be considered "grandfathered" even if the system has to be replaced.  I would love to expand to 3 bedrooms, but the town might restrict me to 2 bedrooms because of the size of the lot. 

One idea I had is to make an offer about 20k lower than asking price due to the likely need for a new septic system.  I thought about including a contingency for MA Title V approval (or at least a remediation plan), but that might not be necessary because I already suspect that the septic is failed, so why waste money on an inspection, right? 

So, my fellow investors/rehabbers/etc.....what would you do?  I would love to hear from anyone, especially local gurus like @Shaun Reilly, @Justin Silverio, @Ann Bellamy, and any other awesome folks out there.  Should I just save money and skip the inspections?  Or, worst case scenario - is it possible that the town will never approve any new septic design, thereby leaving me stuck with a house I can never sell??

Thanks!

[Shaun Reilly]

First off look closely at your numbers.

Thinking that the Septic will fail and you are taking $20K off list price to make up for it insinuates that the numbers look good at asking.

If it is an REO that has been listed for a long time then it is highly unlikely that the numbers work all that close to listing price. Yes in this case being a smallish 2BR with an unknown septic might just cause a lot of people to pass, but not everyone.

Once you know what it is really worth I agree with the general approach of assuming you need to pay for a new system and offer with that off the top.  I usually use $25-30K since $20K is pretty tight around here once you factor in all the stuff like paying the engineer and all that stuff.

Of course if you are going from 2 to 3 BRs then they could have put it in last month and it wouldn't really matter as you need to have the appropriate sized system for the number of BRs.

Not sure what you mean that they would limit the number of BRs based on the size of the lot.  As long as you meet all the legal requirements for something to be a bedroom I have never heard of anything like that.  At least not in an existing structure.  Now if you are worried about being able to put in a new system and that you might not be able to put a 3BR system on the property without needing some variances then that could be an issue.

I would highly recommend running the numbers as a straight rehab as a 2BR house and make sure the numbers work with that if you aren't 100% confident of being able to do more.  If you can add another bedroom or something else to add value that is great but don't offer on it like that is a given when it isn't.