First Flip Opportunity - unknown septic condition

Kevin Degnan · 2015-09-16T17:06:30-07:00

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!

Sean Kuhn

Minooka, IL · Member since 2013 · 353 posts · 85 votes

11y

That's a lot of what ifs. When there's that many what ifs I walk away. I'm not expert but I would think septic tanks last for a very long time. Septic fields are very simple and have few problems except tree roots. Really cleaning out the tank should be your only issue.

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Shaun Reilly

Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes

11y

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.

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Chris SeveneyBusiness Member

Moderator

Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

11y

Several things 1. If your getting bank financing it will need a title V inspection. One thing you can do is make your offer contingent upon a title v inspection as they only cost a few hundred dollars 2. I owned a 2/1 in wayland on an over sized lot and thought it would not be a problem to add a bedroom but several key points were if you upgrade /add a bedroom you would need a new septic. Secondly and more importantly was I was within a certain distance of town wells and I was not allowed to increase the size of the septic on the property so I could never increase the house or septic

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Justin ReppPro Member

Realtor · Beverly, MA · Member since 2015 · 108 posts · 19 votes

11y

I have seen a house restricted to a 2BR septic due to the size of the lot. It was in Hamilton MA. So that certainly can be the case. A trip to town hall should answer that for you.

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Ann Bellamy

Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes

11y

I'm going out on a limb here and assume the property is on Pond Rd. A couple things jump out at me.

First, everything @Shaun Reilly said

Second, since it's and REO, it's probably been empty for a while. If that's the case, it's much more likely to pass Title V since the system hasn't been used. Then when your buyers move in and start using it, it can fail. Something to keep in mind.

Third, although I don't flip houses, I lend on them, and I can also tell you that if you use hard money, you may still be required to pass Title V before you close. You'll need it in writing, as I have heard of inspectors who, when they know their client is a house flipper, give a verbal "OK" so they get paid, and then when they provide the written report after getting paid, tell the real story that it failed. I'd probably allow Shaun's higher end of 30K.

Fourth, there may be water issues with permits depending on how close the property is to the Pond and density of the development. I didn't research that far. It can also increase your cost to replace

Fifth, it is a small lot (less than 1/5 acre) and the house is ugly and awkwardly placed on the lot, so keep the ARV lower accordingly.

@Chris Seveney's point about the well is also valid depending on how close the septic and well are to each other.

If you are a first time flipper, adding another bedroom and replacing a septic is a complex project for a first deal. You'll find the volume of "what you don't know" is huge.

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Kevin Degnan

OP

Westford, MA · Member since 2014 · 5 posts · 0 votes

11y

Excellent responses everyone......seriously, THANK YOU!!

@Shaun Reilly, regarding limiting the # of bedrooms due to size of lot....since the lot is so small and contains a well and septic, the town BOH has told me that that I need 10,000 sqft of land per bedroom. This lot is under 10,000 sqft, so the existing system could be considered grandfathered. If I really want to go to 3 bedrooms, it would require getting credit land, which I know nothing about, so I'm staying away from that. I've looked into alternative nitrogen reducing systems (such as Bio-Microbics MicroFAST) which look promising, but I can't count on them.

@Ann Bellamy, you made a ton of great points, and yes, it's the house on Pond Rd. I do plan on getting it financed (I can put 25% down) and my lender told me that I will need to have at least a septic engineering plan for the new system prior to close and town permit. So it sounds like I will have to pay for the engineering plan up front, prior to closing, but the actual septic repair/replacement can be financed (need to confirm that, of course). I already checked with the town Conservation department to make sure it's far enough away from the pond and there are no wetlands nearby.

Still more research to be done. Keep the comments coming - I welcome all opinions!

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Shaun Reilly

Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes

11y

So remember what I said about if it has been sitting on the MLS for a long time it probably doesn't work at the list price.

I have been following that place since it came on in April.

Now the price has dropped a LOT and it doesn't look a lot more attractive now. However with the septic issue (and I hadn't done the level of research you have to confirm there are big time issues) and it just being an ugly little crapbox that looks to need a full gut I still don't think it is worth all that close to list.

Pulling back the curtain a little my spreadsheet was spitting out an initial offer of about $52.5K and topping out around $60K. This was using my ARV from April, assuming $30K for the septic, assuming that pretty much everything else is also broken and a Hard Money Loan, so this can be low. However I'd think $100K is definitely around best case if the septic was fine.

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First Flip Opportunity - unknown septic condition

First Flip Opportunity - unknown septic condition

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